Review of Austrian Economics - The Ludwig von Mises Institute

Higgs: Analysis of the Growth of Government 29
necessitated more "contracts across time and space and with unknown
second parties," hence a demand for bigger government to
supply "effective third party enforcement" (North 1989, p. 113); it
fostered ideological divisions, hence the proliferation of politicized
interest groups (North 1981, pp. 51, 196-98; 1985); it cheapened tax
collection and hence shifted outward the supply schedule of government
activities. (Becker [1985, p. 345] tells a similar tale.)
Although Wallis and North's empirical exercises in creative national
income accounting are not compelling, partly because the
empirical categories just don't match the theoretical counterparts (for
some details, see Davis [1986]), there may be something to the
Washington thesis. North continually emphasizes that government
has grown throughout the Western world and elsewhere over the past
century; and, by conventional measures, government is bigger in the
more developed countries than in the less developed. A good theory,
it seems, ought to account for the apparently pervasive association of
economic progress and growth of government in the West. Because
rising specialization marks every case, it would appear to resolve the
issue. Perhaps to some extent it does, but problems remain.
One difficulty is that the theory is too general. Although it seems
to match the long-term trend in every Western country—and many
others as well—it cannot account for the marked irregularities that
have appeared in most cases. The specific shape of the historical
profile must be explained by auxiliary theories or in an ad hoc
manner. The abrupt growth of government that occurred in the
United States during the world wars and the Great Depression, for
instance, would seem to have little to do, in any immediate way, with
changes in the degree of societal specialization (Higgs 1987a, pp.
123-236). Similar questions can be raised about the precise paths
followed by other countries.
Another problem: the theory is rather vague, and the attempts to
give it empirical substance only heighten one's misgivings in this
regard. The concepts of "transaction cost" and "transaction sector"
have been stretched to the breaking point. The distinction between
"transaction" and "production transformation," though central to the
thesis, is blurry at best (Davis 1986).
Further, the explanation of why remote transactions and other
features of modern economic life could not be accommodated in the
market, an explanation that appeals to "moral hazard, adverse selection,
and the demand for public goods" (North 1985, p. 392), is offered
almost in passing and needs a much more extensive argument before
it can become persuasive. (See Lindbeck [1985, pp. 315-16] for trenchant
criticism with regard to the alleged roles of adverse selection