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The Political Economy of Poverty, Equity and Growth: A Comparative Study$

Deepak Lal and H. Myint

Print publication date: 1998

Print ISBN-13: 9780198294320

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198294328.001.0001

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Ideas, Ideology, and Economic Policy

Ideas, Ideology, and Economic Policy

(p.305) 7 Ideas, Ideology, and Economic Policy
The Political Economy of Poverty, Equity and Growth: A Comparative Study

Deepak Lal (Contributor Webpage)

H. Myint

Oxford University Press

Abstract and Keywords

Some of the deeper political and ideological factors that can help in explaining different policies and growth, and poverty‐alleviation outcomes in the sample of developing countries examined in the book are addressed. In this chapter, the interplay of ideas and ideology in the formulation of economic policy is introduced. The dominant ideology of economic nationalism is put into historical perspective, as reminiscent of the nation‐building sought by the absolutist monarchies of Renaissance Europe; the similarities between their mercantilist systems of government control and the dirigiste economic policies of developing countries are highlighted. The impetus for reform in both cases is shown to be the paradoxical promotion of economic disorder by attempts to increase the span of government control. The process of economic liberalization (liberalism) in the nineteenth‐century Age of Reform and the current wave in the Third (and Second) World are shown to stem from the same desire of nation‐builders to reassert control over economics made increasingly ungovernable by past dirigisme.

Keywords:   developing countries, dirigisme, economic growth, economic policy, government control, liberalism, mercantilism, nationalism, nation‐building, policy formulation, poverty alleviation

The previous chapter has emphasized the long‐term interactions between the initial resource‐endowments of our countries and their polities. In delineating the factors which influenced long‐term policy formation in this context, we have mainly emphasized the role of interests. We cannot, however, ignore the role of ideas and ideology as determinants of policy. This is our task in this chapter. It will also provide us with an explanation both for why countries have adopted seemingly dysfunctional dirigiste policies and for when and why they reverse them.

I. Two Rival Views of the State and Society

As indigenous political traditions in most of the non‐Western world have been snuffed out by those deriving from the West, it is not surprising that it is two alternative Western conceptions of the state and its relationship to society which are now in contention world‐wide.

In a brilliant historical analysis of the origins of the Western state, Michael Oakeshott (1975) has argued that these two conceptions of the state have deep roots in Western thought. One view, which goes back to ancient Greece, views the state as a civil association. The state is seen as the custodian of laws which do not seek to impose any preferred pattern of ends (including abstractions such as the general (social) welfare, or fundamental rights), but which merely facilitate individuals to pursue their own ends. This view has been challenged by the rival conception of the state as an enterprise association, a view which has its roots in the Judaeo‐Christian tradition. The state is now seen as the manager of an enterprise seeking to use the law for its own substantive purposes, and in particular for the legislation of morality. The classical liberalism of Smith and Hume entails the former, whilst the major secular embodiment of society viewed as an enterprise association is socialism, with its moral aim of using the state to equalize people.

Oakeshott (1993) notes that as in many other pre‐industrial societies, modern Europe inherited a ‘morality of communal ties’ from the Middle Ages. This was gradually superseded from the sixteenth century by a morality of individuality, whereby individuals came to value making their own choices ‘concerning activities, occupations, beliefs, opinions, duties (p.306) and responsibilities’ and also came to approve of this ‘self‐determined conduct’ in others. This individualist morality was fostered by the gradual breakdown of the medieval order which allowed a growing number of people to escape from the ‘corporate and communal organization’ of medieval life. But this dissolution of communal ties also bred what Oakeshott terms the ‘anti‐individual’, who was unwilling or unable to make his own choices. ‘The counterpart of the agricultural or industrial entrepreneur of the sixteenth century was the displaced laborer; the counterpart of the free thinker was the dispossessed believer’. Some were resigned to their fate, but in others it provoked ‘envy, jealousy and resentment. And in these emotions a new disposition was generated: the impulse to escape from the predicament by imposing it upon all mankind’.1 This the anti‐individual sought to do through two means.

The first was to look to the government to ‘protect him from the necessity of being an individual, to make the choices on his behalf which he was unable to make for himself’. A large number of government activities, epitomized by the Elizabethan Poor Law, were devoted from the sixteenth century onwards ‘to the protection of those who, by circumstance or temperament, were unable to look after themselves in this world of crumbling communal ties’.2

The anti‐individual, secondly, sought to escape his ‘feeling of guilt and inadequacy which his inability to embrace the morality of individuality provoked’3 by calling forth a ‘morality of collectivism’, where ‘ “security” is preferred to “liberty”, “solidarity” to “enterprise” and “equality” to “self‐determination”: every man is recognized as a debtor who owes a debt to “society” which he can never repay and which is therefore the image of his obligation to the “collectivity”.’4 Both the individualist and collectivist moralities were different modifications of the earlier communal morality, but with the collectivist morality in addition being a reaction against the morality of individualism which had emerged soon after the Middle Ages.

This collectivist morality inevitably supported the view of the state as an enterprise association. Whilst this view goes back to antiquity, few if any pre‐modern states were able to do more than ‘to maintain peace and order, to guard the laws and customs of the community, when necessary to organize defense, when propitious to embark upon conquest or migration, and to deal with social and economic change when they produced an emergency’. For resources were rarely available even to undertake these basic tasks of government successfully, let alone to undertake any enterprises. ‘The main circumstance that prevented the activity of governing's being, or being thought proper to be, an activity of enterprise was not any abstract principle, but the conspicuous lack of power to be enterprising.’5

This changed with the creation of centralized ‘nation‐states’ by the Renaissance princes and the subsequent Administrative Revolution, as Hicks has labelled the gradual expansion of the tax base and thus the span (p.307) of control of the government over its subjects lives.6 Governments now had the power to look upon their activities as an enterprise. Oakeshott (1993) identifies three versions of the collectivist morality such an enterprise association has since sought to enforce.

Since the truce declared in the eighteenth century in the European wars of religion, the major substantive purposes sought by states seen as enterprise associations are ‘nation‐building’ and ‘the promotion of some form of egalitarianism’. These correspond to what Oakeshott calls the productivist and distributionist versions of the modern embodiments of the enterprise association, whose religious version was epitomized by Calvinist Geneva, and in our own times is provided by Khomeini's Iran. Each of these collective forms conjures up some notion of perfection, believed to be ‘the common good’. Of these three versions Oakeshott notes:

first a ‘religious’ version, where ‘perfection’ is understood as ‘righteousness’ or ‘moral virtue’; secondly a ‘productivist’ version, where ‘perfection’ is understood as a condition of ‘prosperity’ or ‘abundance’ or ‘wealth’; and thirdly a ‘distributionist’ version, where ‘perfection’ is understood as ‘security’ or ‘welfare’. These three versions of the politics of collectivism succeed one another in the history of modern Europe. . . . And in our own time the politics of collectivism may be seen to be composed of a mixture in which each of these versions has its place.7

In the Third World the jealousy, envy, and resentment of the kind which bred the European anti‐individualist were not merely based on the dissolution of the previous communal ties that industrialization and modern economic growth entails, but also, these being post‐colonial societies, such emotions were strengthened by a feeling amongst the native élites of a shared exclusion from positions of power during the period of foreign domination. Gellner (1983) has argued that the resulting nationalism is a natural response in all societies moving from the cultural homogeneity of traditional, rooted and socially immobile agrarian societies, to mobile mass societies; the social mobility being both required by and promoted by industrialization.

It is not surprising therefore that the dominant ideology of the Third World came to be a form of nationalism associated with some combination of the productivist and distributivist versions of the state viewed as an enterprise association. This was moreover aided and abetted by the

crudest of all the voices of lordship, in which European mentors addressed the emergent so‐called states first of South America and later of Africa. Our disposition to recognize what is going on in terms of the constitutions (not the engagements) of governments and of techniques of ruling (not modes of association) has persuaded us that our gifts to these new states have been ‘liberal’ constitutions and a model for an apparatus of ruling, and we are sometimes surprised at their indifference to them. But what they have learned from us is an understanding of a state as a compulsory corporate association and the notion of ruling as the management of a corporate enterprise which they call ‘nationalism’. What these states have never heard is the (p.308) voice of civil association because we ourselves long ago suffered it to be confused with the ‘liberal’ concern for constitutional devices. When the President of Malawi said ‘I don't care what the world calls me, a dictator or what, my job is to develop this country’, he spoke in a European voice.8

Historically, both the secular collectivist versions have led to dirigisme and the suppression or control of the market. For

in the ‘productivist’ version . . . individual choice was to be removed from the activity of production and . . . replaced by a cooperative activity directed and managed by a central authority; in the ‘distributivist’ version, individual choice was to be removed from the activity of distributing the available wealth: the market was to be replaced by a central distributing authority, and the principle of distribution was one of ‘equality’.9

II. Economic Nationalism

Not surprisingly, therefore, a common ideological feature of all our countries, with the single exception of the only colony in the sample—Hong Kong—is economic nationalism. Its economic manifestation is the common desire to industrialize, often through dirigiste means, which is to be found in all our countries.10 The one exception, as emphasized by Pryor, is Malawi under Banda, who, whilst being a nationalist, has unlike most of his peers emphasized the importance of agricultural growth for his country. Haunted by memories of colonialism (as in most African and Asian countries) or their perceived inferiority with reference to the Western metropolitan powers (as in most countries in Latin America), most Third World governments considered their limited industrial base to be the major reason for their relative lack of power in their dealings with the West. Industrialization is then seen as an essential basis both for their self‐respect11 and for waging modern wars, and its promotion as the chief means to overcome that inherent military weakness which led to their subjugation in the past by superior Western arms. In this context, the dirigiste example of the Soviet Union was found particularly attractive (though not necessarily its Communism), since it was deemed to show how a weak and poor underdeveloped country industrialized through planning and became a great power within one generation.12

The nationalist desire to assert national independence is also reflected in a common suspicion of free trade and of foreign capital (Banda in Malawi and Lee Kuan Yew in Singapore being notable exceptions). The danger for the rulers is that dependence on these foreign transactions may be used to subvert or weaken, through direct or indirect pressure, the internal hold of the rulers over the ruled. This threat of direct or indirect subversion is then seen as a means of putting pressure on the medium‐sized or small powers (p.309) to change a course of policy ‘which the national interest—or the interest of its leaders—would appear to require’.13

Nationalism as an idea is thus a Western import into the Third World. It arose as an ideology in Europe as the Romantic reaction to the universalist, rationalist schema of the Enlightenment, and its view that man's relationship to the surrounding world is purely manipulative.14 It initially arose as the reaction of wounded German pride, following the French Revolution and the success of Napoleon's armies, ‘against the French cultural domination of the Western world’.15 Though nationalism, both in Europe and more recently in the ex‐colonies, was in part the reaction of actual or potential élites to military defeat, this can by no means be considered a sufficient explanation for this new idea to have arisen. For as Kedourie and Berlin have emphasized, throughout history the cultural or political pride of various peoples has been wounded without entailing a nationalist response. The special ingredient which led to the nationalist response was the rapid modernization of traditional societies. This modernization was imposed by leaders who were by no means Romantics—such as Frederick the Great in Prussia, or Peter the Great in Russia—to acquire the modern material basis of economic and, more importantly, military power. The same response was elicited by the westernization imposed by colonialism or by those indigenous élites which sought to imitate the West (for instance, the Japanese after the Meiji Restoration) in our time.

This modernization disrupted traditional ways of life, and

left men, and especially the most sensitive among them—artists, thinkers, whatever their professions—without an established position, insecure and bewildered. There is then an effort to create a new synthesis, a new ideology, both to explain and justify resistance to the forces working against their convictions and ways of life, and to point in a new direction and offer them a new centre for self‐identification.16

But as Plamenatz (1973) has emphasized, the resulting nationalism was of at least two different types, which he labels ‘Western’ and ‘Eastern’. The former was that of the Germans and the Italians, the latter that of the Slavs, the Asians, and the Africans. The major difference was that, whereas the Western nationalists already had the cultural appurtenances and skills to put them on a par with the French and English, the ‘Eastern’ nationalists have had to re‐equip themselves culturally with the ideas and practices of an alien civilization.

Moreover, nationalism in Asia and Africa has grown within the arbitrarily defined territorial boundaries of the colonial state. This was no accident. For it was within these colonial boundaries that the West had succeeded in erecting a state:

a legal and administrative entity which worked, an entity which the West had succeeded in identifying with the nation. As nationalists they felt secure inheriting such an entity and felt challenged to preserve this entity and make it strong, just and (p.310) prosperous as the colonial power had never done . . . It is perhaps fitting that nationalism which began as anti‐western should end by throwing off western rule in the name of the most western institution of the new order.17

Thus, whereas the task as seen by German, Italian, and to some extent Slav nationalists was to create a state for a pre‐existing cultural and political nation, most African and some Asian nationalists inherited and cherished states created by colonialists, within which they have since sought to create a modern nation.

As a result, Afro‐Asian nationalism, unlike that of the West, has involved two sets of ambivalent rejections: ‘rejection of the alien intruder and dominator who is nonetheless to be imitated and surpassed by his own standards, and rejection of ancestral ways which are seen as obstacles to progress and yet also cherished as marks of identity.’18

After its repudiation of the militarist attempt to challenge the West, Japan has emerged as the only country to succeed in this contorted balancing act in establishing a state with a modern identity rooted in traditional culture.19 Many of the nationalist élites of the Third World are still struggling to find ways of achieving their primary objective of securing their power and prestige against any future challenge either from external foreign intrusions of from any internal subversion by the upholders of the traditional societies they seek to remould. They are all aware of the need both for economic progress and for the making of nations out of their subject people, so that they can better defend their sovereignty.

The economic nationalism common to most Third World governments can thus be seen as the desire to modernize, where the modernizers have often considered themselves to be a minority charged with the task of forcing the people to be free. But the nationalism and dirigisme they have then espoused in subserving this end, through the promotion of economic development as well as the development of a truly national consciousness, has proved to be a double‐edged sword.

The process of economic development which all Third World élites seek to foster involves profound changes over time in existing patterns of income distribution, where the latter is not to be thought of in the purely statistical sense, but in terms of what happens to the incomes (and status) of particular households over time. Even without any marked change in the statistical measure of this distribution, economic growth is likely to lead to a considerable and often rapid shuffling of the relative economic position and prospects of particular individuals and households. In a genuine nation‐state, the ensuing resentment of the losers may be mitigated by the solace they may find in the accompanying national gains. The resentment is, therefore, unlikely to turn into the deadly conflicts to be found in the pseudo‐nation‐states of the South, with their ancient and still pervasive cleavages of race, religion, or tribe, where these shufflings can be so easily (p.311) identified as the humiliation of one sub‐nationality by another. The nationalist rhetoric of the political élite can then rebound (as it has done quite often in the recent past) into demands to dismember the territorial state, whose preservation was the prime end for which nationalism had been conjured up in the first place.20

Early German and Italian nationalism was largely integrative and economically beneficial, both because of the larger common markets created out of the German and Italian principalities, and because of the partial containment of political discontent arising from the distributional shuffling involved in economic development. By contrast, ‘Eastern’ nationalism, seeking to build a nation out of the sub‐national groups within an inherited state, can lead to a breaking up of the common market, with all its attendant economic damage. Not surprisingly, therefore, it is in the relatively ethnically homogeneous polities of East Asia that nationalism has performed the integrative emotional and economic function that it did in the West. In the more fragile and pluralistic polities of South‐East Asia, South Asia, and Africa, by contrast, nationalist rhetoric used to gain independence from colonialism has created as many problems of national integration as it was hoped it would solve.

Nor has the type of dirigisme espoused in many Third World countries proved helpful in establishing an economically progressive nation‐state. This is in part because of the Enlightenment strand in this form of dirigisme, which has come to be associated with the notion of planning—a term that, like ‘socialism’, seems to have as many different meanings as adherents. Though for some socialists planning is synonymous with Soviet practice, this form of detailed material‐balance planning has not—outside India—been adopted by the South.21 However, two aspects of Soviet practice have struck a deep chord and been embodied in the economic policies of many of these countries. The first is a suspicion of the price mechanism, accompanied by attempts to supplant or control its working. The second is a suspicion of international trade and a preference for the forced industrialization (usually termed ‘self‐reliance’) seemingly so successfully pioneered by the USSR. This suspicion of foreign trade was not purely ideological, but the lesson drawn from the effects of the inter‐war collapse of world trade on the economies of those countries most integrated into the world economy.

As a result, the economic policies of many Southern countries have involved supplanting the price mechanism by bureaucratic allocative mechanisms in the form of price controls, industrial licensing, exchange controls, and quantitative restrictions on foreign trade. These policies have now become synonymous in these countries with planning. The harm that this irrational dirigisme has done to the end of promoting growth as well as equity (an aim shared by all types of socialists) is documented in our country studies.22 In practice, therefore, the type of dirigisme usually (p.312) adopted has made promotion of the economic progress required to provide the material basis for the desired national self‐autonomy all the more difficult.

However, in many of our countries, the government at some stage realized the dysfunctional nature of its past dirigisme and changed course in the 1960s and 1970s (Singapore, Thailand, Indonesia, Uruguay, Turkey), whilst others did not do so until much later (Sri Lanka, Ghana, Nigeria), and some only did so after the end of our period of study (1985) (Peru, Madagascar). The question then arises: What are the circumstances in which governments alter policies which experience has taught them no longer serve the twin purposes of economic development and national integration? A historical review of the rise and fall of mercantilism and the subsequent rise and fall of economic liberalism is useful in answering this question.

III. Nation‐Building and the Rise and Fall of Mercantilism

Whilst our political‐economy models have by and large emphasized the importance of self‐interest (of the rulers or the pressure groups, or the ‘median voter’) in determining the policies pursued in the Third World, the previous section has emphasized the importance of ideology, in particular the universal appeal of economic nationalism in most developing countries. The aim of this economic nationalism, we have argued, can be broadly described as ‘nation‐building’. This aim is very similar to that expressed by the absolute monarchies in Europe after the Renaissance. It is no accident that, like current Third World rulers, they too thought dirigisme was the means to build cohesive nation states.

The mercantilist system which provided the foil for Adam Smith's great work arose, as Eli Heckscher has shown (in his monumental study Mercantilism), from the desire of the Renaissance princes of Europe to consolidate their power by incorporating various feuding and seemingly disorderly groups, which constituted the relatively weak states they inherited from the ruins of the Roman empire, into a nation. Its purpose was to achieve ‘unification and power’, making the ‘State's purposes decisive in a uniform economic sphere and to make all economic activity subservient to considerations corresponding to the requirements of the State’. The same nationalist motive also underlay the very similar system of mercantilist industrial and trade controls that were established in much of the post‐war Third World.

In both cases the unintended consequences of these controls, instituted to establish order, was to breed disorder. As economic controls became onerous, people attempted to escape them through various forms of evasion (p.313) and avoidance. In the post‐war Third World, as in eighteenth‐century Europe, dirigisme bred corruption, rent‐seeking, tax evasion, and illegal activities in underground economies. The most serious consequence for the State was an erosion of its fiscal base and the accompanying prospect of the un‐Marxian withering away of the state. In both cases economic liberalization was undertaken to restore the fiscal base, and thence government control over what had become ungovernable economies. In some cases the change‐over could only occur through revolution—most notably in France23

To understand this process it is instructive to examine the rise and fall of dirigisme in Europe from the sixteenth to the nineteenth century.

Historians of economic thought recognize that mercantilism provided the first relatively systematic set of economic‐policy prescriptions.24 These are important for our purpose, because, as is increasingly being realized,25 the policies of many Third World states—with their industrial regulations, state‐created monopolies, import and export restrictions, price controls, at cetera—are very similar to the mercantilist policies adopted by the absolutist states of Europe after the Renaissance.26 This is no accident.

One of the main objectives of the various mercantilist regulations was to grant trade privileges as royal favours in exchange for revenue to meet the chronic fiscal crisis of the state—a problem of the sixteenth and seventeenth centuries shared by many countries of the modern‐day Third World. Another was to extend the span of government control over the economy to facilitate its integration. But the system collapsed under the administrative burden it created. As Keynes pointed out:

Above all, the ineptitude of public administration strongly prejudiced the practical man in favour of laissez‐faire—a sentiment which has by no means disappeared. Almost everything which the state did in the 18th century in excess of its minimum functions was, it seemed, injurious or unsuccessful.27

The consequences of the regulations and controls, particularly on internal trade and industry, were similar to those observed in many developing countries—corruption, rent‐seeking, tax evasion and the growth of illegal activities in burgeoning underground economies.28 The processes that caused mercantilism to be replaced by economic liberalism for a brief period in the mid‐nineteenth century are beyond the scope of this discussion. But the consequences of the new policy prescriptions are of some importance.

Paradoxically, the new‐found economic liberalism (although short‐lived) achieved the goal sought by mercantilism:

Great power for the state, the perpetual and fruitless goal of mercantilist endeavour, was translated into fact in the 19th century. In many respects this was the work of laissez‐faire, even though the conscious efforts of the latter tended in an entirely different direction.


The result was attained primarily by limiting the functions of the state, which task laissez‐faire carried through radically. The maladjustment between ends and means was one of the typical features of mercantilism, but it disappeared once the aims were considerably limited. In laissez‐faire they consisted, indeed, only in certain elementary and unavoidable functions of foreign policy, defence, legislation, and the administration of justice, nicknamed by Carlyle ‘Anarchy plus the Constable’. Disobedience and arbitrariness, unpunished infringements of the law, smuggling and embezzlement flourished particularly under a very extensive state administration and in periods of continually changing ordinances and interference with the course of economic life. It was because the regime de l'ordre bore this impress that disorder was one of its characteristic features.29

The resulting framework for economic policy can be described as economic liberalism, in the original sense of the term and not in the sense of social democracy used in the mid‐twentieth century, at least in the US.30

But the ensuing period of economic liberalism during the nineteenth century's great Age of Reform was short‐lived, in part due to the rise of another substantive purpose that most European states came to adopt—the egalitarian ideal promulgated by the Enlightenment. Governments in many developing countries also came to espouse this ideal of socialism. The apotheosis of this version of the state viewed as an enterprise association were the Communist countries seeking to legislate the socialist ideal of equalizing people. The collapse of their economies under similar but even more severe strains than those that beset less collectivist neo‐mercantilist economies is now history. But the desire to promote egalitarianism through state action still lingers on as part of social‐democratic political agendas in many countries.

The locus and nature of the argument of those who want to use the state to promote egalitarianism has, however, shifted in a subtle way. In the past such activists, who sought to transform society through state action, usually argued in favour of some form of revolution whereby the anointed would seize power and irreversibly transform society, if necessary by indoctrination to create a New Man.31 With the revolutionary route at least tarnished by the hideous outcomes in Communist countries—which even fellow‐travellers now concede—a new constitutional mania32 has set in. This emphasizes substantive social and economic rights in addition to the well‐known rights to liberty—freedom of speech, contract, and association being amongst the most important—emphasized by classical liberals. It seeks to use the law to enforce these rights, based partly on needs, and partly on the ‘equality of respect’ desired by a heterogeneity of self‐selected minorities differentiated by ethnicity, gender, and/or sexual orientation. But no less than in the collectivist societies that have failed, this attempt to define and legislate a newly discovered and dense structure of rights (including for some activists those of non‐human plants and animals) requires (p.315) a vast expansion of the government's power over people's lives. Their implementation moreover requires—at the least—some doctoring of the market mechanism.

IV. The Rise and Fall of Economic Liberalism

The evolution of economic thought on appropriate public policy has followed (if not led) these political tides. It is useful to outline these, to set the subsequent policy conclusions of this book in context.

Mill defined explicitly the policy prescriptions of classical economic liberalism. Thus it is useful to look at the justifiable government interventions listed in his Principles. He begins his chapter ‘Of the Grounds and Limits of the Laissez‐faire or Non‐interference Principle’33 by distinguishing two types of intervention. The first he calls authoritative interference, by which he means legal prohibitions on private actions. Mill argues on moral grounds that such prohibitions should be limited to actions that affect the interests of others. But even here ‘the onus of making out a case always lies on the defenders of legal prohibitions. Scarcely any degree of utility, short of absolute necessity, will justify a prohibitory regulation, unless it can also be made to recommend itself to the general conscience’.34

The second form of intervention he calls government agency, which exists ‘when a government, instead of issuing a command and enforcing it by penalties, [gives] advice and promulgates information . . . or side by side with their [private agents] arrangements [creates] an agency of its own for like purpose’.35 Thus the government can provide various private and public goods, but without prohibiting competing private supply. The examples Mill gives are banking, education, public works, and medicine.

Most of the government interventions Mill allows belong to this second category. But he warns against their costs: they have large fiscal consequences; they increase the power of the government;36 ‘every additional function undertaken by government, is a fresh occupation imposed upon a body already charged with duties’. so that ‘most things are ill done; much not done at all,’37 and the results of government agency are likely to be counterproductive. In a passage that is prophetic about the structure of many public enterprises in developing countries, he writes:

The inferiority of government agency, for example, in any of the common operations of industry or commerce, is proved by the fact, that it is hardly ever able to maintain itself in equal competition with individual agency, where the individuals possess the requisite degree of industrial enterprise, and can command the necessary assemblage of means. All the facilities which a government enjoys of access to information; all the means which it possesses of remunerating, and therefore of commanding the best available talent in the market—are not an equivalent for the one great disadvantage of an inferior interest in the result.38

(p.316) On these grounds he concludes: ‘few will dispute the more than sufficiency of these reasons, to throw, in every instance, the burden of making out a strong case, not on those who resist, but on those who recommend, government interference. Laissez‐faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil’.39

But Mill also provides a bridge to the ideas that were later to undermine economic liberalism. The most important of these was the socialist ideal of equality, which was later used to develop a powerful antidote to the liberal tradition through Marxism and was implemented as state socialism by the Bolsheviks. Thus Mill allows various forms of government agency, many of which echo what later came to be recognized as causes of market failure, that prima facie could justify appropriate government intervention. Such causes might be externalities in the provision of basic education and public services (like lighthouses), and the need to supervise financial institutions against fraud, or to resolve various forms of what today would be called Prisoners' Dilemmas. Mill also cited the relief of poverty (in the sense of destitution—see Chapter 1) as another possible reason for government intervention:

The question arises whether it is better that they should receive this help exclusively from individuals, and therefore uncertainly and casually, or by systematic arrangements in which society acts through its organ, the state.

Hence, he argued,

the claim to help, . . . created by destitution, is one of the strongest which can exist; and there is prima facie the amplest reason for making the relief of so extreme an exigency as certain to those who require it, as by any arrangements in society it can be made. On the other hand, in all cases of helping, there are two sets of consequences to be considered; the consequences of the assistance, and the consequences of relying on the assistance. The former are generally beneficial, but the latter, for the most part, injurious; so much so, in many cases, as greatly to outweigh the value of the benefit. And this is never more likely to happen than in the very cases where the need of help is the most intense. There are few things for which it is more mischievous that people should rely on the habitual aid of others, than for the means of subsistence, and unhappily there is no lesson which they more easily learn. The problem to be solved is therefore one of peculiar nicety as well as importance; how to give the greatest amount of needful help, with the smallest encouragement to undue reliance on it.40

This is a prescient summary of both the attractions and pitfalls of welfare programmes, which has since been validated empirically, as we shall see in Chapter 9.

Indeed, nowhere in Mill's authoritative text on nineteenth‐century economic liberalism do we find any hint that its principles worked against the state, or the poor, as has been charged by modern thinkers.41 It is (p.317) important to recognize, however, that although liberalism granted these important exceptions ‘to the practical maxim, that the business of society can be best performed by private and voluntary agency’,42 what Keynes called the ‘laissez‐faire dogma’43 had become entrenched amongst the political classes. But this dogma was not without its uses. As Heckscher notes:

Free competition, individualism and the limitation of state encroachment often became pure dogmas among practical men of affairs and politicians . . . without any conscious rational foundations. That such a normative outlook existed is, in itself, by no means a criticism of laissez‐faire. Some norm or other is always behind conscious action, for every action presupposes such a conception of the norm as, in itself, is not demonstrable. Here it was a question, in fact, not of science but of economic policy, that is not of thought but action.44

This liberal ‘disposition towards public affairs’, to use Keynes's phrase,45 did not outlast the resurgence of economic nationalism and socialism which arose in Europe towards the end of the nineteenth century, and grew in importance after the First World War.46

Diverse social and intellectual trends, including important advances in scientific economics, led to the subsequent development in the post‐1930s world of what one of us has labelled the dirigiste dogma.47 The various forms of discretionary government intervention most cogently justified on grounds of ‘market failure’, within the Arrow–Debreu paradigm, provided the intellectual ballast for a new form of mercantilism, particularly in the Third World.48 Can anyone doubt that the ensuing mercantilist view of social causation also underlies our modern‐day ‘optimal’ tax theory, planning in its various forms, and the discretionary use of public action to correct the perceived ills of private agency? In the modern variant of mercantilism, of course, the objective of economic policy is no longer the ‘welfare of the state’, but the welfare of the citizens as summarized in a social welfare function laid down by the state. Heckscher writes: ‘The underlying idea of mercantilism may be expressed as follows: people should be taken as they are and should be guided by wise measures in the direction which will enhance the wellbeing of the state. No one was more explicit in this view than Mandeville (1723).’ ‘Private vices’, he observed, ‘by the dexterous management of a skilful politician may be turned into public benefits’.49 The consequences of the neo‐mercantilist practices that the dirigiste dogma has engendered in the Third World (and in its macroeconomic aspects in the First World),50 not to mention in the wholly centralized socialist states of the Communist world, are very similar to those that helped undermine the mercantilist states of seventeenth‐ and eighteenth‐century Europe. The contemporary reaction (as in the past) has been to move toward economic liberalism (to varying degrees), in large part to gain state control over unmanageable economies. This recent world‐wide (p.318) movement towards economic liberalism, embracing governments of all political complexions, has been labelled a new Age of Reform by an acute observer, David Henderson, from the vantage point of the OECD.51 But it is still progressing half‐heartedly, in part because the dirigiste dogma continues to have a hold on the minds of the ‘thinking’, or (as Mrs (now Lady) Thatcher has labelled them) the ‘chattering’ classes. There are a number of reasons for this state of affairs.

The first is self‐interest. Enlightened government intervention (the neo‐mercantilist objective) requires experts.52 The rise of the professional classes is well documented in Britain.53 ‘It is professionals, whose power lies in expertise and in the rent they are able to extract for that, who have come to run the country . . . Its natural base was the state; its preferred model, what was later called corporatism.54 These mandarins are for self‐interested reasons supporters of the dirigiste dogma.

But, as we have seen, two other currents flow through the dirigiste dogma. The first is the belief, first propounded by Mill, that questions of allocation can be separated from those of the distribution of income:

The laws and conditions of the production of wealth, partake of the characters of physical truth. There is nothing optional, or arbitrary in them . . . It is not so with the distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please and on whatever terms.55

This view is at odds with that of the classical thinkers (including Marx), who did not believe you could separate questions concerning distribution and allocation in this manner.56 Attempts to legislate a particular distribution of income invariably affect the productive efficiency of the economy, because of problems concerned with information and incentives. This has been borne out not only by our sample of countries, but also from the experience of many Western economies, and, most tellingly, in ex‐Communist countries.

The second legacy of Mill, the neglect of the polity, has reached its apotheosis in contemporary technocratic economics, which assumes that the two so‐called Fundamental Theorems of Welfare Economics derived within the Arrow–Debreu framework are applicable in practice to any polity when it comes to policy analysis. The same framework, however, provides an antidote for this problem that is increasingly recognized. According to Partha Dasgupta, one of the more distinguished theorists of this technocratic mould,

The operational appeal of the Fundamental Theorem of Welfare Economics is of course minimal. The informational requirements for the state are awesome. It is required to know the preferences, endowments and the (personalized) production set of all individuals. These observations alone suggest that individual rights to (p.319) certain private decisions may not only be a moral imperative, but may at once be a necessity prompted by the fact that the state possesses incomplete information.57

He then summarizes the recent mathematical economics literature on ‘incentive compatibility’ and the problems this approach raises for a command economy run by mandarins, as Hayek and Mises pointed out at the start of the ‘planning debate’ in the 1930s.58 The only feasible incentive‐compatible mechanism for allocating resources in this framework is not a command economy, but one that achieves a full optimum by working through the price mechanism supplemented by optimal taxes and subsidies.

The question is, what sort of mandarins would be needed to design and administer optimal taxes? To achieve the desired outcomes, the mandarins would have to be ‘economic eunuchs’ (in James Buchanan's apt phrase). As Dasgupta has also pointed out,

It has been an abiding shortcoming of applied welfare economics that it has for the overwhelming part supposed a perfect government—one that faithfully goes about its tasks. But if one addresses oneself to the question of what incentives there must be to ensure that governments undertake their tasks faithfully one is, at a minimum, faced with the principal‐agent problem with all its attendant difficulties.59

Both events (experience) and ideas have therefore undermined the post‐war dirigiste dogma. Above all, particularly in the Third and Second Worlds, the undesirable consequences of post‐World‐War‐II neo‐mercantilism—not least for the state—have made a return towards economic liberalism possible, as did the consequences of seventeenth‐ and eighteenth‐century mercantilism.


(1.) Oakeshott (1993: 24).

(2.) Ibid. 25.

(3.) Ibid.

(4.) Ibid. 27.

(5.) Ibid. 10.

(6.) Hicks (1969: 99).

(7.) Oakeshott (1993: 92).

(8.) Oakeshott (1975: 296 n. 2).

(9.) Oakeshott (1993: 108).

(10.) This is based on Lal (1978, 1985a).

(11.) Thus Rimmer (1992: ch. x, p. 35) reports Ghana's Nkrumah as stating: ‘It is precisely because we were, under colonialism, made the dumping ground of other countries' manufactures . . . that we remained backward; and if we were to refrain from building, say, a soap factory simply because we might have to (p.320) raise the price of soap to the community, we should be doing a disservice to the country.’

(12.) In fact, of course, the Soviet Union had undergone considerable industrialization—particularly in heavy industry—before the Revolution. The Soviets merely perpetuated the myth that they were completely underdeveloped in order to make their subsequent achievements seem more impressive. Since the advent of perestroika and glasnost under Gorbachev, it is now recognized that the Soviet Union may have been a great military power but it was still by and large really a Third World economy.

(13.) Vital (1967); also see Lal (1975).

(14.) See Berlin (1979); Plamenatz (1973); Kedourie (1966, 1970); Wang (1973); and Stein and Stein (1970).

(15.) Berlin (1979: 20).

(16.) Ibid. 349.

(17.) Wang (1973: 92).

(18.) Plamenatz (1973: 34).

(19.) It is still too early to say whether, with their fledgeling democracy, the South Koreans too have entered this category.

(20.) In our sample of countries the violent civil wars surrounding the issues of Biafra in Nigeria and Tamils in Sri Lanka are examples, whilst the Shining Path movement in Peru can be looked upon as another civil war to assert the rights of the Andean Indians.

(21.) See Wiles (1967).

(22.) The country studies of Jamaica, Ghana, Madagascar, Egypt, Nigeria, Uruguay, and Peru in our sample of countries, for instance, provide ample evidence for these assertions.

(23.) See Aftalion (1990).

(24.) See for instance Schumpeter (1954).

(25.) See de Soto (1989) and Lal (1983: 108–9).

(26.) To ascertain the validity of this assertion the reader need only open at random the detailed account of mercantilist practices in Europe contained in the first volume of Heckscher's (1955) scholarly masterpiece to see that most of the practices described, of the regulation of both internal trade and industry and external trade and commerce, are still widespread in most Third World states.

(27.) J.M. Keynes (1928: 12).

(28.) See de Soto (1989) for a fuller elaboration and references.

(29.) Heckscher (1955: 325).

(30.) Schumpeter (1954: 394) noted: ‘the term has acquired a different—in fact almost the opposite—meaning since about 1900 and especially since 1930 . . . as a supreme, if unintended compliment, the enemies of the system of private enterprise have thought it wise to appropriate its label.’

(31.) Sen (1973) characterizes the Chinese cultural revolution in these terms, and with some implicit approbation!

(32.) This term and the following argument are due to Minogue (1993).

(33.) Mill (1970: ch. XI of book V).

(34.) Ibid. 306–7

(35.) Ibid. 305.


(36.) Mill is not sanguine about the consequence that ‘the public collectivity is abundantly ready to impose, not only its generally narrow views of its interests, but its abstract opinions, and even its tastes, as laws binding individuals’ (ibid. 308).

(37.) Ibid. 309.

(38.) Ibid. 311.

(39.) Ibid. 314.

(40.) Ibid. 333–4.

(41.) This point is argued more fully in Sowell (1977).

(42.) Mill (1970: 345).

(43.) J.M. Keynes (1928).

(44.) Heckscher (1955: ii. 331) (emphasis added).

(45.) J.M. Keynes (1928: 5).

(46.) Keynes cites Cairnes's introductory lecture on ‘Political Economy and Laissez Faire’, delivered at University College, London in 1870, as ‘the first by an orthodox economist to deliver a frontal attack upon laissez faire in general’. That the socialist ends had, however, grudgingly come to be accepted, is noted by Keynes, who quotes Cannan: ‘ “Scarcely a single English economist of repute”, as Professor Cannan has expressed it, “will join in a frontal attack upon socialism in general”, though, as he also adds, “nearly every economist, whether of repute or not, is always ready to pick holes in most socialistic proposals” ’ (ibid. 26). Of course Keynes himself explicitly claimed in his General Theory a direct line of descent for his views from the mercantilists. For a scathing critique of Keynes's support of mercantilism, see Heckscher (1955: appendix on ‘Keynes and Mercantilism’).

(47.) Lal (1983: 25). Two books by Hirschman (1977, 1982) are important in exploring the changing fortunes of economic liberalism.

(48.) Two eminent theorists have in fact argued for a prima‐facie case for dirigisme within this framework. See Sen (1983) and Hahn (1984, 1985); Lal (1987a) is a critique of their views.

(49.) Heckscher (1955: ii. 293).

(50.) Though in this section we are emphasizing the evolution of ideas, and relating them to changing policy regimes, this does not imply that we necessarily subscribe to the view most celebratedly propounded by Keynes, that ideas (often defunct) determine policies. On the lines of the new political economy, it is as likely that interests determine events, including changes in policy regime, and if these are far‐reaching, a new set of ideas may emerge (or re‐emerge) to rationalize them. That ideas lag behind events moved by interest seems to us as valid a position to take on the interaction of ideas and interests as the self‐glorifying view of Keynes and many economists that ideas necessarily determine policy.

An interest‐based explanation for the rise of mercantilism is provided by Ekelund and Tollison (1985); they argue for instance that the mercantilists' ‘balance of trade objective was nothing more than the by product of the interplay of numerous self‐interested parties who were seeking rents from monopolization in these early nation‐states’ (p. 5). Similarly the breakdown of the system was not caused by the victory of liberal ideas, but ‘poor regulatory design on the local level and competitive rent seeking forces at the national level (p.322) were the primary factors leading to the demise of economic regulation in England’ (ibid. 14).

In a similar vein, Rogowski (1987), using a variant of the three‐factor model we have outlined, shows how, given its relative factor endowments, Britain in the 19th century was capital‐ and labour‐rich and land‐poor, and hence the interests of the median voter (in our terms) favoured the repeal of the Corn Laws, and free trade. By contrast Germany was poor in both capital and land and rich in labour, with the polity dominated by capital and land, whose interest was in protection. Hence the emergence of the infamous ‘marriage of steel and rye’ in the late 19th century.

(51.) Henderson (1989).

(52.) As Keynes amongst many others recognized.

(53.) See for instance the recent book by Perkin (1988), and the excellent review of this book by Hawthorn (1989).

(54.) Hawthorn (1989).

(55.) Mill (1970: book II, ch. I, pp. 349–50).

(56.) Gray (1984: 102) notes that

Hayek has always recognized that Mill began the ‘manna from heaven’ presumption of contemporary distributivist theories. It may be said that what distinguishes Mill from Hayek—and, for that matter, from Marx—is Mill's lack of any clear view of production and distribution as inseparable parts of a single economic system. We may have a choice between economic systems (though it is the burden of the Mises‐Hayek‐Polanyi argument about resource allocation under socialism that our freedom is far more restricted than we suppose); we do not have the freedom to mix the productive arrangements of one system with the distributive arrangements of another. This is a truth understood by all classical economists, including Marx, which Mill's influence has helped to obscure.

(57.) Dasgupta (1980: 112).

(58.) See Hayek (1935).

(59.) Dasgupta (1980: 119).