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Identifying a form of government intervention in social and economic affairs called public service liberalism, Alan Stone looks to that ideology to confront the problems of the 1990s and beyond. He shows in this fascinating case study that the policy has been effective in the past: the American telephone industry from its inception until 1934 is an illustration of how public service liberalism served both economic efficiency and a complex structure of public values. Stone depicts the stages by which public service liberalism was replaced by less adequate policies and suggests ways that it could be successfully restored. Furthermore, Stone demonstrates that government-business relationships like the one that prevailed in the telephone industry were common in the nineteenth and the early twentieth century. He argues that this period was not an era of laissez-faire, as is often alleged, but that its economic energy and extraordinary technological progress were accompanied by complete acceptance of certain kinds of government intervention. Challenging the presuppositions not only of the new ideologists of deregulation, privatization, and competition but also of the practitioners of what he calls the "sanctimonious muddle" of present-day liberalism, Stone demonstrates that public service liberalism could help resolve current problems, such as those in the savings and loan institutions and the cable television industry.
Originally published in 1991.
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The Counterrevolution in Public Policy
Since the mid-1970s a new trend has come to dominate thinking about the political economy in much of the Western world. The Keynesian and mixed economy notions that dominated most post–World War II political-economic thinking have been supplanted by fervent advocacy of deregulation of state-controlled sectors, privatization of state-owned enterprises, and most important, a belief in competition as the only reasonable economic arrangement. In some countries, such as the United States, where state-owned enterprises are few compared to Western Europe, only a part of this framework is emphasized. But throughout the capitalist world and even to some extent in the less developed and socialist nations, the triad of deregulation, privatization, and competition has been in the ascendancy with varying emphases from country to country.
The dominance of these theoretical views in economic and governmental circles ensued for a variety of reasons. First, such major intellectual leaders as Nobel laureates Milton Friedman, Friedrich A. Hayek, and George Stigler and their numerous followers have forcefully advocated these policy prescriptions. But intellectual advocacy will usually not persuade public policymakers or become a dominant ideological trend unless events in the real world seem to call out for new solutions. In the West, oil shocks, rapid inflation, high levels of unemployment, and other troublesome trends shook the consensus in the efficacy of postwar policies. At the same time the stagnation—indeed, backwardness—of the socialist economies led most observers in the West to reaffirm their belief in the dire consequences of state intervention, either in the extreme form of ownership or in the lesser form of excessive regulation. In both circumstances, it was held, the vital ingredient of entrepreneurship was thwarted by the heavy hand of government. The argument continued that a revival of entrepreneurship and progressiveness could come about only through competition. Finally, in the Third World it became clear that those nations adopting capitalism were growing, while those following the socialist path were stagnating or, worse yet, crumbling.
The new ideologists of deregulation, privatization, and competition claimed they were not embarked on a new experiment but rather the rediscovery of an older public policy tradition. Although aware of the period's harshness, they looked wistfully backward to the great economic takeoffs in England and the United States in which laissez-faire was the alleged engine of growth, inventiveness and entrepreneurship. Then during the twentieth century the state undertook more and more control and restraint. Gradually, according to this view, state control took its toll, eroding entrepreneurship, innovation, productivity, and finally, economic growth.
It is the contention of this book that the view of a laissez-faire past with minimal government intervention is profoundly wrong. The enormous energy of the English and American economies in the nineteenth and early twentieth centuries and the extraordinary technological progress and inventiveness of that period were associated with considerable government intervention. The underlying ideological perspective behind the remarkable achievements of the period was not laissez-faire but public service liberalism, a conception we will more fully examine later. Public service liberalism posits a presumption in favor of free competition that can be rebutted by showing that government intervention is necessary to attain social values that the unfettered market may not achieve. This conception, elaborated by John Stuart Mill, was gradually abandoned. But the change in conception was not simply from free competition to state control; it was far more complicated than that. Even today, the ideologues of free competition ignore the large state role in such dynamic economies as Japan, South Korea, and the Federal Republic of Germany.
Public service liberalism, like every other conception of public policymaking, always had its opponents. Socialists, populists, and libertarians for differing reasons opposed an ideology whose centerpiece is a rebut-table presumption in favor of free competition, but a presumption that can readily be invoked when important values in addition to economic efficiency are at stake. But as the story of American telecommunications policies illustrates, the decline of public service liberalism and its replacement by modern liberalism cannot be attributed to these opponents. Rather, it is attributable to policymakers and elites who did not overtly challenge the old order. Instead, during the Progressive Era they used new approaches that undermined public service liberalism to solve policy problems as they arose. The most important set of such problems were those that arose in connection with the need for a rapid, effective mobilization in World War I. Modern liberalism, which then began to supplant public service liberalism, entailed a more positive state role in which the issues were no longer posed in the forms required under public service liberalism. Rather, under the exigencies of rapid wartime economic mobilization and drastic changes in the allocation of resources, it was assumed that state intervention and leadership, often of an elaborate kind, were required when there were problems to be solved. No longer was there a presumption in favor of market and voluntary solutions.
The changes in public philosophy were, thus, not dramatic but subtle. The participants did not debate these changes as Abraham Lincoln and Stephen Douglas debated the great issues of slavery and states' rights, with each side knowing precisely where it stood. Rather, like some fundamental changes, the participants during the period from World War I until the Great Depression focused more on specifics than on major confrontations in philosophy. As we shall see in chapter 8, the coming of radio provides an excellent case of how the transition in public philosophy occurred. Then the collapse of the American economy in 1929 shattered the older system of public service liberalism in virtually every sector except the set of industries conventionally grouped together as public utilities. In turn, the burgeoning state role had another important outcome—what political scientist Theodore J. Lowi describes as interest group liberalism. Under it various forces sought to use state intervention in both the legislative and administrative arenas to achieve their ends, often by portraying their private ends as public ones.
Although the New Deal is often considered the beginning of a trend, it is, according to the view advanced here, the culmination. Like measles, modern liberalism began earlier than its most transparent symptoms. The forces that gradually led to the erosion of public service liberalism and the ascendancy of modern liberalism are numerous, but several are critical. Among the most important of these factors was the development of professionalism. Historian Robert Wiebe locates the burgeoning of professionalism at the dawn of the twentieth century. Older professions, such as medicine, raised formal entry barriers in order to bar the unfit, while at the same time establishing professional societies (such as the American Medical Association) to disseminate technical information within the profession and take stands on public policy issues, such as public health, on which government could act. Expanding older professions were joined by newer ones such as economics, teaching, social work, and administration.
The formal entry and/or educational requirements of the new professionals both enhanced their prestige and provided them with confidence in their problem-solving abilities. Instead of relying primarily on the forces of markets and voluntary agreements to solve problems with government participating when these were insufficient, the new professionals placed primary reliance on specialists engaging in scientific planning to achieve results. Frequently the principal instrument that was expected to carry out the planning was the state, both because of its resources and its ability to impose sanctions on the disobedient. Of course, the new professionals also appreciated the long-standing fear of government excess. Therefore citizen protection was to be balanced with activist government. This would be the function of the new field of administrative law.
The scale of business enterprise also triggered specialized managerial expertise. Thus, professionalism arose in a number of facets of business enterprises, such as accounting, production techniques, and distribution. At the same time a general philosophy of scientific management under the leadership of Frederick W. Taylor and Robert G. Valentine took root.
Many of the managerial elite, including some of the established figures who preceded the rise of professionalism, also embraced planning and cooperation with government. Judge Elbert Gary of the powerful United States Steel Corporation went so far as to call for the abandonment of competition and the allocation of market shares in proportion to capacity. But more important than Judge Gary's pronouncements was the dramatic formation of trade associations in virtually every leading industry after the turn of the century, but especially between 1915 and 1920. These institutions were based on cooperation and the sharing of market information among erstwhile rivals instead of on old-fashioned rivalry. From the government's perspective it was easier to deal with one trade association than with a host of industrialists.
During the Progressive Era important political leaders close to Theodore Roosevelt and Woodrow Wilson embraced the new ideas. Herbert Croly, who deeply influenced Roosevelt, held that corporate planners closely regulated by professional governmental administrators can better attain the national economic interest without sacrificing efficiency than any other system. Although differing with Croly in some ways, Louis Brandeis, one of the strongest influences on Wilson, virtually triggered a scientific management craze through his skillful opposition to proposed railroad rate increases, claiming that scientific management would obviate the need for the rate increases. Whether in industry or public administration, planning and scientific management would supplant both the irrationality of partisan politics and the destructive impulses of class struggle. Bossism and socialism would recede before scientific management and planning.
The event that caused the convergence of many of these trends, as well as modern liberalism's supplanting of public service liberalism, was America's preparedness campaign and entry into World War I. Older mechanisms could not rapidly redirect resources to wartime purposes. As historian Ellis W. Hawley observed: "The mere placing of orders through competitive bidding, so most leaders had concluded, could not bring this about, at least not without excessive costs and numerous delays." By war's end government operated the railroad, telephone, and telegraph industries and exerted firm control over a wide range of other industries, including food and steel. Important representatives of the new professionals and the ideology of modern liberalism, such as Bernard Baruch and Herbert Hoover, assumed important roles in wartime planning, whereas agencies with broad powers, such as the War Industries Board, were staffed with lesser-known professionals confident in their abilities to plan the effective deployment of resources.
Most of the governmental apparatus constructed during the war was dismantled when it ended. And many public leaders sought to return to the old order. Nevertheless, the precedent had been set, and the new professionals and their ideology of modern liberalism were in the ascendancy. After all, the wartime experience confirmed to them the virtues of a theory of public policy premised on state intervention as a first step, not merely as a possibility, after the presumption against it was rebutted. During the period before his ascent to the presidency, Hoover sought to expand the Commerce Department into a super agency that would direct cooperative economic action. Again, the Transportation Act of 1920, although rife with compromise, sought to rationally reshape the railroad industry under the aegis of the Interstate Commerce Commission (ICC); the act marked a significant enlargement of the old style of railroad regulation that lightly intervened in industry affairs in order to assure the attainment of values other than economic efficiency.
Although Hoover's version of modern liberalism—the associative state—emphasized cooperation and was premised on joint government-business agreements, the virtual collapse of the business system in 1929, coupled with numerous scandals in such critical industries as finance and electric utilities, put business on the defensive even before the onset of the New Deal in 1933. Could business managements, with their presumed failures, be accorded the respectability of expertise? During the New Deal the state became the senior partner. Notwithstanding this important change, the New Deal represented, as Robert F. Himmelberg shows, a continuation of the idea of planning through government intervention that sprouted during the war and was nurtured by Hoover and others during the 1920s. The older ideas of public service liberalism were in full-scale retreat. The contrast between early public intervention in telecommunications and policies toward radio in the 1920s and 1930s strikingly illustrate the wide gulf that had been crossed and the submerging of an older public policy tradition in favor of modern liberalism. The realm of public service liberalism would thereafter be limited to a few sectors, such as the traditional public utilities. During the Gerald Ford presidency the older philosophy would begin its retreat in these sectors as well.
Communications and Public Policy
The American communications industry from its origins to the New Deal is a primary example of public service liberalism. Telecommunications was not an exception to a general rule in which the state did not intervene in social and economic affairs. The communications and transportation sectors—the Post Office, telegraph, telephones, railroads, and general roads—constituted a high percentage of the gross national product (GNP). Further, many other industries and activities were subject to substantial government intervention under public service liberalism. The reasons that the state intervened in the private sector differed from industry to industry, situation to situation. Nevertheless, a general theoretical construct—public service liberalism—determined when state intervention was appropriate and when it was not. One important class of industries in which the state routinely intervened was public services. Among important public services was communication, including the telegraph and the telephone.
Seeing why public service liberalism required close regulation of these instrumentalities and how they were regulated illuminates public service liberalism generally. In the course of this examination we will see how public service liberalism spurred the development and deployment of new technology and advanced the economy generally; competition is only one route to technological progress. Government intervention of the proper type can also spur it.
We begin with the myth of laissez-faire and move from that to a general overview of government intervention in the Anglo-American world from the nineteenth century to the 1930s. Most of the rest of this book is devoted to exploring the development of the government-private sector relationship in the telephone industry within that context, as well as its results. Past styles of public policy, unlike past events, can be recaptured.
The Myth of Laissez-faire
One of the most persistent myths about nineteenth-century political economy in Britain and the United States is that the state virtually did not interfere in economic and social affairs. The persistence of this view is at least partially attributable to the fact that it has received the approval of several eminent figures in the social sciences. According to their views, economic liberalism can be traced to the latter part of the seventeenth century in England and obtained doctrinal justification from Adam Smith in The Wealth of Nations (1776). Under its influence, England attained commercial and industrial supremacy in the ninenteenth century. The application of economic liberalism in the United States contributed importantly to pre–Civil War growth and the extraordinary transformation of the economy in the period following the war.
Excerpted from Public Service Liberalism by Alan Stone. Copyright © 1991 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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