Make Good Government, Not War

War, and the resulting innovations, often drive economic growth. Good government can have a similar effect.
An awful price to pay for economic growth.                                                           

"War made the state, and the state made war," historian Charles Tilly famously wrote. Why would kings and chieftains build roads and schools and fair legal systems for their people, or give their people property rights, when they could just plunder and pillage instead? Tilly's answer: because of war. More productive citizens mean a richer country and more war-fighting potential. Gross domestic product wins wars and keeps the local top dogs on top.

There was an echo of Tilly in a recent New York Times column by economics blogger Tyler Cowen:

Counterintuitive though it may sound, the greater peacefulness of the world may make the attainment of higher rates of economic growth less urgent and thus less likely...the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy. Such focus ends up improving a nation's longer-run prospects...

Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today's entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.

War brings an urgency that governments otherwise fail to summon.

I can think of even more examples. Most industrialized nations built their railroad systems to carry troops and equipment back and forth in war -- in the U.S., it was the Civil War that spurred a flurry of railroad-building.

The idea is an interesting one, but even more interesting because of who is saying it. Tyler Cowen, while not the most ideological guy, is the director of a libertarian think tank, the Mercatus Center at George Mason University. Nor is he the only libertarian talking about the importance of government for growth. In 2012, Cowen's co-blogger Alex Tabarrok called for more government-directed innovation and infrastructure. In that same year, eccentric libertarian tech titan Peter Thiel called for the same thing in an interview:

[T]hough I identify with the libertarian Right, I do think it is incumbent on us to rethink the history of the past forty years. In particular, the Reagan history of the 1980s needs to be rethought thoroughly. One perspective is that the libertarian, small-government view is not a timeless truth but was a contingent response to the increasing failure of government, which was manifesting itself in the late 1960s and early 1970s. The response was that resources should be kept in the private sector. Then economic theories, like Laffer's supply-side economics, provided political support for that response, even if they weren't entirely accurate.

This is revolutionary stuff. It's impossible to generalize from the statements of a few libertarians, even ones as prominent as Cowen, Tabarrok, and Thiel. But the trend is unmistakable -- libertarians, slowly, are rediscovering public goods.

What is a public good? Officially, economists think a public good is something you can't prevent people from using -- clean air, a lighthouse or information. But there's a more general definition of "public good" as "anything that produces a positive externality."

Remember externalities from Econ 101? They're spillovers -- side effects of economic activity. Air pollution is a negative externality; research is a positive one. Sometimes you can set up a system of property rights and bargaining that boosts positive externalities and reduces negative ones, but sometimes you can't -- and that's when you need government to step in. It isn't that the private sector can't build enough roads or do enough research; it's that it won't. Government, for all its inefficiencies, is the only one that might do the job.

For the last few decades, Americans seemed to forget this. Liberals focused on distributional issues -- taxes, subsidies for the poor, etc. -- while conservatives decided that government just needed to be, in Grover Norquist's famous words, "drowned in a bathtub." It's hard to say who won the fight -- taxes went down, but spending just kept growing, mostly on things like health care. The big loser in this fight was investment in public goods. Our roads and bridges fell into disrepair, our research funding declined as a percentage of GDP, our Internet remains slower than in many other nations. More ominously, the efficiency of our bureaucracy probably fell in recent years.

After all, who cares how well government works, when you're just going to drown it in a bathtub?

Except our government didn't drown; it bloated. Conservatives and libertarians might have prevented this if they had focused on good government instead of small government. Maybe Cowen is right -- perhaps it was our lack of an international rival that made us grow complacent.

But it isn't too late. As growth slows, and China becomes a more powerful and aggressive rival, maybe Americans will give up their destructive focus on fighting over the pie, and start thinking about how to make the pie bigger. An important step in that process is for libertarians and conservatives to recognize that good government is an crucial ingredient of national wealth. With any luck, that realization is spreading

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