Dirigiste

BIBLIOGRAPHY

The counterpart to the economic doctrine of laissez-faire, dirigisme refers to an economic system dominated by state control of the market economy. Technically, the concept does not refer to the centrally planned economies of the former Soviet bloc, but to basically capitalistic economies that have extensive regulations and controls throughout that impact production and consumption. Many of the controls are justified because they curb productive inefficiencies, others because they correct market inequities, and still others because they protect consumers from faulty products or their own faulty decisions. In short, dirigisme describes an economic system in which the government is omnipresent and assumed to be omnipotent.

Most modern economies operate to some degree dirigistically. Government regulation and control are a significant part of most economies throughout the world today. But a significant amount of evidence has been amassed that demonstrates that economic freedom rather than government control is positively correlated with economic growth (Gwartney and Lawson 2006). In this work motivated by Milton Friedman’s Capitalism and Freedom (1962) and Free to Choose (1980), economic freedom in a country is determined on the basis of an analysis of the security of private property and the freedom of contract, the tax burden, the inflation rate, the extent of regulation, and the prevailing policies toward foreign trade. When property rights are weak, taxes are high, inflation is ramped, regulation is extensive, and protectionism rather than free trade defines the policy space, the economic freedom score will be low. See Figure 1.

A key issue to remember in debating the role of government in an economic system is to distinguish between scale and scope. Much of the debate over “big government” focuses on the issue of scale—government spending as a percentage of gross domestic product. But in debating the impact of dirigisme, it may be more appropriate to focus on the issue of scope—the extent of activities the public sector attempts to control in economic decision making. A “big government” that permits a wide range of economic freedom would be less cumbersome on economic life than a “small government” that tries to control prices in every sector. The lack of economic freedom, not the size of government, causes the decline in economic growth in nations. See Figure 2.

In many ways, these various indices of economic freedom and the empirical relationship to the economic performance of countries is capturing Adam Smith’s wisdom with the modern tools of economic analysis. As Smith put it in the notebooks that were the basis of An Inquiry into the Nature and Causes of the Wealth of Nations :

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force

things into another channel or which endeavor to arrest this progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical. (Smith 1776, p. xliii)

Thus, the proper scope of government in relationship to the economy is a vital question to address in assessing dirigisme as an economic policy regime.

This is not to say that questions of scale do not matter—they clearly do. James Buchanan, who was awarded the Nobel Prize in 1986, would often ask his students whether a fly that grew to nine times its current size could still fly. He was raising the question of “dimensions” to get to the question of “fiscal dimension”—could a government grow to nine times its current size and still function? But Buchanan also raised questions concerning the scope of government.

In The Limits of Liberty (1975) he put the puzzle of political economy in the following manner. He first divided the activities of the state by functions: the protective state, the productive state, and the redistributive state. The protective state refers to the government provision of law and order domestically and defense against international aggression. The productive state refers to either the production or provision of certain public goods that are essential to the development of a prosperous social order. The redistributive state refers to those set of government activities that attempt to reallocate resources from unfavored groups to those groups that are more in favor. Buchanan’s puzzle is in how to empower the protective and productive state without unleashing the redistributive state. This is a question of constitutionally curbing the scope of governmental activities so that the positive-sum games of economic processes are not undermined by the zero-sum and negative-sum games of redistributive politics.

Dirigisme, in contrast, rejects as old-fashioned any concern among economists with questions of either the scale or scope of government. Instead of curbing government, the social philosophic mindset is to enlist the state to curb the excesses of the profit motive and individual myopia. In French political and economic history dirigisme is associated with Charles de Gaulle and was represented as an alternative to the Soviet model of a command economy and the U.S. model of a laissez-faire economy. When François Mitterrand came to power in 1981 he promised to move the French economy further in the socialist direction by nationalizing firms and banks, but by the mid-1980s he was forced to reverse this policy path due to declining economic performance of the French economy, and dirigisme was rejected (though the remnants of the past policies were certainly not eliminated).

The doctrine of state control of the economy runs into problems of a theoretical and empirical nature. First, empirically, as mentioned above, economic freedom is positively correlated with economic growth, whereas economic control is correlated with economic stagnation. Economic controls thwart innovation, distort the pattern of resource use, and frustrate consumers by offering them a choice of expensive but low-quality products and altogether eliminating from the market the goods they want to secure. Second, the empirical reality of productive inefficiency and consumer frustration follows directly from the persistent and consistent application of the economic way of thinking to questions of the operation of dirigisme.

There are five problems with government attempts to control a market economy:

1. incentive incompatibility—where government controls ask individuals to act in ways that violate their self-interest;
2. distortions in the structure of prices—where government controls result in price signals that lead to malcoordination of economic activities;
3. time inconsistency—where government action at time T1 is inconsistent with the government action required at T2;
4. dynamic instability—where government action results in consequences that are unacceptable from the point of view of the policy maker and thus require adjustment to either more extensive controls or abandonment of the policy altogether; and
5. rent seeking and capture by special interests—where the very existence of government action sets in motion a zero-sum game of privilege-seeking by special interests to cause the government to rule in their favor.

According to arguments 1 through 4, government controls result in unintended consequences; according to argument 5, the undesirable consequences are the result of the logic of concentrated benefits and dispersed costs. These unintended consequences are undesirable because they are wealth-destroying rather than wealth-creating. Dirigisme is an unworkable public policy philosophy.

SEE ALSO Economics of Control; Laissez-faire; Liberalization, Trade; Market Economy; Markets; Planning; Privatization; Regulation; State Enterprise; Statism

BIBLIOGRAPHY

Buchanan, James M. 1975. The Limits of Liberty: Between Anarchy and Leviathan. Chicago: University of Chicago Press.

Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.

Friedman, Milton, and Rose Friedman. 1980. Free to Choose. New York: Harcourt Brace Jovanovich.

Gwartney, James, and Robert Lawson (with William Easterly). 2006. Economic Freedom of the World: 2006 Annual Report. Vancouver, Canada: Fraser Institute.

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of Chicago Press, 1976.

Peter Boettke