Fritz Machlup, The Division of Labor Between Government and Private Enterprise (1943)

Machlup’s journal article, presented as a conference paper, examines how economic responsibilities should be divided between government and private enterprise. Its five sections move from social goals and principles of intervention to the “socialization” of risk, monopoly, and investment. The organizing concern is political liberty: government action may remedy deficiencies in private provision, but its benefits must be weighed against economic costs and the danger that accumulating responsibilities will undermine democratic government. Machlup offers a qualified framework for judgment rather than a fixed boundary between public and private activity.

The preliminary orientation rejects historical inevitability and the supposed necessity of choosing between economic extremes. Institutional arrangements remain matters of human choice, and differences of degree matter. More fundamentally, Machlup separates legal ownership from effective economic control:

Who holds title to property may be quite irrelevant; what matters is who says what should be produced and how, how it should be sold, how the proceeds should be distributed, etc.

This distinction makes managerial discretion, rather than property titles, the relevant test of private enterprise. Government-owned firms with independent management might operate more freely than privately owned firms under comprehensive controls. Machlup consequently treats Nazi economic organization as a warning against identifying capitalism through its legal façade.

He identifies plenty, opportunity, continuity, security, choice, and freedom as broadly accepted American goals, while emphasizing their possible conflicts. Neither the goals nor their trade-offs can be measured with the precision of economic indifference curves. His preference is explicit: productivity and especially political liberty take precedence when they conflict seriously with income equality or security. He distinguishes comprehensive direction of production and distribution, which he considers incompatible with lasting democracy, from deliberate planning of general laws, monetary and fiscal policy, social security, and antimonopoly measures.

The second section distinguishes an areal division, assigning whole industries to government or business, from a functional division within an industry. “Division of labor” encourages thinking in terms of cooperation, but Machlup acknowledges its euphemistic character: government determines the allocation and imposes restrictions on business. His classification proceeds from information and advice through general rules to participation in individual decisions and interventions that destabilize markets, provoking further controls. Functional intervention can thus become effective public control without nationalization.

Ten possible grounds for government action encompass services that cannot be sold individually, benefits extending beyond consumers, conservation, humanitarian provision, market information, superior public efficiency, innovation, insurance, monopoly control, and employment-supporting expenditure. Listing these grounds does not signify accepting every application. Several may support one project, while its costs depend on circumstances:

The real difficulty in all cases is the weighing of the social benefits and social costs.

The relevant cost is not simply expenditure but displaced alternatives. Public housing might entail sacrifices sufficient to reverse its advocates’ judgment, or costs so slight that opponents should reconsider. Machlup also finds substantial elasticity in Adam Smith’s governmental duties, resisting a narrowly restrictive interpretation of the classical framework.

The discussion of risk separates ordinary personal insecurity from entrepreneurial risk. Transferring risk to government does not settle who ultimately bears it: taxation determines its incidence, while guarantees can weaken incentives, conceal subsidies, and burden democratic administration. Nevertheless, social insurance requires more discriminating analysis than a simple denunciation of public expense:

When we speak of the cost of the social security program we should note that most of the expense is not a social cost but merely an interpersonal transfer of income.

Redistribution can improve productivity by relieving misery and maintaining demand, but it can also reduce mobility, raise employment costs, or impair investment. Its effects depend partly on whether capital is abundant or scarce. Machlup’s caution concerns both the scale of proposed commitments and the uncertainty of their consequences.

The monopoly section distinguishes technical economies of scale from monopoly sustained by collusion, corporate organization, or barriers to entry. Antitrust enforcement, corporate-law reform, and reduced trade barriers may restore competition without sacrificing productive efficiency. Incurably monopolistic industries present harder choices among regulation, public ownership, public corporations, and public competition. Machlup questions Henry Simons’s willingness to transfer such industries to government: a commitment to competitive private enterprise might paradoxically justify extensive collectivization. Public management also risks pressure-group exploitation and weakened cost discipline. His discussion of Schumpeter, Nourse, Mises, and a synthetic position shows why monopoly alone cannot establish the superiority of public control.

Finally, Machlup evaluates Keynesian and Hansenian proposals to sustain employment through public investment. He doubts that insufficient private investment is permanently characteristic of a mature economy, but accepts compensatory expenditure during periods of underinvestment:

The art must be learned how to make these government activities really compensatory but not to displace private investment; they should fill a gap without widening it at the same time.

Tax reductions may sometimes be preferable to public works, and sustained public investment need not logically require permanent deficits. Yet selecting projects without profit calculations poses difficult political choices. Projects should be valuable, intermittently executable, and complementary to private enterprise. Rising union wage demands may also frustrate employment policy, inviting wage regulation and renewed threats to liberty. The article’s relevance lies in this sustained distinction between acknowledging a public responsibility and endorsing unlimited governmental control. Its unresolved conclusion reflects Machlup’s conviction that institutional judgment must remain conditional, attentive to incentives, circumstances, and political consequences.