This essay continues the discussion on Keynesian economics. It also offers a rebuttal to Mr. Baidoo’s misguided notions about Keynesian economics. Read on:
Title: “Government is Good: Capitalism Requires Government”
Author: Dr. Douglas Amy
Source: A web project of Douglas J. Amy, Professor of Politics at Mount Holyoke College
THE INHERENT PROBLEMS OF A MARKET ECONOMY
The problem with market fundamentalism is the problem with all forms of fundamentalism – the faith of the adherents blinds them to significant portions of reality. In the case of market fundamentalism, it blinds them to most of the serious problems inherent in a capitalist economic system – the problems that necessitate government action. If pressed, most conservatives will admit that unregulated markets do suffer from a few “market failures,” such as a tendency to ignore pollution. But they see such failures as episodic and limited. For them, these problems only occasionally interfere with the smooth operation of markets to produce the public interest and thus only necessitate a modicum of government interference to set them straight. But they are wrong. The failures of markets are many, serious, widespread, and ongoing. This is not to suggest that capitalism is “bad” or to deny the many economic advantages and achievements of markets.
It is simply to acknowledge that when left on their own, market economies will inevitably produce a whole host of economic and social problems. Let’s consider a list of some of the basic built-in problems, limitations, and failures of capitalist market economies.
• ECONOMIC BUBBLES. Market economies are susceptible to "bubbles" -- where the price of an asset rises high above its real value. These bubbles then burst, leading to the destruction of large amounts of wealth. Recent examples include the Dot-Com bubble crash that wiped out $5 trillion in the market value of technology companies, and the $2 trillion lost when the housing market bubble burst in 2008.
• ENVIRONMENTAL POLLUTION. Pollution is a classic example of one common form of market failure: externalities. Externalities are created when decisions by businesses cause costs to groups outside of the business. Since businesses don’t have to bear these costs, they typically ignore these side effects – but the public is harmed by them. So a company has no incentive to clean up air or water pollution caused by its production facilities, even though it will do great harm to the environment and to humans. This kind of problem cannot be solved within a market framework. Voluntarily assuming the costs of cleaning up its own pollution would be irrational for a business – it would lower profits and put it at a competitive disadvantage with rival companies. Only government can effectively address this problem by devising policies to ban or discourage pollution. Without government, a laissez-faire capitalist economy is inherently and inevitably bad for the environment.
• EXPLOITATION OF WORKERS. Corporations and their employees have conflicting interests. Businesses want to pay their employees as little as possible and not give benefits like health insurance and pensions. Also, businesses do not have an incentive to invest in safety measures in the workplace, which would lower profits. Owners of sweatshops, mines, and other businesses found out long ago that it is cheaper to replace injured workers than to improve working conditions. Given that corporations are often in a position of power over their employees, only a countervailing power on the side of these workers – in the form of unions or the government – can protect them from exploitation.
• UNSAFE AND INEFFECTIVE PRODUCTS. Without government help, consumers are vulnerable to products that are unsafe or ineffective – such as tainted foods and worthless medicines. Some shady businesses engage in outright deception about their products, but even legitimate businesses have an incentive to pad their bottom line by not being overly concerned about how safe or effective their products are. For example, the auto industry fought for decades against such things as mandatory seat-belts, air-bags, and other important safety features because these safety devices lowered their profits. Without government, the reality of the market is “Let the Buyer Beware!”
• MARKETING BADS. Left alone, markets and businesses will sell anything for which there is a demand. But there are many things that shouldn’t be sold. We don’t want women sold into slavery in the sex industry, or the peddling of child pornography, or the sale of dangerous and addictive drugs. Only government can control what should or should not be marketed. Where appropriate, it can try to eliminate markets entirely (such as underground markets that provide Stinger ground-to-air missiles to terrorists), or act to limit markets (as in not allowing cigarettes to be sold to minors).
• RESOURCE DEPLETION. Like individual businesses, capitalist economic systems must grow or die. But as the worldwide economy grows, depletion of non-renewable resources necessarily increases dramatically. For example, the United States, with five percent of the world’s population, currently consumes twenty-six percent of the world’s energy – most of it in non-renewable forms. If the rest of the developing world were to rise to our levels of energy use, non-renewable energy resources would quickly be used up. A worldwide capitalist economy engaged in unlimited growth is fundamentally incompatible with a world where many vital resources are limited.
• CORPORATE AND THEFT. Without the government playing watchdog, there is a constant and strong temptation for companies to cheat their investors and their customers. The Bernie Madoff ponzi scheme that defrauded investors of $50 billion is simply the latest example of this problem. This happens so often, it cannot be considered an aberration. In just the last decade, many large businesses, including Enron and WorldCom, have used deceptive accounting procedures to give the illusion of profitability, defrauding investors out of billions of dollars. Insurance brokers have rigged prices to steal hundreds of millions from their customers. Investment companies have routinely told customers to buy stock in companies they have underwritten, knowing full well that these are poor investments. Several prominent mutual fund companies have been convicted of allowing illegal “late trading” by a few favored customers that lowered the profits of other customers. Drug companies have paid hundreds of millions in government fines for bribing doctors to prescribe their medicines. Corporations also routinely cheat the public by using questionable, unethical, and sometimes illegal strategies to avoid paying taxes, thus forcing citizens to pay more to fund public services.
• NEGLECT OF PUBLIC GOODS. Another classic example of market failure. A public good is something that is hard or impossible to produce for private profit – primarily because once it is produced, you can’t limit who enjoys or consumes that good. The classic example is a light-house, because you can’t prevent any ships from using it. More important examples are national defense, law enforcement, and clean air. Such goods are inevitably under-produced or neglected in a market economy and we must produce them collectively through government.
• NEGLECT OF SOCIAL AND PUBLIC INVESTMENTS. Typically, businesses will not invest in large public projects that are necessary for the long-term health of our economy or society. A typical example is infrastructure facilities like roads, bridges, harbors, airports, etc. Such projects are usually too risky and provide too little profit for most businesses or investors to want to take them on. Education, sanitation, and public transportation are other examples of important social investments that would be neglected if left to the market.
• HIDDEN INFORMATION. For markets to work effectively in the public interest, consumers must have the information they need about products to make an intelligent choice about what meets their needs. But businesses often have an interest in not fully disclosing all relevant information. So government must step in and force companies to reveal that crucial information, such as what is in their food products, how safe their cars are, how efficient their air conditioners are, or what side effects their drugs have.
• INABILITY TO PLAN. Markets cannot plan. Capitalism is basically an anarchical economic process. Economic development is a function of the activities of separate and uncoordinated businesses and customers – all largely oriented toward the short-term. While this arrangement produces great economic efficiencies, it has the disadvantage of disallowing any coordinated planning to make our lives better. Planning is essential if we want to have cities with livable neighborhoods, to create an efficient interstate highway system, to have an energy system not so dependent on foreign oil, to save rare ecosystems for future generations, and so on. Only government can provide rational, long-term plans for the development of society.
• BOOM AND BUST SYCLES. As history has shown, laissez-faire capitalism is subject to regular cycles of boom and bust, where economies heat up too rapidly and then cool down into a period of deep stagnation. This process produces run-away inflation, recessions, depressions, rampant unemployment, etc. – and the widespread and profound human suffering that accompanies these serious economic problems. Government policies are often the only way to dampen these swings. For example, in an economic downturn, when businesses are shrinking, consumers are not buying, and banks are not lending, only government is in a position to revive the economy through the use of monetary and fiscal policies.
• LACK OF MARKETS. Not everything we need for a good society can be provided by markets and business – especially things such as justice, fairness, equality, or basic rights and freedoms. Even if markets were possible for these things, we would not want them. For example, when the well-off are able to buy more justice in our court system, we consider that illegitimate and unfair. Only government can properly supply things like justice and freedom to all Americans.
• MONOPOLY. Competition in capitalism does not foster more competition – it eventually creates monopoly. Unrelenting competition eventually drives many companies out of business or forces them to merge, thus allowing fewer companies to take over increasingly larger shares of a market. Unchecked, this process leads to monopolies and oligopolies. This inevitably produces price-fixing, low-quality products, and other abuses of overly concentrated economic power. The only cure? Government anti-trust laws and other “regulation for competition” policies.
• IGNORING NEEDS. Markets and business do not respond to our needs, they respond to demand, as expressed in money. Thus social needs are sometimes neglected. What concerns producers is not what social needs or functions are fulfilled by their products, but how much people will pay for them. Henry Ford put it best when he said that he was in the business of making money, not making cars or providing transportation. So while there is a pressing need for low-cost, affordable housing in America, what are being produced are huge McMansions and luxury condominiums – because these are more profitable. And while we may desperately need universal health care in this country, it will not be provided by the market alone. It can only be mandated by government policy.
• DEVALUING THE FUTURE. As a rule, businesses are only oriented to the short-term. The accounting practices of firms utilize “discount rates” that require them to consider money, goods, and resources in the future to be worth less than those in the present. So it is better to develop resources like oil and old-growth forest now, rather than leaving them for later. The result: values like long-term environmental sustainability and the welfare of future generations tend to be neglected in corporate calculations.
• POVERTY AND ECONOMIC INEQUALITY. On their own, market economies tend to produce high levels of poverty and economic inequality. In the last twenty years, the distribution of income and wealth has become more unequal in the United States, and we far surpass other Western democracies in our poverty rate. Also, the top 10% of wealthy Americans now own 70% of the wealth of the country. Economic inequality inevitably produces unequal distribution of other vital goods. The poor, for instance, have less access to health care, adequate housing, and retirement security. Only government action can address the low wages and lack of jobs that fuels poverty and can provide an economic safety for citizens. Studies have shown that Western countries that spend more on social programs and do the most to promote worker interests are the ones who have the fewest poor and the lowest economic inequality.7
• LACK OF OPPORTUNITY AND ECONOMIC MOBILITY. The economic inequality characteristic of market economies also undermines equal opportunity. The poor face many obstacles to financial success, while the well-off enjoy the advantages of superior education, social connections, and family wealth.8 Unsurprisingly, studies show that citizens in countries like the U.S. with relatively high levels of poverty and lower government spending to equalize educational opportunities have less intergenerational economic mobility.9 Even the Wall Street Journal has admitted that “Despite the widespread belief that the U.S. remains a more mobile society than Europe, economists and sociologists say that in recent decades the typical child starting out in poverty in continental Europe or in Canada has had a better chance at prosperity."10 Only government programs – like Head Start, high quality public schools, federal student aid, and low cost public colleges – can begin to level the economic playing field and help to equalize life chances for all Americans.
Taken together, all of these failures and problems totally undermine any notion of the “perfection” and “self-regulating” nature of the market. Virtually all of these problems are built-in to a capitalist, free-market system. They are systemic problems – products of the normal operation and the inherent attributes of this kind of economic system. This means that they occur irrespective of who is running our businesses. They are not the product of greedy owners or evil corporate CEOs; they are a product of the systemic priorities that all companies must adhere to if they are to stay in business and prosper. It is the internal logic of capitalism that forces firms to pay low wages, ignore the environment, devalue the future, and hide information from consumers.
Being systemic also means that these problems cannot be cured from within the economic system itself. These problems can only be addressed from the outside by coordinated collective efforts – the efforts of people acting through their governments. This doesn’t mean that the government cannot at times utilize the forces of the market to help solve these problems – such as when it creates a market in pollution rights, or when it auctions off a limited number of licenses to harvest lobsters. But these are not “market solutions” as conservatives like to trumpet; these are “government solutions” that utilize markets to achieve their goals.
Once the extent and severity of the shortcomings of a market economy become obvious, it becomes much clearer why we have big government in the United States. The public has repeatedly turned to government to provide important things the market cannot – such as clean air, retirement security, equal access to a good education, city planning, and health care for those who cannot afford it. Nor can we rely on markets to provide a more just, free, and secure society. Government is also necessary to make sure that market economies don’t hurt people in a variety of ways, including cars that blow-up or roll-over, or mines that collapse. That is exactly why most Americans say they do not want to see consumer or workplace regulatory protections dismantled. 11
Even David Stockman, ardent free-marketeer and lead man in the effort to reduce government in the Reagan administration, eventually had to reluctantly admit that the American public would simply not put up with capitalism in its raw form. Upon leaving office as budget director, he observed rather sadly that “The American electorate wants a moderate social democracy to shield it from capitalism’s rougher edges.”12
WHY TAXES, REGULATIONS AND SOCIAL PROGRAMS ARE GOOD FOR CAPITALISM
That, then, is the traditional justification for government regulation of business and market: only government can address the many serious problems caused by laissez-faire capitalism. Even if government rules decrease somewhat corporate growth and profits, they promote important things that Americans care about – like better health care, safer workplaces, a cleaner environment, and more economic security. But this rationale leaves out an important – and more intriguing – reason why government “interference” in the economy is desirable. The fact is that many government actions that hurt businesses in the short run are actually good for business in the long run. Most regulations, for instance, are not only good for the American people, they are also ultimately good for business as well. This point may not seem obvious at first. But I will argue that the central pillars of the modern democratic state – the regulations and social programs that conservatives and business interests often oppose so vehemently – actually work in important ways to the benefit of the business community and capitalism itself. What business thinks is bad for it economically can be very beneficial, and even essential, for it politically.
How can this possibly be true? To see, we need only asks ourselves a simple question: What would happen to market capitalism without all of these regulations and social programs? Fortunately, we don’t have to try to speculate about the answer to this question; we merely need to go back to the first several decades of the twentieth century. This was the time before big government – before extensive regulations and expensive social programs – an era that anti-government conservatives consider a golden age. But what they forget is that at that time, around the world and even in this country, growing numbers of people were becoming very discontent with capitalism.
They were also becoming increasingly interested in alternatives such as socialism, communism, and anarchism. The communist revolution in Russia prompted a wave of attempted socialist uprisings or threats of uprisings throughout much of Europe after World War I. Rosa Luxemburg led one uprising in Germany, and the communists actually overthrew the government in Bavaria and briefly established a soviet state. Another short-lived communist government was established by revolutionaries in Hungary in 1919. The success in Russia also inspired a host of anti-capitalist movements and incidents in other countries: there was a wave of factory occupations in Italy, a wide-spread series of strikes in Britain, and a general strike in Winnipeg, Canada. Later, in the 1930s, in the Spanish Civil War, anarchists and communists fought side by side for control of the country.
Many people today wonder how anyone could have become such a radical, anti-capitalist revolutionary. But they are forgetting the horrendous conditions that many people were living under in unregulated capitalist economies – the grinding poverty, the enormous economic inequality, the lack of adequate health care for most people, the absence of old-age pensions, the widespread unemployment, the unchecked and abusive power of monopolies, the environmental squalor of the cities, the dangerous and often lethal working conditions, the inevitable and hugely destructive economic depressions. It was these unaddressed problems of capitalism that led to the creation of communism and communist revolutions. Some people were so upset and disgusted with the widespread injustices and suffering caused by of laissez-faire capitalism that they were willing to take up arms and risk their lives to throw out the entire system and to start over with new and untried economic systems. The extreme problems of capitalism drove them to those political extremes.
The United States was not immune to these problems or this kind of political and social unrest. In 1912, Eugene Debs, the Socialist Party presidential candidate, offered a radical critique of capitalism and won the support of nearly a million voters. Some unions, like the Industrial Workers of the World, wanted to replace capitalism with worker-controlled production. The IWW was instrumental in organizing the Seattle General Strike of 1919 where 60,000 workers went out on strike and paralyzed the city for a week. The influence of the Socialist Party and the IWW only abated when federal and state authorities jailed their leaders, deported many of them, harassed their members, shut down their newspapers, and denied them use of the mail.
The 1930s and the Great Depression, however, saw a resurgence of interest in anti-capitalist ideas and movements. Political unrest was growing. There were food riots, widespread labor violence, street protests, and increasing political instability. In this atmosphere, communist and socialist parties experienced growing support and began to exert more influence in unions as well. In addition, socialist and communist groups became very popular on college campuses. To students, they seemed to be the only organizations that could explain the causes of the Depression and who offered alternatives to a malfunctioning capitalist system. Into this highly volatile and precarious political situation stepped Franklin Delano Roosevelt and his New Deal programs. Anti-market conservatives have reviled Roosevelt ever since as a "socialist" who betrayed capitalism; but in reality, his government programs actually saved capitalism by stabilizing the economy and developing programs to alleviate the suffering it was causing – all of which had the effect of undermining political unrest.
Examining the deeper political implications of New Deal, the political scientist Edward Greenberg concluded in his book “Capitalism and the American Political Ideal” that Roosevelt’s efforts can best be seen as ultimately aiding the cause of business and conservatives:
“[T]he New Deal is best understood as a series of attempts to save a faltering and depressed capitalist system by further regulating and rationalizing the economy, by bringing important elements of the labor movement into the established political life, and by staving off social disruption and revolution through expansion of the welfare role of government…The New Deal represents, paradoxically, a conservative expansion of government activities. While it is traditional to define any expansion of government activities as “liberal,” I would argue that since this expansion was directed toward preserving and cementing the position of capital and maintaining the social class system, it must, in the end, be judged “conservative.”13
Ironically, then, free-market conservatives and business leaders who worked so hard against Roosevelt and his policies were actually working against their own long-term interests. They failed to see that capitalism actually needs some “socialism” to make it less destructive and more palatable to most people.
Today, the corporate community and anti-government conservatives fail to see this point as well. They fail to understand that government policies that protect consumers, make workplaces safe, provide economic security, eliminate poverty in old age, provide health care to the poor, and prevent and repair environmental damage are what “humanize” capitalism and make it tolerable to people. In this way, businesses are a lot like sulky teenagers. They resent their parents’ rules – such as no drinking and driving, no unsafe sex, no experimentation with hard drugs – which they simply see as constraints on their freedom and their fun. They refuse to see that these rules are for their own good, their own long-term health and welfare.
Similarly, businesses and free-market conservatives have been unable to appreciate how government efforts to humanize capitalism have been for their own good. Instead, they have resented and opposed virtually every effort to make capitalism less harsh – from the 40-hour week and the abolition of child labor to Social Security and Medicare. They should see the costs they pay for these policies as a premium on a vital form of political insurance. Government regulatory policies and social programs are crucial in undermining popular discontent about the problems of a free-market economy and serve to co-opt potential anti-capitalist and anti-business political movements. These “liberal” reforms provide and sustain the social and political peace on which profitable business activity ultimately depends.
Even Ben Bernanke, chairman of the Federal Reserve, understands how essential government safety net programs are to maintaining public support for our market system. He has warned of the "painful dislocations" associated with capitalism and has stated that if "we did not place some limits on the downside risks to individuals affected by economic change, the public at large might become less willing to accept the dynamism that is so essential to economic progress."
There is one final ironic twist to all of this. Modern government’s achievements in reining in abuses of corporate power and humanizing capitalism have actually backfired on those who champion an active role for government in society. These successes have fostered an illusion that a market economy is relatively harmless.
Few people remain alive who actually experienced the severe problems of the “bad old days” of capitalism before the New Deal. Today, many think we are living in a natural “free market” system, but in reality it has been extensively tamed by myriad government policies. It is as if we lived in a world where all we knew about wild animals is what we learned by going to the circus, and thus came to believe that bears and elephants were naturally gentle creatures. Frustratingly, then, it has been the government’s triumphs in addressing the many problems inherently caused by a free-market economy that has allowed conservatives to argue that markets are naturally benign and largely problem free – and so we do not really need much government.14
BEYOND THE MYTHS OF GOVERNMENT AND MARKETS
In the end, anti-government conservatives get it wrong about both markets and government. In their zeal to justify shrinking the state, they intentionally misrepresent both of these institutions and how they interact. The market is not God and the government is not the Devil. Despite their enormous advantages, markets are not benign and self-regulating. They create numerous social, economic, and political problems that only government can correct. Government is also not the sworn enemy of business and capitalism. Conservatives can only promote this misleading caricature of government by deliberately ignoring the myriad ways that government aids business and makes a market economy possible.
Anti-government conservatives are constantly warning that government is primarily a threat to business and the economy – that unless we reduce it, it will “kill the goose that lays the golden eggs.” But as we’ve seen, this is far from the truth. The modern state is more like the farmer who feeds and waters the goose, builds the facility that houses it, inoculates it from disease, clips its wings so it can’t fly away, protects it from predators, cleans up its excrement, and tames it so it won’t bite people. If we appreciate those golden eggs, we should also appreciate the efforts of the farmer who helps make the egg production process possible. Similarly, those who celebrate the achievements of business and a market economy should also acknowledge and celebrate the role government has had in those accomplishments. This would be the fair thing to do; but of course it would not fit into anti-government conservative orthodoxy.
The basic lesson is this: we Americans need to realize that our economy has thrived not in spite of government, but in many ways because of government. The American economy that so many people admire is not the mythical free market that operates without government interference. Our version of a market economy is highly constructed, regulated, subsidized, and humanized by government laws and policies. And we are all better off for it. Even if it were possible to create a world of free markets that were left entirely alone by government, none of us would want to live there.
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For more on the relationship between government and capitalism, see: How Government is Good for Business.
To see how government programs work quietly to improve our daily lives, see: A Day in Your Life with Government.
See also: Why We Need More Government, Not Less.
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1. For more on this issue, see David Moss’ excellent book, “When All Else Fails: Government as the Ultimate Risk Manager” (Cambridge, MA: Harvard University Press, 2002) chapter three.
2. Moss, chapter five.
3. Robert Kuttner, Everything for Sale (. New York: Alfred A. Knopf, 1997) p. 212.
4. Kuttner, p. 218.
5. Dick Armey, “The Freedom Revolution” (Washington D.C.: Regnery Publishing, 1995), p. 316.
6. Armey, p. 68.
7. See for example, Timothy M. Smeeding, et al., “United States Poverty in a Cross-National Context.” In Sheldon H. Danziger and Robert H. Haveman, editors, “Understanding Poverty” (New York and Cambridge, MA: Russell Sage Foundation and Harvard University Press, 2002) pp. 162-189.
8. 8. Benard Wasaw, “Rags to Riches: The Americans Dream is Less Common in the United States than Elsewhere,” Century Foundation, March 19, 2004. www.tcf.org/4L/4LMain.asp?SubjectID=1&TopicID=0&ArticleID=456
9. 9. Jo Blanden, et al., “Intergenerational Mobility in Europe and North America,” April, 2005. www.suttontrust.com/reports/ IntergenerationalMobility.pdf
10. 10. "As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls," The Wall Street Journal, May 13, 2005
11. 11. Charles Noble, The Collapse of Liberalism (New York: Rowman and Littlefield, 2004), p. xvi.
12. 12. David Stockman, The Triumph of Politics: Why the Reagan Administration Failed (New York: Harper and Row, 1986) p. 394.
13. Edward S. Greenberg, Capitalism and the American Political Ideal (Armonk, NY: M.E. Sharpe, 1985) p. 93.
14. 14. Thanks to Sam Rosen-Amy for making this point to me.
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