What is the Role of Government Vis-ą-Vis Capitalism?
The debate this month boiled down to the extent of government's role in relation to capitalism, says professor Jim Heskett. While some readers argued for a relatively narrow role for government, others disagreed, and commented on the challenges it faces today. (Forum now closed. Next forum begins Dec. 3.)
How broad is government's role in a capitalistic society? The debate this month boiled down to the extent of government's role in relation to capitalism. Those arguing for a relatively narrow role included C. J. Cullinane, who commented, "Government should have little to do with capitalism … there is a place for government, and economists, in the capitalistic system, but in this case less is more." Gerald Nanninga suggested that we "limit government's role to defining capitalistic criminal activity and the means of eliminating such activity." Marshall Cammack asked, "If we take the invisible hand of capitalism away would we ever learn from our mistakes? … The more government steps in the more accountability for actions decreases."
Charles Green set forth an opposing view: "In the real world, competitors compete to get rid of competition. In such a world, it is absurd to talk about 'free' competition—it is inherently unstable, but for the good efforts of government." Alan Ecclesston added, "Let's not confuse 'free market' with freedom from rules and oversight." Elizabeth Doty commented, "…business and markets depend on … 'rules of the game' that we create together as citizens," but cautions that "… when we engage in that process, we need to be equally aware that we are foolish to try to prescribe HOW the game should be played within those rules." Marlis Crichewsky stated: "The overarching question is purpose: What do we need governments for? … as mediators between the different actors of society…. What do we need economy for? … value creation … For … those reasons we need laws and a government to enforce them." Edward Hare joined in, saying that, "Government's role should be to set the conditions for capitalism, practiced fairly and responsibly, to flourish. And to make the punishments for not doing so appropriately threatening and onerous for those who don't."
Others were less definitive in their comments. As Philippe Gouamba put it, "Capitalism is an extremely efficient economic model…. The problem with this model is that we are …greedy … human beings." Paul Browne commented, "Capitalism as an economic ideology that confers control of productive institutions to the owners of capital is often at odds with democracy…. Hence the tensions that arise when a society commits itself to democratic capitalism…. Our focus should be on sorting out these tensions … rather than clinging to a notion that 'free markets' are efficient (good) and 'government' is inefficient (bad)."
Several commented on the challenges that government faces in carrying out its role. In doing so, they left us with interesting questions. Fidel Arcenas described one such challenge: "A bureaucratic apparatus that's way off the pace of the market forces is useless." Do you agree? Jacoline Loewen commented, "Government is about setting the rules and boundaries but also reminding us about the nobleness of the game… (ą la Thomas Jefferson)." Sergio Coutinho asked us to allow him to reframe the question thusly: "Is there an objective set of rules that can dictate when the government should and should not interfere?" What do you think?
Recently a number of questions have been raised about capitalism and how it serves us, particularly in boom and bust cycles. But perhaps a bigger debate has arisen about the role of government in helping capitalism to serve us better in times of economic stress. That's why Bruce Scott's new monograph, The Concept of Capitalism, deserves some attention. In it, Scott describes the context in which the debate about the role of government should take place. It's an exercise in political economics, one in which the relationships between democracy (politics) and capitalism (economics) are explored.
Scott's primary thesis is that "Two systems of governance—capitalism (involving economic actors) and democracy (involving political actors)—prevail in the world today … [T]hey can and do influence each other. Indeed, participants in one system can use their positions in that system as a base from which to compete for power in the other."
Scott argues that past analyses by proponents of the Friedman school of economics fall short because they regard markets and pricing mechanisms as the means by which economies are to a large degree self-regulating. It's a free market philosophy governed by the classic "invisible hand" that Scott claims leads at times to a "free-for all," like an athletic contest without rules. What's to be done about it? That's where a political authority comes in, one similar to FIFA in soccer. Its responsibility, whether in a democracy or an authoritarian regime, is to establish institutions, regulations, and regulators that create what Scott terms "formal markets" that foster competition within constraints set by a political authority. In short, political and economic systems are interdependent.
Even in a democracy, according to Scott, "… government by the people is no assurance that it is for the people. For the market frameworks of a capitalist society to best balance societal costs and benefits … [p]olitical leaders working through the political institutions of legislatures are responsible for shaping the institutions of capitalism such that the markets function for the people." Scott describes the role that government plays in preserving both capitalism and democracy. In his words, "Capitalism requires more than markets, firms, and individual economic actors; it requires structure, security, and adaptability…. Until we accept government's framework-defining role as an essential feature, we will not have a satisfactory understanding of capitalism as a system of governance."
What is government's role in supporting or constraining markets? Is it to set the rules and enforce them? Does the sports analogy apply here, with government setting and enforcing the rules even-handedly through officials in its employ? Or is government's role instead to let market mechanisms and the "invisible hand" do their best? Have economists approached these issues too narrowly in the past? What is the role of government vis-à-vis a capitalistic system? What do you think?
To read more:
Bruce Scott, The Concept of Capitalism (Heidelberg: Springer, 2009) (The words in parentheses in the quotes are mine.)