4 Governments Role in the Economy The Offer

4. Government’s Role in the Economy: The Offer You Can’t Refuse

Government and the Economy • Money may not make the world go ’round, but it is an important political concern. • Perhaps the collective security of economic investment is the reason humans created government in the first place.

Government and the Economy • People tend to hold the government responsible for maintaining and improving the economy. • However, the relationship between economics and politics is much more complex, subtle, and dynamic than many people understand.

The Tragedy of the Commons • The individually rational exploitation of shared resources to the detriment of the needs or interests of the community is known as the tragedy of the commons. • Even if people realize that everyone would benefit from preserving the shared resource (enlightened self-interest), individuals will overexploit the commons if they believe others will cheat or take advantage of the group. • Exploitation becomes the rational choice.

The Tragedy of the Commons • The solutions for the tragedy of the commons all involve collective actions. • Individuals must be compelled to act in the best interest of all, even at an individual cost to themselves. • Government policing and enforcement of laws make it rational for individuals to act in the collective best interest. • This allows groups to pursue goals that cannot be attained spontaneously and would be impossible for any one individual to realize.

The Tragedy of the Commons • To escape the tragedy of the commons, society uses government to control some of the means of production, the mechanisms for transforming labor into wealth. • At a basic level, capitalism and socialism are two perspectives on who should control the means of production: individuals or society.

Karl Marx—Student of Capitalism? • Any exploration of the government’s role in the economy must examine the ideas of Marx. • Marx has been widely vilified, but he made important observations about the transformation of feudalism to capitalism.

The Adolescence of Capitalism: Feudalism • Under feudalism, most production occurred within a peasant/landowner context. • The landowner controlled and owned the land, while the peasants raised crops and livestock on the landlord’s estate. • The peasants were obligated to give a substantial percentage of their production to the landlord. • While exploitative, this was a mutually dependent relationship.

The Adolescence of Capitalism: Capitalism • Under capitalism things were different. • Capitalists used factories as the means of production —that is, to transform labor into wealth. • Laborers became easily replicable cogs in the productive machinery. • Laborers no longer controlled the means of production.

Competition as the Driving Force in Capitalism • The driving force in capitalism is the competition between capitalists. • Constant competition drives an endless quest for greater and greater efficiency. • This requires capitalists to continually cut costs and demand more from workers. • Marx saw the massive overexploitation of workers as the fatal flaw of capitalism.

The Pool of Labor as a Common Resource • If we consider the pool of laborers as a commons, a shared resource that capitalists exploit for economic gain, the concept of the tragedy of the commons is applicable. • The constant push to lower salaries will eventually leave workers unable to buy the goods they produce.

The Pool of Labor as a Common Resource • Workers will eventually become so desperate they will see no alternative to destroying the system through revolution. • Capitalism provides no way for individual capitalists to end the overexploitation; generous capitalists would be overtaken by market forces.

I Thought You Said There’d Be a Revolution? • Why was there no revolution as Marx predicted? • The solution to this tragedy of the commons is, again, collective action. • Through government, individuals can be compelled to prevent the destruction of the commons through overexploitation.

I Thought You Said There’d Be a Revolution? • As worker dissatisfaction and unrest threatened to grow into revolt, capitalists turned to government. • At first force was used, but there is a limit to the effectiveness of force. • Governments gradually adopted policies that gave the workers some of what they demanded, including limitations on the exploitation of labor.

Socialism • Marx categorized political economic systems according to who controlled the means of production. • The means of production are things necessary to transform labor into wealth. • Under the feudal system, craftsmen controlled their means of production. • Land was the primary means of production, which was controlled by the church along with a hereditary elite. • In a capitalist system, individuals control the means of production. • Socialism is an economic system in which society controls the means of production.

Socialism • Pure socialism, just like pure capitalism, cannot work in practice. • Socialism is very good at distributing goods but very inefficient at producing those goods. • In his descriptions of socialism, Marx undervalued the role of human motivation. • Socialism is very inefficient because it undervalues the ability to motivate people to work harder, seek efficiencies, or excel at their craft.

The Ying and Yang of Capitalism and Socialism • All of today’s functioning capitalist systems are mixtures of capitalism and socialism. • Think of the things government does to regulate the marketplace. • When government regulates businesses and polices the exploitation of labor, it uses principles of socialism to save capitalism. • The real question is not capitalism versus socialism, but what balance between the two systems is best.