The Role of Government in the Market Economy, Voluntary Exchange, Competition, and the Case for Efficiency
This essay was written by Ellie AnCap.
In order to discuss the role of government in the economy we must first consider Henry Hazlitt’s lesson that we should look at not just the immediate, but the longer effects of any act or policy and tracing the consequences of that policy not for one group but for all groups.
We must also look at the types of exchanges that occur in an economy as well as the methods of resource allocation and which are the most efficient. There are three basic types of resource allocation: The free market, a regulated market, and a centrally planned public sector. In a free market exchanges are voluntary. In this system we see the widest number of available options for everyone involved. Consumers are able to receive through the market process their desired products or services. This system lacks state coercion. In a regulated market, the state is able to prohibit goods or services that people may or may not want to buy. The state is allowed to force the consumers to buy goods or services that they may or may not want to buy. In cases, where nonviolent individuals are imprisoned or fined for engaging in exchange of a prohibited good or service, or they are fined for not purchasing a particular good if they are unable to afford it, they are worse off. In the centrally planned public sector, taxes are collected through coercive means. Where central planning stands instead of the market process it is an extra expense to provide more choices. The state isn’t capable of knowing exactly what each individual wants and strives for a one size fits all option. According to Rothbard, it finds itself misallocating resources by failing to supply the service where it is needed the most.
“On the free market, consumers can dictate the pricing and thereby assure the best allocation of productive resources to supply their wants. In a government enterprise, this cannot be done. In the case of the free service. Since there is no pricing, and therefore no exclusion of sub-marginal uses, there is no way that government, even if it wanted to, could allocate its services to the most important uses and to the most eager buyers. All buyers, all uses, are artificially kept on the same plane. As a result, the most important uses will be slighted, and the government is faced with insuperable allocation problems, which it cannot solve even to its own satisfaction. Government enterprise will not only hamper and repress private investment and entrepreneurship in the same industry and in industries throughout the economy; it will also disrupt the entire labor market. For (a) the government will decrease production and living standards in the society by siphoning off potentially productive labor to the bureaucracy; (b) in using confiscated funds, the government will be able to pay more than the market rate for labor, and hence set up a clamor by government job seekers for an expansion of the unproductive bureaucratic machine; and (c) through high, tax-supported wages the government may well mislead workers and unions into believing that this reflects the market wage in private industry, thereby causing unwanted unemployment.”
It is a less efficient alternative to the free market. Feedback in the private sector is instant. You vote with your dollars, if you become dissatisfied with a product or if you dislike a company’s business practices you are able take your money elsewhere. People are able to make the choices that suit them the best. To say that the government is better able to know what individuals themselves want is utopian. Through individuals’ spending habits the market is shaped and provided feedback. In the public sector, the government is the middleman. The most control that you have over the government is a vote between two very similar parties. Each of which supports government monopolies and intervention in the economy. The politicians are there to make decisions for you. Short of leaving the country, you have no options to take your dollars elsewhere. You have few if any choices in public services. Feedback provided takes a long time and makes little difference. According to Rothbard the desires of all those forced, directly or indirectly, to pay for the government service cannot be satisfied. Only some forms of the service can or will be produced by the government agency. As a result, government enterprise creates enormous caste conflicts among the citizens, each of whom has a different idea on the best form of service.
A government is an entity with a monopoly on force in a defined geographic region. A government is permitted in many cases to do what the individual is not. The state is allowed to use violence to prohibit and to force certain transactions in the market. The market, or market economy, lacks the forced prohibitions and compulsions of a centrally planned economy. The aggregate interactions of the individuals decide the pricing of goods and services. It is the exchange between individuals that would ordinarily occur. Every dollar of government spending must be paid for eventually through a dollar of taxation. Taxation in itself is distortion of the economy. It is never at the same level for everything in existence. Taxation will always favor some goods, some companies, some industries and some people over others. For instance these companies pay no money and receive a great deal of taxes in return. Where good and wealth would have been allocated in a free market, is not where they are allocated after taxation has exerted its corrupting influence. This necessarily means that some people will have benefited at the expense of others. For instance Wells Fargo & Co., Goldman Sachs Group, PNC Financial Services Group, Capital One Financial Inc. and State Street Corp. received federal bailout funds during the financial crisis. They also did not pay income taxes for one or more years between 2008 and 2010 (Center for Public Integrity).
In an exchange there are peaceful participants and participants that depend on the threat and/or use of force. These participants may participate in voluntary exchange, involuntary or coerced exchange, and prohibited exchange. In a voluntary exchange, peaceful participant A and peaceful participant B each value what they are giving less than what they are receiving from the other, otherwise the exchange would not occur. We encounter the most basic example of this exchange when an individual purchases goods or services from another individual. In involuntary exchange peaceful participant A is being coerced by participant B who uses force to make the exchange. We encounter this type of exchange when we have something stolen from us, or are coerced to pay for something which we are morally opposed to. In other exchanges a third party is able to intervene in a transaction, and either compel a transaction that would already occur even if the intervening party is involved as is the case with car insurance. The third party is able to force people to make exchanges that the participants do not want. This is the case when an individual is forced to purchase something they do not want such as health insurance or when tax dollars are used to pay for products or services the taxpayer doesn’t want. The third party is also able to prohibit an exchange that participant A and B would like to partake in. This can happen when minimum wage laws are enacted or when goods and/or services are banned or restricted. Frequently, the two parties ignore such bans.
If an individual forces another individual or group of individuals, into giving him money, even if he promises to use it to help the individual he is taking the money from, he is indeed a common thief. If I steal all the money in your wallet but promise give $30 of it to the homeless and promise to give some of the money back later am I justified in my actions? If that same individual threatens to throw the other individuals in a cage for not complying with his demands, he is then a kidnapper. Even if the individual hires other badged and costumed individuals to do his bidding for him, he is still a kidnapper and a thief nonetheless. Even if it is done under the guise of a social contract this act is still glorified thievery, unless explicit consent and signature is given this “contract” is invalid. This still holds true even if you have promised away the tax dollars of people generations away from existence. The current national debt stands at $17 trillion. The unfunded liabilities estimates stand at $107 trillion. How can people who do not exist yet be considered fiscally responsible for paying for everything from wars, to bailouts, stadiums and the like? The old Giants Stadium, demolished to make way for the new Meadowlands Stadium, still carries $110 million in debt. The tax payers of New Jersey are still paying off a building that is now a parking lot. In 2010 taxpayers are to pay $35.8 million in principal and interest on the $266 million in remaining bonds for the Meadowlands Sports Complex. The sports complex opened in 1976 but the bonds will not be paid until 2025. To quote Lysander Spooner “If taxation without consent is not robbery, then any band of robbers have only to declare themselves a government, and all their robberies are legalized”. If an action is not okay for the individual it cannot be legalized on the grand scale for the state. For murder is still murder, theft is still theft and kidnapping still kidnapping.
The case for a voluntary exchange is not one that is anti-government, but instead one that is pro-competition. But in deciding whether private or governmental ownership of any enterprise is preferable we should look the following conclusions of Murray Rothbard’s analysis of government efficiency: The first is that every service is able to be supplied privately on the market; and second that private ownership will be more efficient in providing better quality of service at lower cost. Third the allocation of resources in a private enterprise will better satisfy consumer demands, while government enterprise will distort allocations and introduce islands of calculational chaos. Fourth, government ownership will repress private activity in non-competing as well as competing firms. Fifth, private ownership insures the harmonious and co-operative satisfaction of desires, while government ownership creates caste conflict (Rothbard).
Individuals are capable of voluntarily forming a government; there can be voluntary formations of democratic states as well as socialist ones where the individuals pay into a pool to pay for benefits they decide. People are able to form collectives as they wish, just so long as they do not coerce individuals into paying for something they did not agree to in a contract. Private law allows for arbitration to settle disputes. Just as disputes are settled on eBay and items can be certified as Fair Trade. Even if the organizations fall under scrutiny this allows for other, better organizations to come along that meet the customer demand for the quality of production desired. If a dispute resolution organization is unable to provide satisfactory service a customer is able to take their case to another dispute resolution organization. Social norms and relationships will not disappear; a voluntary society is not anomie.
There are fears that if people are left to interact voluntarily that businesses would start to trick consumer. If people are not capable of making perfectly rational decisions shouldn’t the government step in to fix the problem? For instance the individual consumer and the government or central planner may have the following limits to “rational” decision making; cognitive biases, logical fallacies, poor intelligence, faulty or limited information. However the individual consumer has knowledge of their own desires, they are spending their own money and can weigh up cost and benefit. They cares about result of each purchase. The central planner has almost no knowledge of individual consumer desires. They are susceptible to corruption. Since they are not spending their own money, costs don’t matter as much. Their primary concern is about career, not necessarily the actual results of purchases.
If the government gives a product their FDA “Seal of Approval” it must be safe, right? In our current system many consumers don’t check what they are eating or where it comes from, because the government does that for them. The regulators can’t check even 0.1% of the food products sold, most spot check products. They may test a few cans of green beans for instance, but they can’t check every single can. If the government makes a mistake with testing, there may be a scandal, but people will soon forget and regain their confidence in the all-knowing government. Taxpayers pay for the government regulation here and the regulators are susceptible to influence by interested parties. Without the government consumers must be more careful. People may try to trick them and they will have to be more wary of what they are buying and from where. A consumer tests every single product purchased. This informs all their future purchases of that brand, and they can share this information with others. Reputation and brand is everything to a company. Firms spend millions each year on this and a reputation can be damaged overnight. They need to test quality. Free market regulation is free, as it consists of existing market processes. Though it can be supplemented by quality control. Third party testers’ own reputation depends on them providing accurate information and reviews of products.
Self-defense, law, property, even police officers would not cease to exist in a voluntary society. Police would have to be accountable for their actions in order to stand up to the competition of other more virtuous police forces. A police force that repeatedly kills innocent civilians or shoots their dogs is not likely to be hired to police a neighborhood that wants to be genuinely safe. When the state has a monopoly on police many police forces keep or oftentimes give lax or even no sentences to officers who are clearly in the wrong when it comes to their actions. In the case of Kelly Thomas, an unarmed and schizophrenic homeless man, who was beaten to death by two police officers, the officers found not guilty. You are eight times more likely to be killed by a police officer than a terrorist and 500 innocent Americans are murdered each year by police. Police have killed 5000 people since 9/11 and no knock raids have risen by nearly 4000% since the 1980s. The War on Drugs, largely a war on nonviolent people, receives billions in funding a year and the accompanying militarization of the police force has created what some are calling an epidemic of police brutality. According to The White House the President requested $25.4 billion in Fiscal Year 2014 to reduce drug use and its consequences in the United States. This represents an increase of $0.9 billion (3.7%) over the FY 2012 final level of $24.5 billion (White House).
According to Milton Friedman economic freedom plays a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. Secondly, economic freedom is also an indispensable means toward the achievement of political freedom. If the government’s services are so good and they genuinely have the best interest of the people in mind why would they be afraid to stand up to the competition? The only monopoly opposed by proponents of 100% free market capitalism is the one on coercion and governance. Competition in governance would breed much more efficient means of providing any state provided services that we have a demand for in our current system. It holds true that economic freedom is linked to prosperity. See below charts.
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“Bailout List.” Bailout List: Banks, Auto Companies, and More. N.p., n.d. Web. 27 Apr. 2014.
Belson, Ken. “As Teams Abandon Stadiums, The Public Is Left With the Bill.” The New York Times. The New York Times, 07 Sept. 2010. Web. 25 Apr. 2014.
Dorn, James. “More Economic Freedom Is Key to U.S. Economic Success.” Cato Institute. N.p., n.d. Web. 26 Apr. 2014.
Galles, Gary. “Social Security: The Most Successful Ponzi Scheme in History.” Mises.org. Mises Institute, n.d. Web. 27 Apr. 2014.
Friedman, Milton. Capitalism and Freedom. Chicago: U of Chicago, 1962. Print.
Hazlitt, Henry. Economics in One Lesson. New York: Arlington House, 1979. Print.
Kim, Anthony. “The Link between Economic Freedom and Human Rights.” The Heritage Foundation. N.p., n.d. Web. 26 Apr. 2014.
“The National Drug Control Budget: FY 2013 Funding Highlights.” The White House. The White House, n.d. Web. 27 Apr. 2014.
Release Us -a Short Film on Police Brutality. Dir. Charles Shaw. N.d. YouTube.
Rothbard, Murray Newton, and Murray Newton Rothbard. “The Myth of Efficient Government Service.” Man, Economy, and State with Power and Market: Government and Economy. Auburn, Ala.: Ludwig Von Mises Institute, C2004., n.d. N. pag. Print.
Suede, Michael. “Cops Kill More Americans Than Iraqi Or Afghan Insurgents.” Libertarian News. N.p., n.d. Web. 27 Apr. 2014.
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