The Indispensable Role of Government
Modern market economies create an incredible abundance due to dynamic information interchange. People have the freedom to bid for goods and services based on their wants and needs, and people have the freedom to organize resources to meet the needs of others. Vast numbers of free people integrated by markets is an extraordinary achievement. This generally what we mean by free markets
Yet the “free” in free markets does not mean anarchy or unbridled freedom. This is a misconception, one intentionally fostered by some detractors. Markets do not exist in a vacuum but in relationship to societal institutions and traditions.
At the most elemental level, a transaction is not free unless both parties are non-coerced, both parties have sufficient knowledge of a transaction to be able to make an informed decision, and both parties know that there are authorities who will protect their right of ownership and impartially compel compliance with contracts. In short, there must be trust, particularly the ability to trust that even anonymous people will honor their commitments. There is a role for the government in this regard. But there are other roles as well.
Markets don’t always allocate costs effectively. Sometimes a person who isn’t party to a transaction benefits or is harmed by the transaction. If I hire a landscaper to do some work on my front lawn, it will likely improve the value of my property and my neighbor’s. Similarly, if I hire a contractor to build a pig sty in my front yard, the stench and noise will affect my neighbor, who had no part in the transaction.
Pollution is one of the most frequently given examples of externality. A factory pumps pollutants into the air at no charge but diminishes the air quality for everyone else around. Either through taxation or regulation, the government plays a role in reallocating the cost back to those who are unfairly benefiting. Government plays a critical role in this regard.
Capitalist economies, by definition, create large complex entities, abundant sophisticated financial instruments, and very complex market relationships between firms. There is no way most citizens can comprehend these features. Some regulation and oversight are needed, particularly to ensure transparency so that regulators and watchdog groups can scrutinize behavior. This is another critical role that government plays.
Furthermore, government plays a critical role in international trade. It helps establish the ground rules for trading with citizens and businesses in other nations. When other nations engage in unfair trade practices (like placing exorbitant tariffs on American goods while deeply subsidizing the production of competitor goods for export to America), the government can use several actions to address this problem. Government can also use trade rules as a carrot and stick to work for more just working conditions and economic freedom in emerging nations.
In many ways, the government is a critically needed referee in the economic “game.” When players can have a reasonable level of trust that the rules will be consistently and fairly enforced, it facilitates the flow of economic freedom. However, chaos ensues when the referee begins crossing the line into head coach (calling plays, making decisions about personnel, and taking positions on who should be given preferential treatment). Markets become distorted, and buyers and sellers can no longer correctly evaluate how to engage one another. Abundance dwindles.
Finally, government must intervene to prohibit transactions that are ultimately destructive to human life or societal health. While some libertarian friends disagree, I would continue legislating against prostitution. While some people with other legitimate economic choices may freely engage in prostitution, many will succumb to the pressure to debase themselves rather than do what is needed to avail themselves of legitimate economic options. Prostitution degrades human beings (buyer and seller) into a commodity, and that debasement tends to engender other destructive trends.
In broad terms, many people have little problem recognizing the need for this distinction. The challenge comes at the margins of these issues. For example, when is an externality truly an externality or merely an inconsequential annoyance to a third party? What is “enough justice” when discussing trading justly with emerging nations that don’t entirely share our cultural institutions and values? There is room for reasonable people to disagree. I part ways with those who believe in something approaching anarchy or those who think the economy should essentially be an extension of government agendas.
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