Saturday, August 15, 2009

Government and Capitalism

Governments allocate resources in a fundamentally different way than free individuals behaving cooperatively in voluntary exchange via market capitalism. Individuals acting in their own interest results in a spontanous order guided by prices which reflect tradeoffs based on the knowledge and preferences of millions of individuals. Governments allocate resources based on the limited knowledge and preferences of a few voters, elected officials, or appointed bureaucrats. The fundamental problem facing government is that it never has enough information ( or incentives) to carry out plans effectively. As Economist F.A. Hayek (1945) said:

'the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all separate individuals possess'

We must also recognize that there is a moral difference between the two processes as well. With government, resources are coercively taken from one individual and given to another. Through the voting and legislative process, government picks winners and losers ( this would not be so bad if we limited government to a few basic functions but becomes problematic with greater intrusion into our lives). Markets do not pick winners and losers. For voluntary exchange to take place, all parties must gain ( although some may gain more than others). Again, as F.A. Hayek (1973)noted :

'the particulars of a spontaneous order cannot be just or unjust'

Certainly there are situations where government has a role in our lives. Our founders outlined many of these in the constitution and explained them well in the federalist papers. While government may provide a necessary mechanism to achieve certain societal goals, we must also be aware of it's weaknesses and its threats.

We should especially be on guard when we hear political leaders justifying some policy or condemning capitalism because the current system has 'benefited the wealthy and well-connected at the expense of the vast majority of Americans.' They are likely staking the deck to take what you have and give it to someone else, or pass some law that benefits a corporate competitor over your small business in the name of some lofty social goal. Ironically, the effect of their policy will likely be to benefit the wealthy and well connected and will likely be at the expense of the majority of Americans.

Instead of just changing who the government picks as winners and losers, it is time that we inform our leaders that we want a change from these collectivist polices, because 'those theories have been tested, and they have failed.'


F.A. Hayek.The Use of Knowledge in Society. American Economic Review (1945)
F.A. Hayek. The Mirage of Social Justice (1973)


MAT kinase said...

Are you suggesting that there are rarely/never situations where government can accomplish goals more effectively than the private sector?

agEconomist said...

Not necessarily. In general, ( as I mention in this post)economic theory indicates that the incentives and information set used by government is much smaller than that utilized by individuals or markets.

Our founders certainly had a good idea of the things that Government may be more effective at, as indicated in the specifically enumerated powers of A1S8 of the constitution.

There are cases, in general where, government may have a role ( when goods are non rival and nonexclusive- education, national defense). Or when there are external effects, example: you and I engage in voluntary exchange and harm a 3rd party. However, the existence of 'public goods' or 'externalities' alone does not guarantee that government will offer any improvement.

I elaborate more on these details in previous posts- I'll have to hyperlink those in a new post.