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

1. 4Government’s Role in the Economy: The Offer You Can’t Refuse

2. 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

3. 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

4. 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.

7. 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 us to pursue goals that cannot be attained spontaneously and would be impossible for any one individual to realize

8. 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

9. 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 by many but he made important observations about the transformation of feudalism to capitalism

10. Socialism • Marx categorized political-economic systems according to who controlled the means of production • The means of production are the things necessary to transform labor into wealth • Under the feudal system craftsmen controlled their means of production • Land was a 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 where society controls the means of production

11. 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 exploitive, this was a mutually dependent relationship

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

13. 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

14. The Pool of Labor as a Common Resource • The dynamics of the tragedy of the commons are applicable, if one thinks of the pool of laborers as a commons, a shared resource that capitalists exploit for economic gain • The constant push to lower salaries will eventually leave workers unable to buy the goods they produce • 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

15. 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 you can compel individuals to prevent the destruction of the commons through overexploitation • 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

16. Questions for Consideration • Can you think about a contemporary global “tragedy of the commons” problem? • How about arms proliferation? • How does the tragedy of the commons help to explain why these problems are so difficult to solve?

17. Alternative “Ideal Type” Approaches to Economic Well-Being • Pure Socialism • Free-Market Capitalism

18. Pure Socialism • Society (the State) controls the means of production • Virtually no (or very limited) private property. • Management of entire economy by the state (supply oriented). • Underlying premise is that society is a collective, and maintaining the welfare of the entire community is paramount. • Economic power subordinates to political power

19. Free-Market Capitalism • Private Actors control the means of production • State is passive, tries to remain out of economy to maximize capital growth. • Economic decision driven by individual consumption (demand driven) • Underlying premise is that wealth must be created before it can be equitably distributed; economic and social justice is not a primary consideration • Political power subordinates to economic power

20. Ideal Type Political Economies • For the ordinary citizen, what are the main benefits of a socialist economy and a capitalist economy? • What are the most significant drawbacks with each type? • What are the political tendencies for a socialist economy? • Non-democratic tending toward totalitarianism • What are the political tendencies for a capitalist economy? • Various, no tendency • It seems that you can have economic freedom without political freedom but not vice versa

21. Socialism Drawbacks • 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 and the communist utopia Marx overestimated people's industriousness and undervalued the role of human motivation • Socialism is very inefficient because it is hard to motivate people to work and even harder to motivate people to seek efficiencies or get them to excel at their craft

22. Capitalism Drawbacks • Pure Capitalism has its own problems • Capitalism’s productivity results from destroying old economic structures, allowing more efficient structures to rise • This change has become increasingly rapid; why? • Retreat of public ownership (efficient central planning is an impossibility) • Free trade • Technological change • Union bashing/soak the poor mentality • Parenti warns that the capitalism can destroy itself. How? • Consider excesses in the financial markets precipitating the great recession of 2007, Corporate malfeasance like Enron

23. Economic Dislocation • Change disrupts most careers repeatedly • Not just factory workers but also increasing dislocation among white collar workers • Earnings, even for college grads, has been on the decline • Shift of market insecurity from corporations and government to the masses • Tradeoff between the power of the state and the freedom of the private actor is • also a tradeoff between security and insecurity

24. Heilbroner Triumph of Capitalism • What’s the central failure of communism? • Doesn’t produce the goods • What’s the downside of capitalism? • Moral growth, cultural enrichment, 75/25 society, environment, collective goods, etc. • Must constantly destroy and innovative: increasing insecurity for the masses

25. Questions • Capitalism is very productive but it has a lot of faults; Heilbroner’s solution? • State should act as steward • As a counterbalance to corporate power • Are there other methods of dealing with poverty and promoting economic and political well being that deserve consideration?

26. Democratic Socialism • Includes public ownership of key economic and social services. • Agriculture may be communal or private. • Small businesses and service industries remain private. • Balances features of capitalist and communist economies (3rd way) • Reduce inequalities inherent in capitalism • Freedom from uncertainty (i.e. health care, unemployment, old age) • Political system remains pluralistic and multiparty. • Do we see this developing in the U.S.? • No, not willing to pay the high taxes but very popular in Europe

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

28. Judt “Ill Fares the Land” • Is the pursuit of material self-interest a virtue in itself? • What other virtues become eclipsed when we become obsessed with material wealth? • What are the downsides of inequality and the increasing concentration of wealth? • What alternative do we have? • Judt argues for Social Democracy

29. Parenti “Capitalism’s Self-Inflicted Apocalypse” • Do we live in a Democracy or a Plutocracy? • Founding Fathers limited participation for the masses; wanted a government of elites • Can we have democracy AND great wealth concentrated into the hands of a few?

30. Parenti Questions • Do economic elites try to limit political participation of the masses today? How? • Registration requirements, voting on a Tuesday, voter ID laws, etc. • Is the state on the side of the masses or the economic elites? • What about corporate tax policy, government subsidies and bailouts, etc.

31. Capitalist Consumerism • U.S. style “Turbo-Capitalism” is oriented toward short-term profit and growth • Often at the expense of the long-term best interest of their customers • “False Needs” are constructed which consumers become convinced they need for their happiness • The only real happiness can be found by being in the moment but you are constantly distracted from that realization in the quest for more and better “stuff” • Consequently, consumers opt for short-term satisfaction at the expense of real happiness and the long-term health of themselves or the environment • What do you think? • Any critical views are either co-opted or marginalized • Read “The Politics of Food” article in your reader