The Rules

I’m currently in the process of reading Naked Economics by Charles Wheelan. The book is a “refresher” of basic economic theory, both micro and macro, and presents the fundamental concepts that underlie economic s in simple and direct prose (for anyone that wants a nice econ refresher, I highly recommend it). Early in the book, Wheelan confronts the role of government in economics; presenting an argument that government has a role in economics but should not be involved in the market. In other words, “[g]overnment has the potential to enhance the productive capacity of the economy and make us much better off as a result.” The basic underpinning of Wheelan’s argument is this: the government exists to set the rules, and, without the rules, we wouldn’t have an economy.

The idea is this: the free market is great and we should do our best to make sure that free markets exist, but, without a democratic government (and the laws, rules, and regulations that go along with a democratic government), the cost of doing business would be too high for any rational person or business to chose to engage in the economy. Businesses would need to pay for basic security that they get for free in a democratic society. He cites a 2000 column from New York Times columnist Thomas Friedman, where Friedman argues that developing countries envy the U.S. because of its government bureaucracy.

Without the laws, rules, regulations, and uncorrupted government agencies that make up a stable western democracy, economic development is nearly impossible. These regulations provide the framework for protecting patents, ensuring that monopolies don’t price gauge us, and define property rights. Plus infrastructure investment – it sure is nice not driving on dirt roads (I’ll comment on this in greater depth in another post). As Wheelan writes, “Good government makes a market economy possible. Period. And bad government, or no government, dashes capitalism against the rocks…the reality is that nobody ever likes the umpire, but you can’t play the World Series without one.” For Wheelan, the proper role of government is to deal with externalities, those consequences of individuals acting freely in their own best interests that impact other people.

Juxtaposed against this is the wave of anti-government populism embodied by the “tea party.” These populists want less government in their life. The irony is that I would wager that they don’t want to eliminate the role of government in their life; the inherent sense of fairness and justice that permeates the rhetoric from this group leads me to believe that some government is good. When the “tea partiers” wave their “Don’t Tread on Me” flag, they’re really saying, “Don’t tread on me, unless treading on me will benefit me.” So, it’s not, “Don’t tax me.” It’s more, “I don’t want you to tax me, unless it’s going to the fire department, which will save my house from burning down after I had the unlicensed electrician do some work on my house.” The challenge is in defining the limits of good government. What negative things have an impact on you that are the result of someone “exercising their freedom”? And who decides?