The Government Role in a Capitalist Economy

By Joe Campbell
March 30th, 2009

Robert J. Samuelson does a pretty good job in his column from last week of illustrating the incoherence of “the Establishment’s view” of government’s role in capitalism.

He begins his article discussing the prescient observations of Joseph Schumpeter, a 20th century economist who predicted that capitalism “sowed the seeds of its own destruction.” He described Schumpeter’s understanding of capitalism:

[Capitalism’s] chief virtue was long-term – the capacity to increase wealth and living standards. But short-term politics would fixate on its flaws – instability, unemployment, inequality. Capitalist prosperity also created an oppositional class of “intellectuals” who would nurture popular discontents and disparage values (self-enrichment, risk-taking) necessary for economic success.

Samuelson observes that Schumpeter’s observations seem to get to the heart of capitalism – yet he says, their conclusion is wrong – because capitalism survived. It survived Samuelson observes because:

We have subordinated unrestrained profit-seeking to other values. “We’ve gradually taken into account the external effects (of business) and brought them under control,” says economist Robert Frank of Cornell University. External costs include: worker injuries from industrial accidents; monopoly power; financial manipulation; pollution.

Samuelson goes on:

Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive – the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can – through taxes, laws and regulations – weaken the profit motive and interfere with markets…

Now we’re really getting somewhere. Capitalism, it seems, must not be a matter of pure natural forces. It is not “unrestrained profit-seeking” in Samuelson’s view – nor does it exclude government intervention, as legal and political structures must modify markets and profit-making in order to “create public acceptance.” That’s a bit of an odd formulation, as anything could be justified as being done in order to “create public acceptance.” Circuses, beheadings, propaganda, war, large-scale confiscation of property – whatever. What Samuelson must mean – although it has to be inferred – is that measures designed to “create public acceptance” can only go so far before the essence of capitalism is destroyed – as he warns is imminently possible in his concluding paragraph. There is only a “thin line” he explains between capitalism and socialism – because:

If companies need to be rescued from “the market,” why shouldn’t Washington permanently run the market? That’s a dangerous mindset.

To illustrate this dangerous mindset which is empowered by an equally dangerous populism, he points to interjections of the government into the economy in the past half-century that have not been for the good – that is, those interjections in which the benefits are concentrated and the costs are dispersed, for example, ethanol subsidies and the promotion of the advantages for politically-connected companies; and those interjections that have scapegoated various groups – such as the anti-bonus tax bill. This implies – if nothing else – a confusion on Samuelson’s part.

Political actions in which the benefits are concentrated and the costs are dispersed are – as George Will put it “the supreme law of the land.” They have been the main business of American government since shortly after it’s founding – from subsidies for railroads to the laws enabling the various cartels of the Gilded Age to the military-industrial complex to agriculture subsidies in general to the bailouts of various industries. Only a few presidents have ever taken on this “supreme law of the land” and decided to extract costs from the politically influential few for the good of the many – Teddy Roosevelt as he sought to bust the trusts; FDR as he re-wrote the social contract. Most other presidents have tried to have it both ways – to give the politically influential few what they want while also attempting to achieve some common good. This has often been the source of their failure. The populist scapegoating is an entirely different matter – and is generally fleeting and while distasteful does little real damage. 

Both of these have been part of American capitalism since the beginning. Yet for some reason, Samuelson believes that capitalism is more under siege today than in the past. He never makes the case why – except to point to distasteful and inefficient aspects of American capitalism that have been around since it’s inception. This is little reason to believe that either populist scapegoating or actions with concentrated benefits and dispersed costs have increased significantly. And Samuelson does not try to make that case. Rather, he reveals the same unease that the rest of “the Establishment” has with any significant change. 

The incoherence and of this worldview is clear. What is less obvious is why. The answer is a theme I have been coming to again and again in this blog: that the free market is not a natural phenomonen, but a creation of a society and government. Thus – we did not really “[subordinate] unrestrained profit-seeking to other values” as Samuelson suggests – rather the government created costs to balance the marketplace. If a company was polluting, it was damaging those around it just as much as if it had been stealing from them. By imposing costs, the government was not so much “subordinating unrestrained profit-seeking” to some other values – but preventing one party from stealing from another. So, the government enacted regulations to reduce that pollution – and exacted costs if companies did not follow those limits. The cap-and-trade legislation promises to be an even clearer interjection of the government in this manner. The government and the society of which the government is a part together create the circumstances in which a market can truly be free.

Capitalism – alone, without a society to provide a marketplace – is a meaningless concept. Pairing a capitalist economic model with a democratic state has become a long-term successful model for progress because the “seeds of destruction” that capitalism produces are mitigated and sometimes used by the democratic state to the confer legitimacy on the model. The problem with capitalism has proved to be not as much the “instability, unemployment, inequality” that Samuelson describes – but the concentration of power among a monied and politically-influential elite that has attempted to protect the status quo and their own interests at the expense of the legitimacy of capitalism itself. Once the concentration of power reaches a certain tipping point, the market becomes less free. Which is why the government must, from time to time, step in to allow some sort of balancing to take place and to create rules for the market which allow it to operate freely.

Samuelson is concerned that this means that Washington may take it upon itself to “permantly run the market.” In this he demonstrates his lack of understanding. The government – and the society at large – have always created the rules by which the market is run – have always sought to mitigate the damage wrought by robust competition and worse. What is different now is that once again the government failed to adequately police the market. Or alternately, you could argue that the government failed to ensure the market stayed free, allowing firms to become so big and powerful they posed a systematic risk. Either way, while it would be dangerous to have a government declaring it would “run the economy” – that is not the situation we are now facing. Samuelson’s unease seems more the result of a desire to protect the status quo than any real regard for or understanding of capitalism and free markets.

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7 Responses to “The Government Role in a Capitalist Economy”

  1. Is This Downturn a Crisis of Confidence or a Fundamental Error? - 2parse Says:

    […] the same time as Establishment defenders such as Robert Samuelson are uneasy about the scope of what Obama is proposing, other members of the Establishment are […]

  2. Joe Campbell Says:

    I am not sure what you are responding to. I do not believe in – and have not suggested – any “social engineering” projects of any sort.

    Rather, I believe that capitalism – in some fashion – is the least worst economic system yet devised. You seem to fail to acknowledge that the market itself is a creation of the government (in partnership with society.) More important, you should acknowledge that capitalism – though the least worst system – has certain tendencies which render it unstable, unsustainable, and unfair (or unjust). You try to dodge this by saying that you do not define justice as a statistical distribution. Of course you don’t – this is a strawman argument as neither do I. You also state that you cannot scrutinize the whole state of things to determine if it is just or not. This, of course, is ridiculous. You can – and likely do. If I see a whole race of men enslaved, I can see that this is not just. Similarly, if I see a small percentage of a population possessing nearly all of the wealth, I can, based on my basic knowledge of human beings in general, determine if it is unjust. I am not saying I can determine this with precision.

    The economy is so vast with so many factors and individual choices play a large role in distributions – it is impossible for me to determine at what point “justice” has been achieved. But as a crude tool, the statistical distribution of resources can demonstrate injustice – even if it does not necessarily demonstrate how this injustice should be remedied.

    What I propose is not “social engineering” but a politics that acknowledges the inherent limitations of our system.

  3. The Limits of the Free Market - 2parse Says:

    […] benefits and dispersed costs.” What free market supporters rarely seem to admit is that the free market exists not in spite of the government, but because of it. And today, our market is far from free because the government has failed to protect it – and […]

  4. The Success of Goldman Sachs as a Repudiation of the Free Market - 2parse Says:

    […] From this insight comes the inevitable conclusion that – contrary to the doctrine of the right-wing – the government is not the antithesis of the free market, but rather plays an essential role in creating and maintaining it. […]

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