Because the thought process through history on the market versus
the government has varied, it is interesting to start off with
some people's various views before diving into the primary topic
at hand:
Early political economy: At
first, religious leaders and other moral philosophers saw the
market economy as a place for selfishness and competition. They
believed that buyers and sellers acted impersonally and without
any regard for others. They saw the market economy, with lack
of government intervention, as being a threat to altruism and
social cooperation. Instead they felt that it was a like a breeding
ground for selfishness and greed.
Thomas Hobbes (1651): He said that without a government, anarchy would be sure to develop, and each person would be in continual misery. He also felt that people would never feel safe because they would always be concerned and in fear of brutal death at the hands of other people. Hobbes saw the government mainly as a force just to deal with stopping brutality and killing.
John Locke (1690): He argued
that people have the natural right to life, liberty, and property
and that the government needs to protect these things.
Jean Jacques Rousseau (1762): He saw the government as an expression of the "general will." He felt that it was a necessity that the government secure freedom, equality, and justice.
Adam Smith: He tried to
change all of the views previously mentioned. He pointed out that
under certain conditions self-interest has the potential of actually
giving great benefits to society. He said that people interested
in their own gain realize that they can do the best if they produce
goods and services for trade. The things produced for trade must
be of a higher value than what other people have (if they want
to be able to sell it), and thus it encourages people to specialize.
Consumers trying to maximize their utility, and producers trying
to minimize their costs leads to goods and services can being
produced in the quantities desired and at the lowest costs possible
(due to competition). These ideas are those of "market economy."
He believed that although we might not be able to stop the propensity
to be self-interested, if we design the proper rules, then this
propensity can be used to help humankind. His "Invisible
Hand Theorem" is the idea that people are led by an invisible
hand to promote others' interest, even though they act in their
own self interest.
During the 19th century: Many
more people started seeing the government as being necessary,
or at least as a compliment to the market economy. More and more
began seeing that the government was needed to supply certain
goods and services which the market itself could not supply efficiently,
such as Public Goods. They made proposals as to how the government
could most efficiently raise funds to pay for these things. This
is the field that we now call the Public Finance.
Karl Marx: He believed that the idea of markets was foolish. He said that there was conflict between capitalists (profit maximizers) and workers; the workers transformed the raw materials into goods and the capitalists who financed the ventures received most of the gains. He didn't see this as being fair, and he believed that this inequity would continue to increase as time went on.
Neoclassical: In a simplistic
summary, they said that Marx's ideas were based on the idea that
there was a strict division between the suppliers of labor and
the suppliers of capital and management. However, they did not
believe this to be realistic. Practically everyone to some extent
is a financier, an employer, and a laborer. And each person can
and often does own land and capital goods on which they earn income.
Frank Knight (1921): He
said that for a person to go into business and sell goods, someone
must save and bet on his/her beliefs about the future and any
possible profits that he/she thinks they might be able to make.
He said that a property system forces people to be responsible
for their errors and carelessness. It also rewards them when they
are right. Therefore, the saving and risk-taking are more effective
than they would be under a communal system, where the responsibility
for errors and benefits from being correct must be shared. Basically
he believed that with this type of system there would be a greater
production of what people call wealth than there would be with
an alternative system.
Then there were people
who began studying market failures; that is that the market is
less efficient than it could be. They started looking for ways
to correct the inefficiencies of the market. They believed that
they needed to find solutions and present them to the government-in
hopes that the government would adopt them and the inefficiencies
would be corrected.
Today there are still conflicting
opinions as to which is more efficient-the government or the market.
As mentioned before, the topic of interest here is dealing more
with the inefficiencies of democracy (the government and voting,
etc…) however, that is not to say that markets are perfectly
efficient themselves.
Today Public Choice is
a topic which has been gaining more interest with many people.
You see, in order to get an economic policy to be carried out
in a democracy one cannot just convince the government leader
that it is a good idea. Enough voters must themselves believe
that the policy is in their interest so that they will approve
it through some form of collective decision-making process. Public
Choice scholars are now concerning themselves with the rules of
collective decision-making and to the efficiency with which the
policies are administered.
James Buchanan and Gordon Tullock are the key players in much of the research that has been done recently under the field of Public Choice. In a nutshell, Buchanan and Tullock feel that majority rule will not give you a political equilibrium. To them, a democracy should not mean one majority ruling. They also believe such things as: the government sector is too large, and that it tends to favor certain groups too much; that a flat rate tax (every dollar of income being taxed) instead of a progressive one is better, etc… More will be mentioned on Buchanan and Tullock later.
Before the beginning of Public Choice in the 1960s, it has
been noted that people more easily regarded the government as
an entity that would adopt the recommended policies and faithfully
carry them out. Today most people are not so naïve. People
now realize that policy decisions are often made through a collective
decision-making process in which efficiency considerations are
often secondary. The actual decisions are made by an elected legislature;
and the economic futures of these politicians rests on their ability
to please a group of independent voters, pressure groups, and
political parties. The "problem" is that these people
generally think the most about their own private interests than
about implementing the optimal policy that might be recommended
by economists. We can even take this introduction one step further
and state that even if an economist's suggested policy is passed
into law, the bureaucrats who are assigned to carry it out usually
are not very efficient in satisfying the demands, as you will
see further evidence of as you read on.