Professor Douglas J. Amy is a Professor of Politics at Mount Holyoke College. On this page, he writes a long and complete blog entitled “Government is Good: Capitalism Requires Government.” Based on my understanding of economics, politics, and the like, I would agree. He has allowed me to hit the highlights here in this blog (his words in blue). Herein you will find some good stuff, such as this quote about government from Professor Amy: “Americans need to realize that our economy has thrived not in spite of government, but in many ways because of government.” Along very similar lines, this time by a noted conservative, David Brooks: “The biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.” I for one am interested in a government more like European welfare states and social democracies. We need grassroots change so that government responds to the peoples’ needs, not moneyed interests. This is the progressive hope. Read further to hear plenty from Douglas J. Amy, Ph.D. and also from individuals such as
One of the most common and misleading economic myths in the United States is the idea that the free market is “natural” – that it exists in some natural world, separate from government. In this view, government rules and regulations only “interfere” with the natural beneficial workings of the market. Even the term “free market” implies that it can exist free from government and that it prospers best when government leaves it alone. Nothing could be further from the truth. In reality, a market economy does not exist separate from government – it is very much a product of government rules and regulations. The dirty little secret of our “free” market system is that it would simply not exist as we know it without the presence of an active government that creates and maintains the rules and conditions that allow it to operate efficiently.
“Americans love the free market, but again and again they have risen in revolt when market forces become too powerful.”
Government Rules Make Markets and Capitalism Possible
Markets, like governments, are very much social constructs. The market is a set of behaviors that is structured by rules, and many of the most important rules have been developed and enforced by government. Without these rules, our prized free-market economy would be a stunted and feeble version of what we see today. To see how this is the case, lets looks at these essential “rules” – the vast infrastructure of laws and policies that make a modern capitalist economy possible.
Professor Amy, on his blog page, goes through in some detail about ten aspects of rules that make capitalism possible. He is pointing out that government is like a referee that we should not blindfold or handcuffed. His categories are:
limited liability laws
law and order
a stable money supply
patents and copyrights
banking regulation and insurance
commercial transaction laws
international trade law
enforcement of laws
“A laissez-faire state is open to abuse by monopolies and cartels. I really doubt that early proponents of the free market system like Smith would have approved of modern capitalism. The problem here is the system is rigged from the top, down. You cannot talk about consent if the only options are to live or to die. The modern capitalist economy is full of market failures like the existence of monopolies and oligopolies, asymmetric information, and externalities. A government is required to protect people from these market failures that benefit the most affluent. So, I don’t think an extensive government violates people’s rights. On the contrary, it protects peoples rights.”
To see how just how essential these government contributions are to the workings of a free market system, you merely have to imagine what it would be like if these measures didn’t exist. Or if we didn’t enforce these laws. Imagine that investors were liable for all debts of a company, that there were no patents, copyrights, or property rights, that contracts couldn’t be enforced legally, that there was no official and stable money supply, and so on. In such a world, markets would be very limited, and economic growth severely stunted. It would hardly resemble the economic world we now live in.
Conservatives would like us to think that there can be a strict boundary between public and private in modern economies. But this is impossible. As the points above make clear, markets and capitalism are quasi-public entities – made possible by a myriad of government rules and laws that establish many of their basic inner workings. We may think of the “private market” as existing separately from the public sphere, but it does not.
“Although many of his latter-day prophets ignore this, Adam Smith taught that the social benefit of the free market would be realized only in the wider public sphere, with the populace actively debating matters of common concern and expressing its will through the state.”
Consider this analogy: free-market capitalism is constituted by government laws in the same way that sports are constituted by their rules. When we watch football, for instance, we usually see it as a freewheeling game with exciting runs and daring passes. But in reality, football is a highly circumscribed and regulated activity. It is only made possible by a large numbers of rules and regulations that cover everything ranging from the size of the field and the ball, to the number of downs, how scoring occurs, how tackling and blocking must take place, what constitutes a legal play, and so on.
He continues with this analogy on his blog. For example, pointing out that [j]ust as rules can create different kinds of football, government laws can create different kinds of capitalism and market relations. This clearly shows how market economies are actually political constructions – with their basic institutional arrangements being developed and managed by government rules.
In the paragraph entitled “Our Fantasy of Laissez-Faire History,” Amy shows that [t]here is nothing new in the way that government aids business and a market economy. Conservatives would have us believe that our nation began and prospered under a laissez-faire arrangement, until the twentieth century and the advent of the New Deal and big government as we know it. But in fact, there has never been a complete wall between the public and private sectors. Government has always been involved in the economy.
“To some people, especially those who worship at the altar of the free market, the collapse of communism in the 1980s and 1990s conclusively demonstrated the wonders of capitalism. That assumption is akin to the notion that the moral bankruptcy of the Republican Party implies proof of the greatness of the Democratic Party.”
Professor Amy points out the many duties enumerated in section 8 of the United States Constitution. He writes: What is remarkable about most of these topics is that they have little to do with promoting freedom, justice, equality, or the other lofty political values for which the American Revolution was fought. What they are promoting is economic prosperity. This was the first attempt to create a legal and policy infrastructure that would promote and encourage business growth – establishing protective patents, providing a stable money supply, preventing counterfeiting, creating uniform duties on goods, establishing uniform bankruptcy rules, regulating foreign trade, and so on. Even the creation of post roads was not simply for the mail – these roads were the main avenues of commercial transportation in the states.
So as far back as the 18th century, American government has been working hand in glove with business interests to promote economic growth.
Thus, the conservative idea that until recently we had a laissez-faire economy that prospered without any help from government is really a myth. Robert Kuttner, one of our most insightful commentators on the relationship between government and business makes this point very strongly. Looking at this long tradition of government aid for business in this country, he concludes that it “gives lie to the idea that the United States has historically been a laissez-faire nation. Despite the constitutional restraints on state power and the generally libertarian national creed, government action for economic and industrial development is deeply ingrained in our heritage.
“The idea of a ‘free market’ separate and distinct from government has functioned as a useful cover for those who do not want the market mechanism fully exposed. They have had the most influence over it and would rather keep it that way. The mythology is useful precisely because it hides their power.”
Up until this point, I have been talking about how government policies and programs actually help businesses and stimulate economic growth. These have clearly positive effects on business, and even most conservatives would not deny the beneficial economic results of the government enforcing contracts, keeping the money supply stable, limiting liability of corporations, and so on. But the fact is that modern democratic governments also do a lot of things that are not necessarily good for particular businesses – at least in the short run. And these are what really bother anti-government conservatives….
The Inherent Problems of a Market Economy
The problem with market fundamentalism is the problem with all forms of fundamentalism – the faith of the adherents blinds them to significant portions of reality. In the case of market fundamentalism, it blinds them to most of the serious problems inherent in a capitalist economic system – the problems that necessitate government action. If pressed, most conservatives will admit that unregulated markets do suffer from a few “market failures,” such as a tendency to ignore pollution. But they see such failures as episodic and limited. For them, these problems only occasionally interfere with the smooth operation of markets to produce the public interest and thus only necessitate a modicum of government interference to set them straight. But they are wrong. The failures of markets are many, serious, widespread, and ongoing. This is not to suggest that capitalism is “bad” or to deny the many economic advantages and achievements of markets. It is simply to acknowledge that when left on their own, market economies will inevitably produce a whole host of economic and social problems. Let’s consider a list of some of the basic built-in problems, limitations, and failures of capitalist market economies.
“…[S]ome of the most important innovations in business in the last three decades have centered not on making the economy more efficient but on how better to ensure monopoly power or how better to circumvent government regulations intended to align social returns and private rewards. Making markets less transparent is a favorite tool. The more transparent markets are, the more competitive they are likely to be. Bankers know this. That’s why banks have been fighting to keep their business writing derivatives, the risky products that were at the center of AIG’s collapse, in the shadows of the ‘over the counter’ market.”
Here is the list of some of the basic built-in problems, limitations, and failures of capitalist market economies (and, as before, he goes into detail about each if you need more convincing):
exploitation of workers
unsafe and ineffective products
corporate fraud and theft
neglect of public goods
neglect of social and public investments
inability to plan
boom and bust cycles
lack of markets
devaluing the future
economic inequality and poverty
lack of opportunity and economic mobility
He sums up with the following: Taken together, all of these failures and problems totally undermine any notion of the “perfection” and “self-regulating” nature of the market. Virtually all of these problems are built-in to a capitalist, free-market system. They are systemic problems – products of the normal operation and the inherent attributes of this kind of economic system. This means that they occur irrespective of who is running our businesses. They are not the product of greedy owners or evil corporate CEOs; they are a product of the systemic priorities that all companies must adhere to if they are to stay in business and prosper. It is the internal logic of capitalism that forces firms to pay low wages, ignore the environment, devalue the future, and hide information from consumers.
“One large body of research provides detailed studies of the systematic and regular process through which ‘iron triangles’ of corporate and other pressures hedge in and co-opt regulatory systems- allowing just enough reform to buy off critics without seriously challenging basic corporate priorities.”
Being systemic also means that these problems cannot be cured from within the economic system itself. These problems can only be addressed from the outside by coordinated collective efforts – the efforts of people acting through their governments. This doesn’t mean that the government cannot at times utilize the forces of the market to help solve these problems – such as when it creates a market in pollution rights, or when it auctions off a limited number of licenses to harvest lobsters. But these are not “market solutions” as conservatives like to trumpet; these are “government solutions” that utilize markets to achieve their goals.
Once the extent and severity of the shortcomings of a market economy become obvious, it becomes much clearer why we have big government in the United States. The public has repeatedly turned to government to provide important things the market cannot – such as clean air, retirement security, equal access to a good education, city planning, and health care for those who cannot afford it. Nor can we rely on markets to provide a more just, free, and secure society.
Amy goes on to note that taxes, regulations, and social programs are positives and: That, then, is the traditional justification for government regulation of business and market: only government can address the many serious problems caused by laissez-faire capitalism. Even if government rules decrease somewhat corporate growth and profits, they promote important things that Americans care about – like better health care, safer workplaces, a cleaner environment, and more economic security. But this rationale leaves out an important – and more intriguing – reason why government “interference” in the economy is desirable. The fact is that many government actions that hurt businesses in the short run are actually good for business in the long run. Most regulations, for instance, are not only good for the American people, they are also ultimately good for business as well.
“Thus, the rich get richer (and more powerful) on the backs of the poor and the middle class, giant corporate behemoths wipe out small and middle sized businesses, and a corporate iron fist is seizing control of our government itself.”
What would happen to market capitalism without all of these regulations and social programs? Fortunately, we don’t have to try to speculate about the answer to this question; we merely need to go back to the first several decades of the twentieth century. This was the time before big government – before extensive regulations and expensive social programs – an era that anti-government conservatives consider a golden age. But what they forget is that at that time, around the world and even in this country, growing numbers of people were becoming very discontent with capitalism. They were also becoming increasingly interested in alternatives such as socialism, communism, and anarchism.
He continues: …the horrendous conditions that many people were living under in unregulated capitalist economies – the grinding poverty, the enormous economic inequality, the lack of adequate health care for most people, the absence of old-age pensions, the widespread unemployment, the unchecked and abusive power of monopolies, the environmental squalor of the cities, the dangerous and often lethal working conditions, the inevitable and hugely destructive economic depressions. It was these unaddressed problems of capitalism that led to the creation of communism and communist revolutions. Some people were so upset and disgusted with the widespread injustices and suffering caused by of laissez-faire capitalism that they were willing to take up arms and risk their lives to throw out the entire system and to start over with new and untried economic systems.
“One of the important lessons of history is that those who own, rule. Even in titular democracies, the powers of ownership gradually trump the power of the ballot and play an often decisive role in shaping cultural values. For these reasons, growing living economies that democratize economic relationships in the deepest sense is a leading edge of the work….”
Ironically, then, free-market conservatives and business leaders who worked so hard against Roosevelt and his policies were actually working against their own long-term interests. They failed to see that capitalism actually needs some “socialism” to make it less destructive and more palatable to most people.
Today, the corporate community and anti-government conservatives fail to see this point as well. They fail to understand that government policies that protect consumers, make workplaces safe, provide economic security, eliminate poverty in old age, provide health care to the poor, and prevent and repair environmental damage are what “humanize” capitalism and make it tolerable to people. In this way, businesses are a lot like sulky teenagers. They resent their parents’ rules – such as no drinking and driving, no unsafe sex, no experimentation with hard drugs – which they simply see as constraints on their freedom and their fun. They refuse to see that these rules are for their own good, their own long-term health and welfare.
There is one final ironic twist to all of this. Modern government’s achievements in reining in abuses of corporate power and humanizing capitalism have actually backfired on those who champion an active role for government in society. These successes have fostered an illusion that a market economy is relatively harmless. Few people remain alive who actually experienced the severe problems of the “bad old days” of capitalism before the New Deal. Today, many think we are living in a natural “free market” system, but in reality it has been extensively tamed by myriad government policies.
“[T]he New Deal is best understood as a series of attempts to save a faltering and depressed capitalist system by further regulating and rationalizing the economy, by bringing important elements of the labor movement into the established political life, and by staving off social disruption and revolution through expansion of the welfare role of government. … the New Deal represents, paradoxically, a conservative expansion of government activities. While it is traditional to define any expansion of government activities as ‘liberal,’ I would argue that since this expansion was directed toward preserving and cementing the position of capital and maintaining the social class system, it must, in the end, be judged ‘conservative.'” ~ Edward Greenberg
Beyond the Myths of Government and Markets
In the end, anti-government conservatives get it wrong about both markets and government. In their zeal to justify shrinking the state, they intentionally misrepresent both of these institutions and how they interact. The market is not God and the government is not the Devil. Despite their enormous advantages, markets are not benign and self-regulating. They create numerous social, economic, and political problems that only government can correct. Government is also not the sworn enemy of business and capitalism. Conservatives can only promote this misleading caricature of government by deliberately ignoring the myriad ways that government aids business and makes a market economy possible.
Anti-government conservatives are constantly warning that government is primarily a threat to business and the economy – that unless we reduce it, it will “kill the goose that lays the golden eggs.” But as we’ve seen, this is far from the truth….
The basic lesson is this: we Americans need to realize that our economy has thrived not in spite of government, but in many ways because of government. The American economy that so many people admire is not the mythical free market that operates without government interference. Our version of a market economy is highly constructed, regulated, subsidized, and humanized by government laws and policies. And we are all better off for it. Even if it were possible to create a world of free markets that were left entirely alone by government, none of us would want to live there.
“Since World War II, the driving forces behind economic globalization have been several hundred global corporations and banks that have increasingly woven webs of production, consumption, finance, and culture across borders. Indeed most of what we eat, drink, where, drive, and entertain ourselves with today are the products of global corporations. These corporations have been aided by global bureaucracies that have emerged over the last half-century, with the overall result being a concentration of economic and political power that is increasingly unaccountable to governments, people, or the planet and that undermines democracy, equity, and environmental sustainability.” ~ John Cavanagh and Jerry Mander
Noam Chomsky, a libertarian for the most part, said: “I don’t think one should abandon hope at chipping away at the more oppressive aspects of this society within the electoral system, but it’s only going to happen if there is massive popular organization – which doesn’t have to stop at that; it could also be building the institutions of the future within the present society.” I want to reflect a bit on government just so that no one misunderstands my point of view. I do believe that government has a role in markets and that capitalism is for the most part an immature and amoral economic system. However, I am not of the opinion that there has ever been much good governance in the United States. We certainly are at a nadir presently. I am more of a proponent of a responsive, responsible, representative government which is really the people. If
I am more of a proponent of a responsive, responsible, representative government which is really the people. If government is heading in the direction of Donald Trump, Paul Ryan, the Koch brothers, and Roy Moore, who is running for Senate in Alabama is is 99% sure to be a pedophile, then count me out. I would prefer to either move to a European social democracy or actively participate in reforming the government by whatever means are necessary.
Some of the critics of capitalism I quote in this blog are under no illusion that government is functioning well, is not totally beholden to various industries and think tanks and lobbyists and special interest groups, and I agree. Indeed, Thom Hartmann believes that “[w]e need to begin paying attention to the wisdom of the Founders and Framers [of the United States] if our country is to survive.” If he is referring to some of the virtue and service and honor present in many (not all) of the founders’ actions, I couldn’t agree more. George Washington would take one look at this Roy Moore character and probably vomit.
The nationalizing project that unfolded from the Progressive Era to the New Deal to the Great Society succeeded only in part. It managed to create a strong national government but failed to cultivate a shared national identity. As the welfare state developed, it drew less on an ethic of social solidarity and mutual obligation and more on an ethic of fair procedures and individual rights. But the liberalism of the procedural Republic proved an inadequate substitute for the strong sense of citizenship that the welfare state requires.
Here is a blog I wrote that you might like: https://www.valuesofthewise.com/responsive-government/
For more on the relationship between government and capitalism, see Amy’s How Government is Good for Business.
To see how government programs work quietly to improve our daily lives, see Amy’s A Day in Your Life with Government.
Words in blue © Douglas J. Amy. Reproduced by permission. Cover photo © Douglas J. Amy.