For the 2020 election campaign, Trump and his Republicans have made it perfectly clear; The Democratic nominee, and Democrats in general, will be painted as “socialists,” intent on leading the U.S. toward a failed socialist state.
The chattering class of the mainstream media is already driving a wedge between those who claim to be capitalists and Democrats who see themselves as capitalists, but see a greater role for government in this economy.
Casting this controversy as “capitalism vs. socialism” surely has dramatic appeal for the profit-motivated media. Debate over the role of government under capitalism sounds less dramatic.
“Capitalism vs. Socialism” is a false choice. The world’s successful economies are what economists refer to as “mixed systems,” with a mix of free markets and government management of their economies.
I still recall a session with a graduate assistant in a quiz section during my second introductory economics course at the University of Wisconsin-Madison. He drew a line on the blackboard with an X on one side of the line. “This is pure capitalism — it doesn’t exist and you wouldn’t want it if it did.” On the other end of the line he drew another X. “This is pure socialism — you don’t want that either. So, what is the solution? The solution is to make capitalism work.”
Was this too simplistic? No, not at all. A simple explanation can convey powerful logic. After all, the objective is to augment capitalism, a system of private markets, with government policies to achieve what unfettered capitalism alone does not and cannot do.
While the objective of “making capitalism work” is obvious enough, achieving it is more difficult, and controversial. That is what the legitimate political debate is about.
What is the role of government under capitalism?
Let’s start with the less controversial. Government must establish a legal and institutional framework within which private enterprise operates. We need contracts to be enforced by law and established norms, not by thugs wielding baseball bats.
Government needs to establish a monetary system and establish rules under which banking and financial systems operate. There needs to be a mechanism by which the money supply is increased as the size of the economy grows.
Beyond these functions, the economic role of government becomes more controversial. A system of private enterprise does some things very well, such as producing a wide range of consumer and capital goods. But there are some things that private enterprise would not provide in sufficient quantity if left solely to the profit motive. Education and access to health care are among them. It is up to government to provide, or ensure provision of, these public goods.
Local government, assisted by state government, is responsible for public elementary and secondary education in this country. The Land Grant Act of 1865 provided for a major public university in every state of the union. The American college and university system is the envy of the world. Public universities did not mean the end of private universities. But it went far toward making higher education available to students who would not have had access to private universities.
If there were no government policies involved in health care, profit-motivated insurance companies would insure only the young and healthy at affordable prices. While the degree and means by which government is involved remains a hot, controversial topic, few would assert that government should play no role whatsoever.
Provision of transportation infrastructure, water supply and sewage disposal involves government. While there is some degree of privatization in these activities, these are nevertheless public goods that necessarily involve government.
Leading to the more controversial, another economic role for government is adjustments for what economists refer to as “external costs.” The classic example is pollution. A profit-maximizing industry has the incentive to reduce its financial costs by discharging pollutants into the environment rather than incurring costs for treatment. With this, costs in terms of health and environmental damage are thus external to the firm, borne by the public.
This is where controversial regulations come into play. What is the role of government in regulating private enterprise to protect public health and the environment? The Trump Administration promised to free up industries from what it termed “strangling regulations.” Candidates for public office should be able to discuss these matters without the debate being cast as “capitalism vs. freedom.”
Another controversial role for government is ensuring an economic safety net for citizens. In a civilized society, we don’t want homeless people starving in the streets. While we have programs that assist with food security, we have become accustomed to a substantial number of homeless people living in the streets of our cities.
Apart from addressing basic problems of food and housing, what is the role of government in reducing inequality of income and wealth? Economic rewards under capitalism are not only very unequal, but tend to become more unequal for a number of reasons. No rational voter would insist on perfect equality of reward and income for all. However, it is best for the economy as a whole. Even for the wealthiest, if all workers, including the “unskilled,” are rewarded with a living wage.
The role of government regarding rights of labor to organize, programs to upgrade skills and the role of taxation to moderate after tax income inequality are important along these lines.
The Full Employment Act of 1946 established the goal of the federal government to promote full employment. Fiscal policy and monetary policy, along with various federal programs are the policy tools available. Monetary policy involves adjusting the money supply and interest rates sufficient to provide for a growing economy while maintaining price stability. Fiscal policy involves adjusting government expenditures and taxes with the objective of full employment.
These various economic roles of government under capitalism are controversial. The debate is really about how to make capitalism work for all.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
