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One of the things I’m planning to write about quite a bit on here is government – what its role ought to be, how its interventions in the free market might be justified, and so on. When it comes to questions like whether the government should be providing universal healthcare coverage, or whether it should be providing more funding for science and technology research, or whether it should be taxing pollution, I tend to fall squarely in the “absolutely 100% yes” camp; I think that ultimately, there are some areas where private markets just aren’t sufficient on their own. Having said that, though, while I do think there are quite a few things that government can do better than the private sector, I don’t go quite as far as the “capitalism is a poison that ruins everything” crowd, nor do I share the tendency that some leftists seem to have to react to every social issue with a knee-jerk outcry of “government needs to do more!” So I feel like I should explain myself a bit before I spend 150,000 words (in my next post) expounding on all the great things government can do and all the areas where private markets fail, and just provide a kind of disclaimer in the form of this 150,000-word post laying out my case for why, despite government being great in many regards, it’s also possible to have too much of a good thing. Long story short, I don’t just think that giving the government too much power over the economy is a somewhat misguided idea that might occasionally produce some suboptimal policy outcomes – I think it’s the kind of idea that can potentially ruin nations and doom millions of people to poverty (or worse); so for that reason, I think our default approach should be to treat the free market as the go-to method for meeting our economic needs, and to only bring in government power as a corrective mechanism under the special conditions where it’s really necessary. The market economy, for all its flaws, is an incredibly powerful thing – and although we can’t rely on it to do everything, it’s worth recognizing that the things it does do, it does amazingly well. There’s a reason why so many economists regard it as one of our species’ most miraculous accomplishments – especially compared to the alternative of trying to run an entire economy through direct government control. In my opinion, then, it’s worth taking the time to lay out exactly what it is that makes the market mechanism such a big deal.

Now, I should say right at the outset here that although I’ll be talking a lot about all the benefits of free exchange and the market economy, I’ll mostly try to avoid using the word “capitalism” as a label for what I’m talking about (unless I’m quoting someone else), for the same reason that I tend to avoid terms like “socialism” – namely, that people of different political persuasions so often have such wildly different definitions for what these terms actually mean. For some people, “capitalism” is just another word for free exchange, and only carries positive connotations; but for others, it refers specifically to the kind of system that consolidates capital in the hands of a few powerful oligarchs at the expense of everyone else, and empowers them to expand that wealth even further until they’ve separated themselves into an elite class far removed from the concerns of the beleaguered working class. (Not such positive connotations there.) In Chris Dillow’s words: “Capitalism and markets […] are, in fact, two different things: capitalism is a system of ownership; markets a method of exchange.” To avoid confusion, then, I won’t even use the term “capitalism” if I can help it, and will instead just say right here (in case it’s not obvious) that what I want to argue for is the free exchange thing – i.e. the market economy – because that, in my view, is not only something that’s perfectly possible to have without all the extreme inequality and capital consolidation and class stratification and so on; it’s something that can help a society without such issues to flourish even more than it otherwise would. In fact, even if (let’s say) we had a private sector that consisted of nothing but democratic worker-owned cooperatives, and had a relatively equitable distribution of wealth across the population (concepts I want to discuss more in future posts), it would not only be possible to maintain a system of free exchange between those firms, their workers, and their customers – it would ultimately be far better for everyone involved than an alternative regime of top-down state control would be. Indeed, we have only to look around at the real-life examples of various countries around the world to see that all the most successful economies are those in which the government provides a strong social safety net to ensure relative equity across the population, but then also allows that population to freely engage in private commerce relatively unimpeded by excessive regulation and micromanagement.

Of course, this may all seem like a moot point to you from where you’re sitting now. Here in the First World, we tend to take it for granted that the government won’t ever try to impose its will over the economy to the same extent as countries like the Soviet Union or North Korea – so reading this post, you might be rolling your eyes a bit, wondering if it’s really necessary to point out that a market economy works better than a command economy when that’s pretty much the universally accepted wisdom at this point. Do we really need to spend 150,000 words cautioning against something that just isn’t a real looming threat here in the 21st-century developed world? Well, there are a couple of responses to this. First, although I do agree that the market economy likely isn’t going anywhere anytime soon here in the First World, the reason why this is the case is because our collective understanding of its importance has been so consistently reaffirmed over the years (along with our collective knowledge of what happens without it). In light of this, it seems to me that the goal of continuing to maintain this popular understanding is an important one – because as soon as it starts to fade away – i.e. as soon as people start forgetting why communism failed and why markets offer a better alternative – it’s all too easy for popular opinion to start drifting back toward the kinds of hard-left economic ideologies that have caused so much damage in the past. (For a case in point, see the recent online rise of “tankies” – hard leftists whose anti-capitalist sentiments are so strong that they’re willing to go so far as to support Stalinist-style authoritarianism in the name of their cause. To be sure, they’re still just a small fringe group at the moment; but even so, the fact that they’ve been gaining so much steam lately isn’t exactly a great sign in the broader scheme of things.)

More to the point, though, even if we First Worlders can mostly take it for granted that our market economy won’t face any kind of existential threat from authoritarian government in the near future, this is far from being universally true around the world. The fact is, there are countless people out there right now in numerous other countries who actually are living the reality of overassertive government making it impossible for them to thrive. So although we can talk all we want about how free exchange and the market economy are firmly-entrenched fixtures of the First World that aren’t going away anytime soon, we also have to remember that the First World isn’t the only world that exists. Most of the worst human suffering in the world is happening in less affluent countries – so if we really claim to care about alleviating human suffering and making the world a better place, we have to be mindful of what’s happening in those countries too, not just what’s happening in the richer ones. And in a lot of those countries, the market institutions that we take for granted here in the First World really aren’t firmly entrenched – not by a long shot. I already mentioned North Korea as the most dramatic modern example of an overbearing government strangling the economic life out of its people; but even at the less extreme end of the scale, there are countries all over the world which, while certainly not as bad as North Korea, are nonetheless plagued by all kinds of gratuitous government interference in their economies in less overt ways – with the unfortunate end result being a whole lot of unnecessary hardship for their populations. Charles Wheelan provides a glimpse into how even these more run-of-the-mill, everyday instances of government overreach can have a severe negative impact on such places:

By global standards, the United States has a relatively lightly regulated economy (though try making that argument at a Chamber of Commerce meeting). Indeed, one sad irony of the developing world is that governments fail in their most basic tasks, such as defining property rights and enforcing the law, while piling on other kinds of heavy-handed regulation. In theory, this kind of regulation could protect consumers from fraud, improve public health, or safeguard the environment. On the other hand, economists have asked whether this kind of regulation is less of a “helping hand” for society and more of a “grabbing hand” for corrupt bureaucrats whose opportunities to extort bribes rise along with the number of government permits and licenses required for any endeavor.

A group of economists studied the “helping hand” versus “grabbing hand” question by examining the procedures, costs, and expected delays associated with starting up a new business in seventy-five different countries. The range was extraordinary. Registering and licensing a business in Canada requires a mere two procedures compared to twenty in Bolivia. The time required to open a new business legally ranges from two days, again in Canada, to six months in Mozambique. The cost of jumping through these assorted government hoops ranges from 0.4 percent of per capita GDP in New Zealand to 260 percent of per capita GDP in Bolivia. The study found that in poor countries like Vietnam, Mozambique, Egypt, and Bolivia an entrepreneur has to give up an amount equal to one to two times his annual salary (not counting bribes and the opportunity cost of his time) just to get a new business licensed.

So are consumers safer and healthier in countries like Mozambique than they are in Canada or New Zealand? No. The authors find that compliance with international quality standards is lower in countries with more regulation. Nor does this government red tape appear to reduce pollution or raise health levels. Meanwhile, excessive regulation pushes entrepreneurs into the underground economy, where there is no regulation at all. It is hardest to open a new business in countries where corruption is highest, suggesting that excessive regulation is a potential source of income for the bureaucrats who enforce it.

Now, we should note that there are actually a couple different things going on in this story that are worth distinguishing between. On the one hand, a lot of the economic problems in these parts of the world might not necessarily be cases of governments overstepping their bounds per se – i.e. they might not actually be examples of government regulations themselves being bad – but instead might simply be the result of plain old corruption and ineptitude turning good regulations bad – i.e. bureaucrats doing a bad job of implementing policies which, if better implemented, might actually be good for the country. This is always a natural explanation to want to point to when things go wrong (not just in this context, but in any context, really) – so much so that it can often be tempting to act as if every problem must simply be a result of these kinds of personal failings on the part of political leaders, and to say that if only a particular country’s leaders weren’t so inept or corrupt, the country could succeed. (Not incidentally, this is also a claim often made by candidates running for political office, who blame all the country’s problems on the fact that the incumbents they’re running against simply don’t have the same amount of political backbone or integrity that they do, and that if they’re elected, they’ll be able to succeed where their predecessors failed due solely to their superior will to get the job done.) And sometimes, this kind of individual-level corruption and ineptitude really is the actual root of the problem; deeply flawed people do exist, and sometimes they happen to get elected to political office. But in many other cases, it’s not just a matter of flawed people doing a bad job of implementing what would otherwise be good policies; oftentimes, it’s the policies themselves that are the problem. If a particular country’s policies are bad enough, it won’t matter how pure-hearted and well-intentioned the people responsible for implementing them might be – the outcomes they produce will still be bad. And in fact, in situations where the political leaders are corrupt, it will often turn out that the bad policies (along with the institutional arrangements that accompany them) are the very things producing such perverse incentives and generating the corruption in the first place. In other words, the quality of the political leadership in such cases isn’t just some completely independent factor that might or might not counterbalance the quality of the political policies and institutions; it’s actually a product of those policies and institutions – and if the latter are designed in such a way as to incentivize abuses of power and economically harmful courses of action, then those are the outcomes they’ll produce.

Continued on next page →