Few Americans dispute the need for some sort of government to be in control of national decision making and policy. The tricky question is, what size government is the most beneficial for the people?
Fierce political debates over healthcare, the minimum wage, environmental regulation, education, welfare, taxation – they all come down to questions of the role government should play in the lives of its citizens. These aren’t just questions of economics but of philosophy as well.
The Big Questions of Philosophy
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Adam Smith and Competition
Any discussion of modern economics has to start with Adam Smith. Fans of small government usually quote Smith with gusto.
But the common popular understanding, as it usually is, isn’t exactly accurate.
Smith’s seminal 1776 work, “The Wealth of Nations,” is the most famous academic defense of capitalism. It’s core idea: the economy should be dictated by the activity of private citizens rather than controlled by the government.
During Smith’s time, the dominant economic theory of mercantilism suggested that the best way to make a nation wealthy was for its government to protect its own merchants and industries. The government should tax and tariff competing foreign imports to death, so as to give local merchants a price-controlling monopoly and keep the nation’s money inside the country. To Smith, this was the wrong way to think about national wealth – all such efforts did was set the price of goods so high most people couldn’t afford them.
The real key to wealth, according to Smith: competition. If you let producers and businesses (both foreign and domestic) compete, you provide them with an incentive to keep their prices down. If your prices are lower than your competitor, people will buy your stuff instead of theirs. This makes the goods more affordable, which means more people will buy them, thus increasing demand for the product and forcing business to use division of labor and other industrial methods to produce more products more quickly.
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Innovation and Production
Competition will also drive innovation. To make money, people will invent new, useful things for others to buy. All of this will create more jobs, increase the spending power of the consumer, and enable them to buy more goods. This will again increase production, which will create even more jobs, and so on. When a nation’s citizens are employed, have more money, and more access to always-improving goods – that is how you measure the wealth of a nation.
This may seem obvious to us now, but it was a pretty new idea in 1776.
Smith’s “The Wealth of Nations” played the most important role in capitalism’s takeover of the developed world. Smith wasn’t defending economic liberty simply because he thought it was a natural right. He thought capitalism was the most effective way to generate happiness; to raise the standard of living for everyone, both rich and poor.
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This is where his concept of the “invisible hand” comes in. Smith admitted that, in a capitalistic system, everyone is just acting out of self-interest. They do what they want to do to get more money, not to better society.
Smith argues that the interaction of everyone freely acting in their own self-interest actually works to the betterment of all. As if the entire process were guided by an invisible hand. Try to engineer an economy to benefit all, and you’ll just fail. Just let the economy be. Let everyone act selfishly, and it will produce universal opulence. Some will be richer than others of course, but everyone will be better off.
This was not fallacious thinking. Recall that a whole can have properties that its individual parts lack. A collection of individual actions, each aimed at benefiting a single person, could collectively benefit everyone. (Interestingly, Smith’s idea that order could emerge from disorder served as an inspiration for Darwin’s theory of natural selection.)
Because Smith was interested in results, not just the production of individual liberty at all costs, he was more than happy to admit capitalism’s shortcomings, and to recommend government action and interference where needed. This is what those who quote Smith today usually fail to recognize.
Republican or Democrat?
Some of Smith’s suggestions aren’t that surprising. The government should
- provide a military, police force, and legal system;
- offer access to the utilities business needs to function;
- regulate any industry that tends toward monopoly; and
- pay for all of this with a progressive tax.
Usually it’s Republicans that invoke Adam Smith today, but if you ask me, he sounds a lot like a modern Democrat.
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One of Smith’s biggest worries about capitalism was worker alienation. The division of labor necessary to increase production called workers to perform the same task repetitively on an assembly line, over and over. It’s not only boring, but because it divorces the worker from the final product, it can be dehumanizing. This worried Smith. Smith’s solution to this was publicly-funded education. A publicly-educated person, Smith thought, is the kind that has the mental fortitude to survive working in a factory.
Does unregulated market competition really make everyone better off? After capitalism had time to set in, in places like France, England, and the United States, it became quite clear that the answer was no. Not only did worker alienation remain a problem, but, since there was an abundance of workers, and the division of labor did not require workers to have high skill levels, capitalists could get away with paying them very little. People were working long days in unsafe, unsanitary conditions, with no break or relief in sight, for subsistence wages – just enough to keep the worker alive and able to work.
It was a far cry from the universal opulence Smith had promised.
Karl Marx and Communism
No one objected to the horrors of capitalism more fervently than Karl Marx.
As with Smith, the popular conception with Marx is not exactly accurate. When you think of Marx, you probably think of Siberian gulags (or that stone-cold boxer from Rocky IV). In reality, Marx would never have endorsed gulags (or thought it necessary to break you). He was not the devil he’s often made out to be. Like Charles Dickens, Marx saw the plight of the poor as something created by greedy Scrooge-like capitalists. The liberty defended by Locke and Smith had simply become the liberty of rich business owners to oppress workers – as Marx put it, “the liberty of the bourgeoisie to oppress the proletariat.”
Marx didn’t consider himself a philosopher but a social scientist. He was trying to articulate what the abuses of capitalism were going to lead to: a communist revolution. In the same way that slavery had given rise to feudalism, which in turn had led to capitalism, Marx said capitalism would eventually lead to socialism, which in turn would lead to communism. Since all such transformations result from economic class struggle, and since communism would be classless, Marx believed communism would lead to the end of social progress.
How would capitalism lead to communism? Marx argued that, since capitalism survived by exploiting the workers, the workers would eventually revolt. They would realize that the capitalists were thieves.
According to Marx’s labor theory of value: If people buy the product of a worker’s labor for $100, that’s what their labor is worth. When the capitalist only pays the worker $50 and then charges $100 for the product, they’re stealing $50 from the worker. As competition increases, the exploitation will only worsen, monopolies will appear, prices will rise, and wages will decrease, creating more working poor and even fewer jobs. Wealth will concentrate in fewer and fewer people while the poor will just get poorer and poorer. Eventually the workers will snap and revolt.
- Workers will take control of the government and purge capitalism from the system, making the government socialist.
- Then, the socialist government will take over the production of all goods and industry.
- Later, the socialist government will eventually dissolve, and the people will take control of all political decisions and the economic life of the country directly.
- The people will ensure no more worker exploitation, no more worker alienation, and no more child labor.
- All credit in banking will be done by the state, as will all means of communication and transportation.
- Anyone who can work, will, and the profits of all labor will be shared by everyone.
- Everyone will be guaranteed income, free education, and free medical care.
“From each according to his ability, to each according to his need,” wrote Karl Marx. That’s his idea of communism.
Marx was also a revolutionary. He was trying to make this happen. This is why, at the end of The Communist Manifesto, he called for “the workers of the world to unite.”
Just like Smith, Marx was concerned with guaranteeing the greatest good for the greatest number. He just thought it had to be accomplished in an entirely different way. Only a system that regulated the economy heavily, that guarded against the dangers of capitalism, and that distributed the resources of society equally, could really accomplish this.
Theory versus Practice
Was Marx right? Should government actually be this big? As you probably know, Marx’s theory wasn’t vindicated in the long run. (As Homer Simpson once said, “In theory, communism works in theory.”)
What went wrong?
First, it’s well known today that Marx’s labor theory of value is wrong (though it was the standard theory at the time). Much more than the cost of labor determines the value of a product. A product’s utility, supply and demand, and other factors are also relevant. Marx failed to take into account that capitalists are owed some compensation for their efforts. Not only do they do the legwork to create the business, but they take financial risks workers do not. (After all, there’s no guarantee the product will sell.) Contrary to Marx’s suggestion, charging more than it costs to make something does not always amount to the kind of theft he thought motivated and justified a worker revolution.
More importantly, many of Marx’s predictions were just flat-out wrong. For example, he said communism would first arise in the most developed nations. It did not. The most famous communist revolution happened in Russia in 1917 when Russia’s economy was extremely primitive. Most developed nations never saw a communist revolt at all.
Regardless, where communism did arise, it didn’t produce the worker-run, state utopia of equality and plenty Marx envisioned. The horrors suffered by the poor under capitalism pale in comparison to the horrors suffered under Stalin’s communist Russia and Pol Pot’s Cambodian communistic regime. As noble as their intentions might have been, Marx’s ideas may have led to more suffering than any other philosophical idea in history.
Also, communism wasn’t the final stage in social progress. Most of the nations that experienced a communist revolution eventually collapsed, like the Soviet Union in 1991. Those that remain today are either infused with capitalism, like China, or are dismal failures, like North Korea.
A Cogent Critique?
During his life, Marx distanced himself from almost every country that tried to implement his ideas. He even once famously insisted that he, himself, was not Marxist; that is, most people who said they were Marxist were actually failing to properly follow his theory. He probably would have said the same thing about the communist regimes he didn’t live to see. (We have to be careful here. Defending Marx on the grounds that Marxist states aren’t “truly Marxist” sounds like an ad-hoc, untestable excuse.)
Given all of this, it’s probably safe to say the government shouldn’t be as big as Marx suggested. But that doesn’t reduce the cogency of his critique on capitalism. It was still widely acknowledged that capitalism gave rise to two major problems.
- Economic Inequality. The disparity between the rich and poor was ever increasing in capitalistic societies. Money collected at the top and tended to stay there (as exemplified by America’s Gilded Age).
- Economic Instability. Capitalism was unstable. It inevitably caused crashes, panics, recessions, and depressions. The most famous, of course, is the stock market crash of 1929 and the subsequent Great Depression of the 1930s.
John Maynard Keynes and Government Intervention
The Great Depression motivated a new kind of answer to how big government should be. An answer that came from the economist John Maynard Keynes.
It’s important to realize that Keynes wasn’t just worried about the stability of capitalism. He was living through The Great Depression, which you recall, went on for years and years. It seemed as if there was no end in sight. That was exactly Keynes’s worry. He thought the Great Depression might be permanent. Left to itself, capitalism might never correct it. So Keynes argued that government needed to step in to rectify the problem. How?
Before Keynes, it was commonly thought that unemployment was always voluntary. Production and consumption would naturally balance out, so there could be the same number of people buying things as there was making them. If you weren’t working, it could only be because you were lazy and refused to work. But the Great Depression made this notion impossible to defend. There were literally thousands upon thousands of people who would gladly have taken any job offered them, but there were just no jobs to be found.
What had happened, Keynes suggested, was that, contrary to the prevailing theory, production had outstripped consumption. There was more supply than demand. Thus, there was no need for workers to produce more products, and thus no jobs to be had. Although this made goods cheap, so few people had the money to buy them (because so few people had jobs), that there was no way to bring the supply back down to balance things out again.
This, Keynes thought, revealed the solution. If the problem is too much supply without the means to buy, then just give the people the means to buy the supply. This will increase demand, and the system will balance out again.
How do you give people the means to buy the supply? Government intervention.
Vindicated by History
To end the depression, Keynes argued that the government needed to
- lower interest rates on loans to give the public greater access to funds, and
- spend money, especially on infrastructure to create jobs, and thus give people money to spend.
He didn’t actually suggest the government pay people to dig holes and then fill them up again, but he did suggest that doing something very much like it would be preferable to doing nothing. Giving people an income was key to ending the Depression.
Many thought Keynesian economics was vindicated after World War II. Fighting the war required the kind of huge government spending Keynes was calling for. It seemed to not only end the Great Depression but led to one of the biggest economic booms in American history.
A Middle Ground
As you might have recognized, Keynes is a kind of middle ground between Smith and Marx. Keynes didn’t think the government should be involved in the economy to the extent Marx did, and he recognized the flaws in Marx’s theory. While he agreed with Smith about many of capitalism’s virtues, Keynes disagreed about its stability and its ability to guarantee positive outcomes without interference. Keynes is like Smith with a little infused Marxism.
So we might say the answer to our question – How big should government be? – is somewhere between Smith and Marx. We don’t want communism, but we don’t want unregulated capitalism either.
I’m not saying Keynes was exactly right, and the debate about economics is over. The stagnation of the 1970s, when both unemployment and inflation rose, contradicted Keynesian models. I also think he was wrong about the paradox of thrift; people saving money is not necessarily bad for the economy. What’s more, Keynes might not have been concerned enough about the long-term consequences of the actions he suggested. When pressed about the fact that, in the long run, his policies might have negative effects, he famously dismissed such concerns because, as he said, “in the long run, we’re all dead.”
Not Always Good, Not Always Bad
What I’m saying is this: Government intervention is good for some things and not for others. We’ll have to figure out which is which on a case-by-case basis. Thinking government intervention is always good or always bad is just too simplistic. Thinking unregulated capitalism will always produce the best results for everyone leads to things like the financial crash of 2008. Some level of government involvement and regulation is necessary to save capitalism from itself.
Thinking that every time the government interferes with the economy, things will turn out for the best is equally naive. The Cash for Clunkers program, for example, is widely thought by many to have caused more harm than good. We simply need to look at the results of government action and inaction, and figure out what works best in each situation.
This may seem really obvious, but accepted answers to these questions remain elusive because people ignore such evidence in favor of a dogmatic devotion to their economic theory of choice. Worse yet, such devotion causes them to cherry pick evidence and distort statistics. With enough creative finagling, you can make economic data support just about any theory you like.
If we’re really going to discover the truth, though, we have to guard against things like conformation bias and availability error. Also, we have to admit when we’re wrong, when our economic theory didn’t get it right.
We have to be good philosophers.