GraniteGrok

"I can't resist: without government, there would be no f*****g MARKET. What is it about contracts you don't understand?"   -Michael Kitch

Skip asked me to comment on this ("Is Government NECESSARY for a marketplace to exist?"), as he knows that I am an economist. This is a very good but very complex question. Someday we should discuss it in depth. But here is my quick take on this question.

As you know, I studied "the free market religion" at the University of Chicago under the likes of Milton Friedman, Stigler, Miller, Arrow, etc. I totally get what they were preaching and, in fact, chose to go the Chicago for that reason. But………….

For a number of years I also worked with the emerging countries of Asia. Here is what I learned. With all due respect to Ronald Reagen government is not the problem - bad government and also bad politics are the problems. In the vast majority of cases, government is lousy at providing goods and services; the private sector is much better in this role. To the maximum extent possible, keep government out of this and leave it to the private sector!

The appropriate role of government should be to provide the proper "enabling environment". Without this the private sector can not properly function. Yes a market can exist without a government. But do you really want to go back to bartering? A primitive economy can function without government, but in order to run a sophisticated, global economy a proper enabling environment is essential.

The lack of a properly functioning government is the central problem in most emerging countries, particularly Africa. That is why they don't develop. The rare few like Botswana which have good governments are doing very well. Indeed, one can not find a thriving economy anywhere in the world that has a dysfunctional government. Thriving economies all have good, stable and predicable governments. The better the government, the greater the development. (We in the U.S,. are not faring so well i.e., at the level we should these days. Our government is getting worse by the day because we have the odd notion these days that any dim wit can be entrusted with political power because they are "nice guys." How about we try competence and expertise for a change?)

The proper enabling environment includes: stability, the rule of law, security, a minimum of corruption, and a measure of good regulation. No one likes to be told what to do - particularly those with a libertarian bent - like me. But we all appreciate the rules like - drive exclusively on the right side of the road; stop on red; men don't go into ladies rooms (except in NH?), etc. Also, markets have a tendency to extremes - like the asset bubbles we have just lived through.

The need for good governance is not confined to the public sector; it is all too often absent in business organizations of every size. This is true because they can't change fast enough and/or run themselves into the ground out of stupidity and rigidity i.e., GM, Chrysler, AIG, Indybank, Wachovia, Fannie and Freddie, Citbank, etc. There is a natural life cycle to corporations and other business firms which is why they don't live for ever. Indeed, as the world gets more complex and faster paced, the life cycle is getting shorter and shorter all the time. In the 1950s the average tenure of companies on the Fortune 500 list was 40 years; it now roughly 14 years and dropping.

So some regulation is in order. But the key question is this: does the government itself go a good job of providing the proper enabling environment? Is it wise enough to do a good job? Therein lays the problem. One major failing is that we don't attract good people to government, we don't pay them well, and they are subject to enormous political pressures in their decision making. If you are looking for a very successful and well functioning economy and society – like Plato's Republic - look at Singapore. Government is well functioning, very well paid and it attracts the best in society. AND it has a very good partnership relationship with the private sector. But no one ever said that Singapore is a democracy!

I can't help  but think of what James Madison said in the Federalist Papers #51:

"But what is government itself, but the greatest of all reflections on human nature. If men were angels, no government would be necessary. If angels were to government, neither external nor internal controls on government would be necessary. In forming a government which is to be administered by men over men, the great difficulty lies in this: you must first enable government to control the governed; and in the next place oblige it to control itself."

In short, the problems and tradeoffs are very complex. As Churchill said, democracy is the worst form of government known to man - except everything else. So to with capitalism.