Economic Arguments Against Small Government

I often write in this blog about the social justice and empirical arguments against the "small government" discourse. I thought I would add a few economic insights that support the claim that we need a strong government in some instances to deal with market imperfections. Three that are well-known in economic circles are the issue of externalities, market power and asymmetries of information and power.

Externalities are a key issue in economics, as they are benefits and costs not accounted for in the pricing system of supply and demand. Common externalities include pollution, health and inequality/poverty. The market does not account for these externalities and thus generally is unable to properly deal with them. As regards the most important externality today -- pollution and global warming -- some economists argue technology and science will save us from the long term effects of carbon emissions and the cutting down of forests. Yet the acceleration in environmental degradation appears to be beyond the power of science alone to handle the looming crisis. Government intervention is thus necessary to regulate market activity and ensure that these negative externatilities are accounted for. There are also positive externalities associated with public goods like education. If we privatize these goods, market interests often undermine the positive side effects of those institutions. We already see this in education with the diminution of civics education, physical education and the humanities -- all undermining the broader goals of education to spread freedom and democracy.

The second issue is market power and it is governments alone that can regulate industries to ensure the monopolies, oligopolies and cartels don't form that raise prices above their natural levels. It is clear that market power has again concentrated across the globe with the rise of multinational corporations and the inability of current global governance to regulate them. Corporations were once given their charters by states with an explicit clause that they must serve the public good. Without government intervention to ensure that corporations (like Microsoft), or groups of corporations (like the gas companies) don't gain too much power thus raising prices, cutting production and, often, cutting jobs. Market power leads to excessive profits without the concommitant economic benefits for the nation or society at large.

Finally is the issue of asymmetries of power and information. The first relates to issue discussed above, with excessive power not only undermining the market for goods but democracy itself. We see that today with lobbying and campaign financing, where the interests of huge corporations and industries like the financial sector working to undermine the will and interests of the people. But asymmetries of knowledge can be just as important -- as consumers are left without sufficient information to make wise choices and have any say in the decisions that affect their lives.

All three of these issues fundamentally undermine the argument for limited government intervention. Regulation, oversight and enforcement are all important aspects of ensuring that corporate interests don't trump those of the public at large. Yet beyond that, without government intervention, externalities, market power and asymmetries also undermine the effectiveness of markets themselves, undercutting economic efficiency and economic growth. What surprises me the most is the disingenuous nature of economic debates in the West today that fail to account for these three economic issues and their huge role in the financial crisis we continue to be mired in. A more honest accounting of the truth of the global market economy today might lead to more sensible economic policies that can restore some sanity to policy debate and action.