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It’s a new year, and with it has come a whole new crop of state and local elected officials. It’s early, but the signs are not auspicious.
Case in point: One of the first official pronouncements from the newly inaugurated Governor of Indiana was a solemnly-delivered promise to stop regulating—to cease issuing administrative rules except when “absolutely necessary.” Cynics noted that the language of the executive order pretty much anticipated business as usual, but they missed the point of the exercise, which was to confirm the new Governor’s conservative, small-government “bona fides.” And what better way to accomplish that than by demonstrating his profound misunderstanding of the role of the state in the operation of the market?
What is the proper role of government in a capitalist system? It is to act as “umpire” or referee, ensuring that everyone plays by the rules. For example, as Teddy Roosevelt reminded us, monopolies distort markets. If one company can dominate a market, that company can dictate prices and other terms with the result that free-market transactions—defined as exchanges between a willing buyer and a willing seller both of whom possess the necessary relevant information—will no longer be truly voluntary.
If Manufacturer A can avoid the cost of disposing of the waste produced by his factory, by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal.
If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.
Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field. This need for government is a response to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.
Policymakers may disagree about the need for particular regulations, or the optimum number of regulations, or the relative costs and benefits of suggested regulations, but most do agree that an absence of all regulatory activity undermines capitalism. Unregulated markets can lead to a very different system, sometimes called corporatism. In corporatist systems, government regulations favoring powerful corporate interests are the result of lobbying by corporate and monied special interests that stand to benefit from them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.
It’s probably unfair to pick on one Governor, or even one political party. This rhetorical framework, where the forces of Leviathan are arrayed against the creative energy of the market, has been a staple of American politics for at least three decades. Unfortunately, it’s an incomplete and misleading framework, and its continued use undermines both the government’s ability to do its job and, ironically, citizens’ ability to impose appropriate limits on government authority.
American politics has devolved into an exchange of bumper-sticker slogans and labels barely masquerading as discussion. Terms like capitalist, fascist, socialist and communist are used as epithets by people who rather clearly have no real acquaintance with the elements of those economic philosophies. The result is a discourse that has more in common with a mud fight than a debate, a faux “conversation” where everyone is talking nonsense, but it really doesn’t matter because no one is listening anyway.
Those of us who teach public administration talk a lot about transparency. One essential element of that transparency is a “back to basics” honest discussion about the role of government.
It’s seductively easy to blame “Washington” or “government” or “the Statehouse” for doing too much or not doing enough or doing the wrong things. It’s a lot more difficult to have an adult discussion with one’s constituents about the complexities and ambiguities of decision-making in the administrative state. I get that: no one was ever elected using a campaign slogan proclaiming “On the one hand…but on the other hand..”
Until we elect people who are willing to have that discussion, however, we will continue to see officeholders—many of whom have spent their entire lives in government—rhetorically biting the hand that feeds them, and continuing to undermine the enterprise they claim to serve by mischaracterizing the questions we face.
Governments do not face a choice between regulation and the free market. They face a much more difficult question: which regulations will protect the operation of the market and ensure a level playing field? How much is enough, and how much is too much? What are the costs and what are the benefits?
When our elected officials don’t understand the questions, they aren’t likely to arrive at good answers.
Author: Sheila Suess Kennedy is a Professor of Law and Public Policy at the School of Public and Environmental Affairs at IUPUI.