The Proper Role of Government in the Economy

Sometimes the most important questions go unasked.  Politicians constantly debate the need (or lack thereof) for different regulations, but what never seems to get asked is what the role of government in the economy is.  What framework should we use to decide when, and where, regulation is appropriate?  What is government even for?

Most discussions about government flip between extremes – as if the only answers possible are either an unlimited government, or no government at all.

The vast majority of people want a government.  We want police and fire protection, and a strong military, at the very least.  In providing these things, government necessarily involves itself in the economy.  Police, firemen, and soldiers all draw salaries.  We have to spend money equipping our police, firemen, and soldiers.  We have a whole industry built around national defense.  We may disagree on specifically what government should spend on these things, or on what level of government should do certain things (between federal, state, and local), but we should all agree that spending the proper amount on legitimate government services – whatever that may be – is appropriate.

What is an economy?  Frederick Hayek said that we are the economy, and he was absolutely right.  People sometimes look at the economy as some kind of machine that can be driven, but really the economy is made up of all the everyday activities each of us perform as we live our every day lives.  Our jobs are parts of the economy.  Everything we purchase are all parts of the economy.  Every interaction we have that drives any form of economic activity – basically everything we do – that’s the economy.  As such, there is no engine to start, or ‘it’ to drive.  The economy is nothing more than the composite of all of our everyday activities all rolled together.  We are the economy.  When government manages the economy, it manages us.

The government exists, primarily at least, to preserve and expand negative rights.  In a libertarian society, each of us has the right to live our lives however we see fit, provided we allow others to do the same.  Anything government does that protects our collective ability to live as individuals is thus legitimate, even to a libertarian.  Protecting our nation from invasion is a legitimate government activity.  Protecting freedom of the seas is a legitimate government activity.  Passing and enforcing laws that prevent us from infringing on the negative rights of one another – these are all legitimate government activities.  Some might want to expand this list beyond what libertarians would include, but I would hope we can all agree with those things I have listed, as a starting point of common ground.

It is much harder to justify positive rights.  If one person claims a right to food, they are claiming the right to force others to provide food.  If one person claims a right to healthcare, they are claiming the right to force others to provide healthcare.  While we all want, and need, food and healthcare, we have no right to force others to provide us with those things.  We have, rather, a responsibility to work within the economy to earn the income to provide those things for ourselves.  Obviously, a minimum level of income is needed to afford a minimal level of sustenance, and we might as a society try to create a mechanism to ensure that everyone has the ability to live at least at that level, but none of us have the right to demand anything from others without first doing what we can to support ourselves.  As such, any legitimate wealth redistribution system must be based on making working-age people as independent as possible.

Governments often guide public behavior through tax law.  This is not a legitimate government function.  We can debate how to tax, and what to tax, but I would hope we could all agree that the purpose of our tax system should be to fund government, and not to guide public behavior.  There is one exception to this rule that I’ll get into in a couple of paragraphs, but for the most part, government has no role in guiding public behavior, beyond that of protecting negative rights.

People debate whether we have too many regulations, or too few.  A better debate would be that of what to regulate, and why.

I would suggest that government has two legitimate roles in regulating the economy.   Any regulation that follows these roles is legitimate, and any regulation that does not, is not.  Those roles are:

  1. To promote and protect the efficiency of the market economy, and

  2. To provide for those legitimate societal needs that run counter to market efficiencies.

The first role is fairly straight forward.  Markets tend to move toward higher levels of efficiency, over time, on their own, but in a truly efficient market, consumers know as much about products as producers do.  Government has a role in enforcing truth in advertising laws, as doing so helps make markets more efficient.  Government has a role in ensuring that consumers know the risks of using different products.  Where government can make markets more efficient than they would otherwise be, it should do so.

The second role is more nuanced.  Note the use of the phrase, ‘societal need’, rather than ‘individual need’.   The government should not provide for individual needs, but only for societal needs.  Also, any need that can be provided by the market economy, should be.  This still leaves roles for government, such as environmental protection.  There may be other legitimate societal needs that run counter to market efficiencies as well.  Rational people can debate what those things may or may not be.

Whenever government regulates to perform the second role, it should remain mindful of the first.  Government regulations should always be designed to have as little negative impact on market efficiencies as possible, and that is where the exception to tax policy I alluded to earlier comes in:  sometimes the least intrusive regulation is the imposition of a tax.  I rarely advocate for new government agencies, but we probably should have an agency that works with Congress to strike down regulations that do not fit within these two roles, and to try to constantly make regulations more efficient.

I would also suggest that regulations should be applied at the lowest level practical.  Each state should protect its own environment within its own borders.  The federal EPA should only worry about pollutants that cross state lines.  California should decide what Californians consider ‘legitimate societal needs that runs counter to market efficiencies.’  California should not decide what that means in Michigan.  Needs should be addressed at the state or local levels whenever practical.

That’s it.  Government should have no other role in the economy at all.  Government should not pick winners and losers.  Government should not dictate societal behaviors.  Government should not involve itself with defining the culture of the country.  There should be no federal Department of Education.

State and local governments are closer to the people they govern, and as such, local governments are far more responsive than are federal bureaucrats.  There is no reason to have the federal government doing anything that is not truly federal in nature.

There will undoubtable be some people who read this and who disagree with it.  If you are one of those people, I would like to ask that you comment with your suggested framework.  How would you determine what government’s role within the economy should be?  This is one of the most basic questions of all, so let’s try to get this one right.  We can debate the details later.

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