Moving Beyond the Reagan Era

So: for the last thirty years, political debate in the United States has been organized around a supposed choice between big government and small government.

This debate rests on mistaken assumptions and should be abandoned. Above all, both sides of the size-of-government debate assume that there is a clear and categorical distinction between “the government” (or “government intervention,” or “regulation”) and “the market” (or “the free market,” or “private markets”). Advocates of the market argue that distributing goods and services through the market makes us more free. In the market, they say, we have choices, while when the government provides goods and services, we do not. Also, they add, businesses in the market cannot coerce us as the government can through fines and imprisonment. Advocates of government intervention, on the other hand, point to the many failures of private markets, and argue that government can correct those failures. They assume that government responds to the needs of the people in ways that private businesses do not.

But the sharp distinctions that both sides of the debate draw between the government and private markets do not exist. After the jump, I offer three reasons why.

I. Governments Create Markets

First, private markets are a government creation. They do not exist without governments. It is not the case, as the rhetoric of both sides usually suggests, that private markets exist on their own, coming into being through the interactions between private actors, and then government is faced with a choice of whether or not to intervene in those markets. Rather, government creates markets through all the government-enforced legal rules that make markets possible, including the rules of property and contract law, the law of corporations, securities law, and so on. By the time you find a market, the government is already there—already “intervening” in it—because the government defines and enforces the legal rules that give rise to the market.

The government’s constant, practically necessary, foundational role in ostensibly private markets is usually invisible. This may be the primary reason it is so frequently overlooked. Only when a dispute arises do the parties to a transaction call upon the government, through its courts, to clarify who owns what, and who owes what to whom. But the potential for calling on the government lies latent in the background of every transaction, enabling the behavior of private parties and shaping the terms of private agreements. Once again, by the time two people make a deal to trade the money of one for the goods of another, or indeed to make any trade in a modern economy, government is already on the scene—not only providing the currency for nearly all transactions, but providing the legally enforceable bundle of property rights that define the goods as the goods of the second person and the money as the money of the first person.

In addition, the specific contents of the bundle of property rights and the rules of contract law have always been a political choice, like every law. There is no way to deduce from the nature of property (that is, the way we use the term “property”) whether a landowner should or should not be able to use all the water passing through his land, or whether a court should enforce a gift of land that requires the land to lie fallow in perpetuity. Governments have always defined the rules of the market, and they have always done so with an eye to serving various interests. This applies also to other areas of law affecting the economy—such as corporate law, through which the government quite formally and explicitly created one of the primary actors in the modern economy.

Once we accept that governments create and define markets—and even, in many ways, their participants—it becomes harder to understand what is meant by the choice between “big” and “small” government. Whether government arranges the resources of the public directly by distributing goods and services through its salaried employees, or indirectly by establishing and enforcing legal rules that create various kinds of private markets that distribute those goods and services, government policies shape the outcome. The choice faced by policymakers is between direct and indirect government management of an area of economic activity, not between government management and leaving private actors to themselves.

(As a sidenote: we should find it odd that John Locke attempted to explain government by presenting it as a contract between the sovereign and the people. Contracts do not exist in any familiar sense unless there is a sovereign to enforce them. Arguing that government is made possible by a contract between the sovereign and the people is a little like looking at a fully constructed building and arguing that the first floor is supported by the roof. A blindness to the all-pervading role of government in economic markets is a recurring feature of liberal political thought from Locke through Nozick and up to the present day. Behind the invisible hand that transmutes the dross of self-interest into the gold of mutual gain lies another hand that has all too often been invisible to liberal thought—the hand of government that sorts out the legally enforceable rules of trade.)

II. Neither “Small” Nor “Big” Government Necessarily Promotes Freedom

There is a second sense in which both sides of the size-of-government debate rely on false assumptions about the relation between government and markets. Both sides assume that there is a consistent relationship between the goals of freedom and the choice between distributing goods and services through government spending or through government-created markets. That is, proponents of “small government” argue that there is a consistent, positive correlation between freedom and the smallness of government, while their opponents often assume that there is a consistent, positive correlation between freedom and government intervention in the economy.

But once we recognize that “small government” is just another way of saying that the government should limit itself to using market-creating legal rules to shape economic outcomes, it becomes easier to see that the Reagan era equation of freedom with small government is not always true. There are numerous cases in which distributing a good or service directly through the government makes us more free to achieve our goals than we would have been if the distribution of the good or service had been left to government-created markets. To take an obvious example, a person who cannot afford adequate private medical insurance and receives insurance through Medicaid is more free to live a long and healthy life pursuing her goals, whatever they may be, than she would have been without medical insurance and, at best, sporadic access to emergency rooms—access that would itself have only been guaranteed through the government’s legal mandates.

It is also clear that in most people’s lives—barring contact with the criminal justice system—private corporations can be and frequently are no less coercive and freedom-constraining than the government. To begin with a trivial but common example, whether one is waiting in line at the DMV, the post office, or the local cable company store, the experience is the same—one is legally free to leave, but unable to accomplish some task without waiting. It makes no difference to one’s lived experience of constraint that the DMV and post office are staffed by government employees and owned by the government, while the local cable company office is privately owned and staffed. Some of the most serious experiences of coercion in many people’s lives will also likely be carried out by private rather than public actors. It could be a private insurer’s denial of coverage for a medical procedure or property loss. Or it could be the threat of a private creditor to ruin your credit rating, and with that, access to affordable loans and housing. The requirement to pay taxes—the most commonly lamented instance of government coercion—may be relatively minor compared to some of the constraints on freedom imposed by private entities.

In fact, the most pervasive and routinely overlooked constraint that most Americans will experience in their lives is the constraint imposed by a lack of money. Obviously, one is only able to obtain goods and services through the market if one can afford them. One is only free to do what the goods and services make possible if one has the money to buy them. Where government distributes goods and services without regard to a person’s ability to pay, this constraint on freedom does not exist.

On the other hand, the ideology of the New Deal era (and the progressive era before it) was also wrong to the extent that it assumed an unerring correlation between freedom and the direct government provision of guaranteed benefits. The Reagan era ideology owed its public persuasiveness in part to the obvious fact that a government bureaucracy can be just as unresponsive to an individual’s needs as a market can be. It is also obvious that there are many cases in which the direct government provision of goods, such as groceries, would inevitably fail to offer choices to consumers that would have existed in a well-designed market, because a market is able to coordinate the self-interested behavior of a multitude of actors through price signals, while a government must rely on the centralized collection of information and a centralized response. There is no serious argument that a Soviet grocery store could offer greater consumer freedom of choice than a Safeway—or even that a centrally planned government commissary in a well-functioning democracy could offer greater freedom for consumers than the provision of groceries in a market of competing grocery stores.

In addition, just as markets will predictably fail to serve the interests of the public if much of the public lacks the wealth necessary to convey their preferences through price signals, the government will predictably fail to serve the interests of the public to the extent that it is unresponsive to the public. This lack of responsiveness could result from any number of democratic failures, including the capture of regulatory, legislative and judicial processes by wealthy and powerful entities; breakdowns in the ability of the electoral process to provide political representation for the public; or perhaps even a societal disconnect between the public’s interests and the political behaviors of its members. Whatever the conceptual and empirical weaknesses of public choice theory, there is no doubt that government actors and institutions often behave in ways that fail to maximize any plausible conception of the public good.

III. The Blurring Distinction Between Market and Non-Market Activity

A third sense in which both sides of the size-of-government debate rely on mistaken assumptions about the relation between government and markets is that both sides ignore, or misconstrue, the ever-growing extent to which the line between direct action by the government and indirect action by the government through private market actors has become blurred.

For example, government use of private contractors has skyrocketed. While this keeps the number of government employees nominally lower than it would otherwise be, it also creates a large and growing number of businesses that largely or exclusively exist to serve the government and in many respects function as part of the government. To call this portion of the economy non-governmental or private is true in some senses, but in other senses obscures the scope of direct government action in the economy.

Far more significantly, nearly every important area of the American economy is dominated by a small handful of extremely large, extremely powerful firms that exist in an inextricable, symbiotic relationship with government legislators and regulators. Energy, finance, pharmaceuticals, agriculture, telecommunications, defense—in each of these areas, it is impossible to say where direct government action stops and indirect government action through private markets begin. Unlike in an idealized nineteenth-century American classical liberal market, where the government’s role is mostly limited to setting the basic rules of the game through slowly evolving common law decisions involving property and contract rights, in the current system powerful corporations work continually with legislators and regulators to define and manipulate the rules governing their industries, including not only regulations and exceptions to regulations but the provision of direct and indirect subsidies such as tax credits and the granting of intellectual property rights.

As noted above, the bright-line distinction between government and markets has never been stable, because governments construct markets through enforceable legal rules. But the distinction has become even more untenable as powerful private actors in the economy continue to grow ever more directly intertwined with government actors. Thinking back to the second point above, it becomes harder to see why the difference between direct government action through government spending and indirect government action through rule-setting makes a difference to our freedom—or should be the defining issue of our politics—when the ostensibly private actor effectively controls the rule-setting process, and the government’s rules often transfer wealth from the public to the private actor for no clear reason.


10 thoughts on “Moving Beyond the Reagan Era

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