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Chapter 26

Public Goodsand the Role

of theGovernment

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Karl Marx

And Socialism

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Our Situation

• The Classical Theory of Economics

ADAM SMITH:“Involuntary Unemployment is Impossible.The economy is self-correcting and self adjusting.”WRONG!

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The Situation in 1868• workers-including children-spent 14 hours a

day, 6 days a week on the job• factory work was unsanitary and unsafe with

no guarantee of compensation for injury or illness

• 80% of factory workers lived in poverty huddled in ghettos and tenements

• business cycles made workers the victims of either high inflation or high unemployment

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How Did This Happen?• All wealth is a direct result of combining Labor with the other

Tools of Production

LABOR THEORY OF VALUELABOR THEORY OF VALUE• The concept of Private Property has separated the worker

from access to the other Means of Production

ALIENATIONALIENATION• Private Ownership allows the Capitalist to seize the Surplus

Labor Value of the worker as Profit by paying Subsistence Wages

EXPLOITATIONEXPLOITATION• There is a Contradiction between actual production and

rewards of that production evident in the existence of Social Classes

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BUSINESSCYCLES

IMPERFECTCOMPETITION

PUBLICGOODS

ASYMMETRICINFORMATION

Marx’s Market Failures

INEQUITY

EXTERNALITIES

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Fig. 26.1 top

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Marx’s Theory of the Business Cycle

Level of

Real O

utp

ut

Time

Peak

Peak

Peak

Recession

Recession

Expa

nsio

n

Exp

ansi

on

Trough

Trough

Growth

Trend

Twin Problems of the Business Cycle• Unemployment• Inflation

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Three Facts About Economic Fluctuations

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1965 1970 1975 1980 1985 1990 1995 2000 2005

$

The shaded bars are recessions

The shaded bars are recessions

U.S. real GDP, billions of 2000

dollars

U.S. real GDP, billions of 2000

dollars

FACT 1: In spite of Marx’s theories, economic fluctuations are somewhat irregular and unpredictable.

FACT 1: In spite of Marx’s theories, economic fluctuations are somewhat irregular and unpredictable.

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0

2

4

6

8

10

12

1965 1970 1975 1980 1985 1990 1995 2000 2005

Three Facts About Economic Fluctuations

FACT 3: As output falls, unemployment rises.

FACT 3: As output falls, unemployment rises.

Unemployment rate, percent of labor forceUnemployment rate, percent of labor force

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An Interesting Aside About Economic Fluctuations

FACT?: Some Economists believe Technological Cycles have become shorter.

FACT?: Some Economists believe Technological Cycles have become shorter.

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Alternatives Considered

Unions

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Alternatives Considered

government

intervention

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SOCIALISM• GOVERNMENT BY DIRECT POPULAR VOTE

• PUBLIC OWNERSHIP OF THE MEANS OF PRODUCTION– COMMUNICATION

– TRANSPORTATION

– FINANCE

– EDUCATION

– HEALTH CARE

• PROGRESSIVE INCOME TAX

• REDISTRIBUTION OF INCOME THROUGH CREATION OF A SOCIAL WELFARE SAFETY NET

• ELIMINATION OF DISCRIMINATION

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Alternatives Considered #1

REVOLUTION

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Friedman and Galbraith

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“The proper guardians of the public interests are governments, which are accountable to all citizens. It is the job of elected politicians to set goals for regulators, to deal with externalities, to mediate among different interests, to attend to the demands of social justice, to provide the public goods, and to organize resources for the greater good.”

John Kenneth GalbraithThe Economist MagazineJanuary 2005

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John Kenneth Galbraith• All truly important economic activity takes place within giant corporations.

• Large dominant firms are immune to competitive pressure.

• Wages and prices are artificial creations of large corporations.

• Consumers are manipulated by advertising.

• The United States is a planned economy run by large corporations.

• The government in a liberal society is the ‘public conscience’ which must

– enforce law and order and protect property rights

– serve as a balance to the power of large corporations.

– protect human rights: resolve inequity, prevent discrimination and exploitation

– promote full employment and a stable economy through taxing and spending

– model social responsibility: correct externalities, promote culture, and eliminate pollution

– Provide community investment in public goods such as schools, transportation, communication, and healthcare.

• Taxation is the price paid for membership in civilized society

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In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all—regardless of station, race, or creed. Among these are:

Roosevelt’s Second Bill of Rights

•The right to a useful and remunerative job in the industries or shops or farms or mines of the nation•The right to earn enough to provide adequate food and clothing and recreation•The right of every farmer to raise and sell his products at a return which will give him and his family a decent living•The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad•The right of every family to a decent home•The right to adequate medical care and the opportunity to achieve and enjoy good health•The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment•The right to a good education

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

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ADAM SMITH

The Capitalist Response

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“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits in open and free competition without deception or fraud.

Businessmen who talk about corporate social responsibility are unwitting puppets of the intellectual forces that have been undermining the basis of a free society for decades; in fact, they are preaching pure and unadulterated socialism.”

Milton Friedman New York Times 13th September 1970

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Milton Friedman• Economic freedom promotes political freedom.

• The only role of the government is to provide order and protect property rights. 

• Government intervention in the market is ineffective because of

– the rational ignorance of voters,

– the special interest effect from lobbyists,

– the short-sightedness of politicians.

• Taxation and spending by the government make the economy less stable.

• A uniform flat ax with no deductions is more fair than a progressive income tax.

• Social welfare programs don't help the poor; they reward poverty and prevent investment in human capital.

• Free public education is foolish.  Anything that is perceived as free is undervalued and abused. 

• There is no justification for licensing or regulation; government regulations inhibit the freedom of individuals to produce and consume as they choose.

• The only true solution to the problem of global conflict and poverty is the end of all trade barriers.

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CROWDINGOUT

RENT-SEEKING AND

SPECIAL INTERESTS

BUREAUCRATICCAPTURE

DEADWEIGHTLOSS

Friedman’s Government Failures

SHORT-TERMTHINKING

RATIONALIGNORANCE

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Friedman and Galbraith

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ChapterConclusions