Visible Hands in the Economy
5. The visible hand of the government

In order to correct market failures governments pursue a great variety of economic policies. That is to say, they wield their visible hand in markets.

McCloskey: Yeah, sure, "to correct market failures." So the extortions of dictators and the pork barrel projects in democracies are "to correct market failures"? The famous "bridge to nowhere" sponsored in 2006 by Senator Alaska's Senator Ted Stevens and Representative Don Young. The proposal was to connect Gravina Island (with a population less than 50) to the town of Ketchikan (8,000 people) with a bridge costing nearly a billion dollars.

Klamer: All right. But what about the many hundreds of billions spent increasing the fairness of the economy? Let's hear about them first!

Policies directed against price inflexibility

In the U.S., price fixing by suppliers is illegal. If suppliers of rubber-improving chemical are caught meeting in a smoke-filled room---or these days in a strictly smokeless room---conspiring to keep prices high, they go to jail. In August 2005, for example, two former executives of Bayer AG, the German chemicals producer, were indicted in federal court in San Francisco for so conspiring.

Incidentally, the government itself is often responsible for inflexibility of prices, or for agreements to increase prices to the detriment of households. (McCloskey: "You're telling me!") In France, for example, the government sets the price that bakers can charge for their French bread. In Paris the government sets the supply and therefore a good part of the price for street musicians. In Japan the government essentially sets the price for rice. The American government has set a minimum level for wages, below which the wage rate cannot go no matter how excessive the supply of labor is. The price of sugar is protected and high in the U.S. And so on.

Provision of public goods and regulation of public bads

The U.S. government at all levels from federal down to the dog catcher provides many desirable goods that have to be consumed collectively. Obvious examples are law and order, national defense, fire protection, national parks, and clean streets. But there are volunteer fire departments. And private donations finance public radio and television.

In the case of a public bad such as pollution the government can step in to forbid its production. Alternatively, the government can impose taxes on the polluters. The solution that many economists favor is the organization of auction markets in the rights to pollute. In that way pollution would carry an explicit price that the polluter has to pay. By limiting the total of the rights to pollute the government limits the pollution---in the meantime leaving the allocation of those rights to the market. In 1991 President George Walker Bush signed the Clean Air Act, legalizing the annual auction for the right to pollute. Sounds bad. Economists from left to right think it's good.

Policies to protect people from the inappropriate markets

The American states closely regulate the adoption of children, because many people object to a market in children. The market for body parts is also strictly regulated. Some Moslem countries forbid a market for loans because the Moslem religion forbids the charging of interest, as did Christian Europe until the 19th century. And of course there is a raft of laws prohibiting or limiting this or that market. You cannot, as you could easily a century ago, buy any drug you want at the drug store or from a street vendor. Pornography of certain kinds is in some places illegal. Twelve of the fifty United States prohibit "scalping" of tickets to concerts and ball games. Most economists, specially the sports fans among them, think that's going way, way too far: so-called "scalping" is merely buying low and selling high, in this case about a non-sacred item like a baseball ticket. Non-sacred? Well, some think so.

The invisible hand versus the visible hand in politics
The argument on markets versus government is played out in the political arena. The contrast shows in what the two presidential nominees said at their conventions back in 1992. Pick out the differing role of government implied in each:

George Bush, Sr. (the Republican nominee):

"We offer a philosophy that puts faith in the individual, not the bureaucracy . . . . My feelings about big government come from my experience; I spent half my adult life in the private sector . . . . Government has the power to separate you from your wallet. . . . I believe that small business needs relief - from taxation, regulation and litigation. . . . Here's what I'm fighting for: open markets for American products, lower government spending, tax relief, opportunities for small business, legal and health reform, job training and new schools built on competition."

Bill Clinton (the Democratic nominee; he won the election):

"We have to steer our ship of state on a new course. . . . . We have to go beyond the brain-dead politics in Washington, and give our people the kind of government they deserve; a government that works for them. . . . The old ways don't work. Trickle down economics has sure failed. . . . I call this [new] approach a New Covenant, a solemn agreement between the people and their government . . . . American companies must act like American companies again, exporting products, not jobs. . . . Health care is a right not a privilege. . . . Your government has the courage, finally, to . . . make health care affordable to every family."

Concept Check 4: In the United States beer, alcohol, and tobacco are regulated and taxed by individual states and localities. Marijuana is a common weed but is, with few exceptions, unlike dandelions, illegal to consume, distribute, or produce. Using supply and demand analysis, what would be the "free market" price of marijuana if it were legal? Contrast its price when, as now, illegal. Are there other, non-price costs of illegality?
Perform an Ideological Thought-Experiment on Yourself
You have already, right now, without taking an economics course, an economic "ideology"---more or less fixed opinions of a political character---whether you realize or not.

The experiment: You've enjoyed a nice meal in a restaurant with friends, and are on your way out when you are confronted by a homeless person begging. What's your reaction?

(1.) If you are annoyed at the homeless person and think something like "Why doesn't he try to get a job?" you believe that markets work and that anyone who really tries can make an honest living. No government action is needed. You may even argue that the homeless person is out on the street bothering innocent passers-by because of government programs that make him lazy. That would make you a conservative or more likely a libertarian.

(2.) If you feel vaguely guilty about the situation, or if you already know the homeless person's name and have a relationship with him or her, you are most likely a liberal. You believe that our market economy is by no means perfect and that some government action is needed to help the victims of its failures. You probably will argue that the government has to do more to reduce homelessness.

(3.) You may also get angry at the whole economic system. This places you in the radical camp. If you were to have this reaction, you apparently see basic flaws in our system and would want to see major changes, possibly a revolution to take-on the powers that be.

Now: we want you to re-take the experiment at the end of your economics course.