8.6 Notes: How Politics and Markets Intersect (Comprehensive)

8.6.1 The Case for Leaving Markets Alone vs The Case for Intervention

• Learning objectives recap: 1) Understand arguments for and against government intervention in markets. 2) Understand why businesses seek protection from competition through government action.

• Central questions to consider:

  • To what extent should government intervene in the economy?

  • Presuming we continue to rely on markets to determine what to produce, how can we keep government from limiting competition when it intervenes?

• The basic tension: history shows markets seek intervention almost as much as government seeks to intervene, creating a two-way street between political and economic decisions.

• The Case for Leaving Markets Alone

  • Public choice school argument: government doesn’t always make good choices; people are generally a better judge of what to do with their money.

  • Conservative, public choice, and libertarian view: government should be smaller, tax and spend less; libertarians favor a minimal state (national defense and police protection).

  • Moral hazard concern: if you bail people out from stupid decisions, they’ll repeat them because there are no consequences.

  • Public choice theory: government economic decisions are often aimed at benefiting government officials (e.g., aiding officials’ re-election) rather than society as a whole.

  • Empirical note: presidents have been observed to take steps to pump up the economy before elections; such stimulus can lead to inflation and higher budget deficits later.

  • General efficiency concern: intervention, regardless of method (regulation, taxation, subsidies), tends to make markets less efficient by raising costs for businesses and consumers.

  • Picking winners and losers: government is notoriously bad at this; the historical example of 60 years of communism is cited as illustrating inefficiency.

  • Extreme government control risks: reduced innovation, higher prices, shortages, and weaker incentives to work.

  • Why governments aren’t as efficient as markets: markets respond to supply and demand signals; governments must satisfy concerns about employment and basic welfare, which makes them more egalitarian but less efficient.

  • Anecdotal illustration: Alaska during the 1980s oil boom, where state-led small business development included a dog-powered clothes dryer project; the state spent heavily until oil prices collapsed, prompting a popular bumper sticker: “Please, God, just once more. We won’t piss it away this time.”

  • Bottom line: there is some truth in both sides; many people will be more careful if government isn’t always bailing them out; government planning of economic outcomes has a poor track record.

• The Case for Intervention

  • Imperfect nature of governmental decisions: no decision (including inaction) makes everyone better off; those who don’t save for retirement bear costs.

  • Public choice caveat: for such theory to hold, people would need to be rational all the time, which we know is false; people act irrationally part of the time.

  • Conservative belief that markets sort things out in the long run ignores the costs of waiting and the human misery that can accompany it.

  • Ethical and practical balance: unfettered markets are not necessarily better than unfettered state control; the right policy depends on cost-benefit trade-offs.

  • Question posed to students: Do the benefits of government involvement outweigh the costs, or do the costs overwhelm the benefits? Personal stance varies, and rational arguments exist on both sides.

  • Overall takeaway: every government action or inaction imposes costs and benefits across different groups within a country.

8.6.2 Government to the Rescue? The Case for Intervention and the Political Economy of Regulation

• Despite criticism, much government meddling serves business interests because markets are political economies; much legislation has economic impact.

• Adam Smith’s insight (as summarized here): left to themselves, businesses will try to use government to rig markets and limit competition.

• My Second Law of Political Economy: Politics is economic competition, carried on by other means.

  • Why this matters: most legislation across taxes, spending, regulation, monetary policy, and economic development has significant economic effects.

  • Firms in every sector actively seek legislation that helps them and hurts competitors, making regulation a tool to influence competition.

• Example of regulation as a byproduct of business interests: licensing requirements protect consumers from bad practices but also restrict supply (e.g., doctors, lawyers) and thus raise prices.

• The idea that “regulation” is often a tool to restrict competition and raise profits for incumbents.

• My Fourth Law of Political Economy: Everyone favors competition, except when it applies to them. In other words, people advocate for competition in general, but oppose it when it affects their own interests.

• The First Law of Political Economy: The decision will be made in the direction of the greatest value (often interpreted as money).

• Local dynamics: wealthier interests and neighborhoods may shape policy because they have more political voice (e.g., development decisions benefiting homeowners who vote more than renters).

• The Fourth Law (revisited): Economic interests tend to become politically dominant to the extent that they are economically dominant.

• The Fifth Law: All life is politics. Politics is everywhere; influence often hinges on who you know.

  • Anecdotal example: a consumer antitrust lawsuit against Microsoft included many state attorneys general whose states were home to Microsoft’s competitors, illustrating the lack of consumer representation in such cases.

• The Iron Law of Public Policy: Every government action creates winners and losers in the marketplace.

• Practical takeaway for businesses: they frequently seek regulation to limit competition and keep prices higher than they would be in a fully competitive environment.

• Discussion prompts to deepen understanding:
  1) What are the costs and benefits of speed limits? What would be the alternative?
  2) Think of a current or proposed government economic policy. What would be the costs and benefits of that change in policy?

8.6.3 The Laws of Political Economy and Their Implications

• First Law of Political Economy: The decision will be made in the direction of the greatest value (usually money).

• Second Law of Political Economy: Politics is economic competition, carried on by other means. (See above for the rationale and implications.)

• Fourth Law of Political Economy: Everyone favors competition, except when it applies to them.

• Fifth Law: All life is politics. The everyday reality is that political influence matters and often privileges those with resources and connections.

• Iron Law of Public Policy: Every government action creates winners and losers; smart business people anticipate and act on this.

• Practical implications for policy and business:

  • Businesses often seek regulatory protections to limit competition and raise prices.

  • Government interventions carry both costs and benefits that are unevenly distributed across different groups.

  • The interaction between government and business is substantial and pervasive across sectors and levels of government.

• Additional examples and observable patterns:

  • Local zoning and land use reflect the friction between housing demand, property values, and political influence (homeowners vs renters).

  • Licensing regimes illustrate the trade-off between consumer protection and price/availability of services.

  • The broader point that most legislation has economic consequences, regardless of whether the explicit aim is social or moral in nature.

• Conclusion and reflective stance:

  • The debate over intervention vs non-intervention is not settled; there are rational arguments on both sides.

  • The goal for students is to understand the trade-offs, to recognize who bears the costs and who reaps the benefits, and to articulate a reasoned stance based on foundational principles and empirical considerations.

KEY TAKEAWAYS

• Politics and markets are deeply intertwined; government actions are often motivated by economic considerations and can shape market outcomes.

• Public choice theory highlights that government decisions can reflect the incentives of policymakers and interest groups as much as the public good.

• Markets tend to allocate resources efficiently, but they can fail due to externalities, poverty, unequal start conditions, and concentration of wealth and power.

• Government intervention can correct market failures but can also reduce efficiency and distort competition; the challenge is balancing the benefits and costs for different groups.

• The set of “laws” (First, Second, Fourth, Fifth) and the Iron Law of Public Policy provide a framework for analyzing how economic interests shape political outcomes and vice versa.