Small Government the nemesis of the Competitive Economy

The rise of the Capitalist Market Economy in the twentieth century and its domination of the world economy in the twenty first century raises many interesting questions as to its origins and its operational structure.

Governments up until the end of the nineteenth century were scarcely interested in economic affairs. Largely confining themselves to Law & Order issues and the promotion of National (or in many cases Dynastic) identity on the world stage.

As the so-called Industrial Revolution began to make significant headway in the nineteenth century this began to change. The general population was being offered a glimpse of a more enticing future. A future where social and financial status could be changed through hard work and enterprising behaviour. A future where there was some hope of escaping the drudgery and indeed slavery of the past.

To deny citizens a chance at this future risked revolution and chaos. Pressure was now on governments to facilitate and encourage the expansion of this changing economic order. For governments to do this required knowledge of how the economic system worked.

What gradually emerged was, unsurprisingly, a corollary of the psychological make up of human behaviour. Humans are part of that extremely rare variant of life (ants being another very prominent life form so ordered) that can act in a manner that puts the interests of the group before the interests of the individual.

But unlike ants, we humans also have a very strong individual selfish interest. The tensions between the selfish individual and the collective spirit form the back drop to the development of an economic philosophy that explained this new economic order.

It is generally accepted that the purpose of the modern market economy is to ensure the most efficient use of scarce resources to enable the maximum satisfaction for the economy’s inhabitants. In theory this is achieved by allowing individuals the freedom to experiment and strive for economic success. This was seen by many people then and now as a justification for continuing the historical tradition of governments being removed from involvement in economic matters. This viewpoint is, I would suggest, based on a superficial reading of the nature of human motivation and a head in the sand approach to the practicalities of achieving economic success.

Underpinning the framework of an efficient market economy is firstly the much-discussed concept of the level playing field whereby anyone and everyone has the opportunity to achieve economic success. Secondly the creation of a society that the inhabitants value sufficiently to willingly make sacrifices to ensure the success of the common good.

Both of these foundation pillars of the market economy are, in reality, exceptionally difficult to not only achieve but also to maintain. Some of these difficulties lie in environmental barriers e.g. lack of water, lack of fertile soil, low population density, remoteness from markets etc. Other barriers are largely of a human nature e.g. access to education, access to capital, a stable and engaging political environment, an infrastructure that facilitates economic activity.

Many of the human difficulties inevitably involve a trade-off between those two often contradictory human traits of altruism and selfishness. The role of government is to not only manage these trade offs but to lessen as much as possible the natural barriers to economic activity. Whether this is a “small” government or “big” government purely depends on the nature of the challenges facing the economic society. To be ideologically fixated on “small” government runs the very real risk of creating economic inefficiencies and thus ensuring economic underachievement.

Even in that bastion of free enterprise, the USA, it was realised quite early on that there were significant barriers to economic efficiencies that could only be dealt with by governments. In the period between 1890 and 1914 the US Federal government passed a series of laws outlawing commercial behaviour that lessened competitive endeavour. This was a reaction to the increasing level of monopolistic and oligarchic behaviour appearing in the nascent American market economy which was seen as inhibiting economic growth and opportunity. Interestingly these laws not only carried civil implications but also criminal penalties.

This behaviour of monopolies and oligarchies towards curtailing economic efficiency and economic progress is not just confined to the Americas. It is a world wide or should I say human wide phenonium. Studied and taught in all tertiary economic courses worldwide.

So, it is with some curiosity that here in Australia we have spent the last thirty years privatising i.e. selling off, various government organisations such as Electricity, Gas, Phones, Roads etc. All of these were sold into an oligarchic market with minimal regulation. As the economic textbooks have explained for the past 60 odd years this is a dangerous path for economic efficiency.

Australians are currently now scratching their heads as to whether all these moves to a smaller government actually did anything useful towards creating a strong and efficient economy. I certainly am and have yet to see any figures that show that this is the case.

But do government run organisations always have to be characterised as inefficient? Many if not most of the structural problems of these organisations appear to stem from the fact that at the end of the day the politicians at the head of government want to use them as a means of getting elected at the next election.

A rather more satisfactory way of ensuring these organisations (which are mostly infrastructure related) contribute to economic efficiency and progress is to have them run by independent statuary boards. Boards which have clear goals, accountable to not just the government but also the general community. Keep them well clear of the pollies.