Friday, 3 June 2016

Foreign Affairs: Making America Great Again

Foreign Affairs: Making America Great Again

The Case for the Mixed Economy

by Jacob S Hacker and Paul Pierson

"Why does it take a lot of government to get and keep prosperity? Because government has unique capacities—to enforce compliance, constrain or encourage action, and protect citizens from private predation—that allow it to solve problems that markets can’t solve on their own. These problems are both economic and political; they concern areas in which markets tend to fall short and areas where market actors tend to distort democratic processes in pursuit of private advantage. And even beyond correcting market failures, government can play an important role in helping markets do better at serving human needs.

One important market failure comes in the underprovision of what economists call “public goods,” valuable things that must be provided to everyone or no one. The classic example is a lighthouse. Its light is available to all ships navigating a coastline. There is no cost-effective way to limit the lighthouse’s benefits to paying customers, so nobody has a reason to pay. And if no one pays, markets won’t motivate anyone to provide the good. Public goods of this kind are prevalent in modern life. The biggest, most obvious example is national security, which consumes one-sixth of U.S. federal spending, but the same logic applies to infrastructure and fundamental scientific research, the latter of which is the cornerstone for technological innovation.

Another kind of market failure involves the effects of market operations on people who are neither buyers nor sellers. Economists call these effects “externalities,” and a classic example of a negative externality is pollution. In an unregulated market, neither a factory owner nor a firm’s customers have strong incentives to care about what happens to, say, the noxious byproducts of the factory’s manufacturing processes. So in an unregulated market, the factory can spew toxins into the air or water with impunity. Where such externalities are present, the market prices for the goods in question will not reflect the true social costs (or, for positive externalities, the benefits) of the private transaction."

An extremely interesting article arguing for the role of government intervention as fundamental to economic prosperity.

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