The Role of Government in the Optimal Economic System

Opinions on Debatable Issues #47

In the Declaration of Independence, Thomas Jefferson and other editors laid out the role of government, upon which many democratic countries are built: to secure inalienable rights, including “life, liberty, and the pursuit of happiness” (262). The responsibility to safeguard those basic rights of the people should guide governmental actions in all aspects of society, including economics. To do so, the government must prioritize providing optimal economic and social stability by finding the “bliss point,” at which individual citizens are content with their daily financial freedom while comfortably obliging to necessary legal restraints that minimize their economic risks. Thus, the government must maintain a perfect balance of governmental intervention and inaction in economics, which has no simple and permanent formula due to everchanging economic activities and complex market conditions. However, four considerations should inform the government’s role in the economy: 1) risk management to prevent an economic recession or disruptive economic activities, 2) monitor and address human rights and law violations of private enterprises both domestically and internationally, 3) reverse material obsession by regulating the advertisement industry to revive moral values centered on human rights, 4) allow a healthy competition and price fluctuation that incentivizes innovation and profitmaking.

Equality of opportunity is instrumental in ensuring the long-term protection of inalienable rights. It guarantees the freedom of individuals to select their profession and advance their careers without constant supervision and frequent intervention. As the Friedmans recognize in their argument supporting full-scale free market, equality of opportunities allows everyone to have the same chances and the fair advantages to achieve their full potential in amassing wealth and be successful (Friedmans 268). Within such a system, individuals are limited only by their abilities and uncontrollable factors of biological differences and fortune. This equality will be disrupted when a central institution, striving to achieve equality of outcome, forces some people to give up their hard-earned wealth or opportunities to others. So, an ideal world where individuals all righteously utilize their skills and talents to live a better life would result in maximum happiness and peace. Yet, the reality is far from perfect as the impacts of historical injustices and modern exploitation prevent many from enjoying equality of opportunity. An unbridled free market cannot ensure equality of opportunity for every citizen. As a result, controlled governmental intervention is imperative.

First, when the market is fully left to the will of individual businesses and average citizens, lack of an understanding of the entire market and comprehensive intelligence emerges from those entities. This void of knowledge leads to issues like inflation, dependence on international trade, and riskier stock for individual citizens. In John Mayard Keynes’s words, the government must take on the responsibility to manage the “risk, uncertainty, and ignorance” (245). Arguing for prioritizing the practicality of government intervention rather than overanalyzing ideologic legitimacy, Keynes presents several great examples of numerous problems that a fully free and independent market tends to fall prey to. For instance, when there is a sharp increase in demand for certain products or services like housing and mortgage, or a surplus of raw materials, consumption is stimulated, pumping more cash into the money flow and causing inflation. Though moderate inflation can stimulate economic growth and market vivacity, excessive inflation disproportionally hurts lower-income people whose wages do not grow in accordance with the inflation rate, contributing to wealth disparity and poverty intensification. This uncertainty must be addressed by the government both on the federal and the regional level. Preventative measures of such instances cannot be drafted and implemented by an individual or a single company as either lacks adequate information of the market and comprehensive understanding of the economy and effective means to make a difference. This is because average citizens often obtain financial information from news media, which are incentivized to report primarily on sentimental events and are often politically affiliated, or private enterprises, which are driven by self-interests to hide information that are detrimental to themselves or conflict with their vested interests. Also, most moderately educated people are susceptible to rampant misinformation, which is spread unintentionally, and disinformation, which is purposefully fabricated to mislead. As a result, the public makes unwise economic decisions and advocates for flawed economic policies. This dilemma is further exacerbated by individuals’ biases of being part of the supply chain and bargain process that make it extremely challenging to form an objective view and a balanced approach towards problem-solving. Therefore, an independent central institution that monitors and controls “currency and credit”, as the Federal Reserve, is paramount to be established to minimize economic abnormalities (Keynes 245). With control over money and interest rate that regulates the entire economy, Federal Reserve can practically and effectively stir the market away from potential crises. Besides uncertainty and ignorance, the government must assume the obligation of managing risk as profit-driven individuals are willing to take excessive risk for lucrative returns. In the documentary Enron, countless stockers and analysts invested income, even their pensions and life savings, into its stock. Though the compelling advertisements and charismatic leadership certainly increased people’s confidence in the company, the rapid increase of stock value from $40 to $70 in three months was a strong incentive for people to join this investment frenzy, despite the huge risk. Therefore, consumers and investors are unreliable when it comes to limiting risk in the face of lucrative potential returns. On the other hand, the government, whose main constitutional goal is not to make money but rather provide optimal economic stability to safeguard fundamental rights, will be more cautious when risks are detected. More importantly, with sufficient information about individual companies, each sectors’ projection, and international trade, the government should not only regulate the stock but also ensure overall stability and economic prosperity. As Keynes points out, the government’s primary task is to do “what is urgent and desirable to do in the near future…those decisions which are made by no one if the State does not make them” (Keynes 245). This outlook on practicality is essential for the long-term sustainability of the economy and individuals’ financial security. Without using theories that are detached from the ever-changing and complex reality, governmental officials and lawmakers can effectively discern a root problem and draft the most suitable solution with a minimal partisan stalemate.

Second, in addition to practicality, the government must address economic activities that violate human rights promptly through efficient law implementation and policymaking and changes if necessary. Injustice and inequality are universally acknowledged as the primary enemies of the pursuit of happiness and full humanity. When both are prevalent in society, the government fails to fulfill its sole responsibility. In a theoretically perfect world in which all people have similar intellectual competence and equal access to opportunities, serving self-interest can ultimately benefit individuals and society at large (Smith 447). However, different birth conditions and life experiences that people have means some are inevitably marginalized and exploited in the process. Enron is a great example of how a couple of smart and greedy individuals can utilize their creative ideas and compelling publicity to take advantage of the masses. Enron’s irresponsible fake marketing and blank promises caused many to lose their entire life savings and pensions and endangered the lives of millions of Californians as it intentionally disrupted electricity usage. Such offenses are beyond the severity of simple financial crimes. They display a staggering level of superiority callousness towards other human beings. This is because by basing the meaning of life and value of actions on profitmaking, people lose sight of their shared responsibility as citizens and members of a greater community that relies on mutual trust and love to flourish. As a result, the majority of people are subject to exploitation and dehumanization by a minority. To prevent or ameliorate such a situation, the government must proactively detect any signs of illegal activity and penalize offending businesses. Especially, it should assume the right and power of “the collection and dissemination on a great scale of data relating to business situation, including the full publicity of law if necessary, of all business facts which it is useful to know” (Keynes 245). When government demands a regular examination of economic activities and require disclosure of financial statement, businesses cannot abuse their control of the market and manipulation of consumers easily. “Full publicity” means the information is disclosed not just to the document but also the citizens. This can prevent the government from aligning with large corporations for political goals. In the case of Enron, it was able to rise so quickly and dissipate some opposition because it was backed up by the Bush administration for their aligned interests. If the executive and legislative branches were objective enough to demand disclosure of financial statements from Enron earlier, the robust evidence of the scandal would have prevented millions to lose their life-saving money. This historical scandal is a wake-up call for the government to reexamine its power structure. Realizing there are loopholes that allow corruption between the executive branch and large corporations, the lawmakers must ratify a law that keeps the president and its cabinets accountable for and transparent with their economic interests to uphold the constitutional principle of “checks and balances”.

Supporters of pure capitalism would likely argue against this view by claiming that federal policies that interfere with economic activities unfairly benefit certain industries and put some sectors at disadvantage (Smith 440). However, such reasoning is based on the presumption that freedom means the individual has the opportunities to accumulate wealth via whatever means. Yet, freedom is not measured and cannot be obtained long-term through individuals pursuing affluence. This is because humans naturally demand a higher level of satisfaction than power, money, and frame, which only create a fleeting sense of joy and pride while leaving a greater unsatiable void afterward. Sustainable happiness is obtained through intimate relationships and spiritual pursuits. Furthermore, Marcal, who criticized the exploitive nature of Adam Smith’s theory of capitalism, points out “however you look at the market, it is always built on another economy. An economy that we rarely discuss” (16). The invisible economy she talks about is unpaid domestic work, usually done by females, especially females of color. In capitalism, profits are made through net positive gain when the revenue subtracts the cost. If everyone is fairly compensated for the work they do, there are supposed to be little to no additional profits. Though high demand and low supply can indeed increase the value of certain goods, excessive wealth usually comes through exploiting unpaid labor or low-wage workers. In recent years, the wage gap between genders and minuscule payments are slowly addressed. However, domestic labor is often left out of the conversation. Free-market capitalism, which always relies on some form of free labor to create excessive profits, bereaves approximately half of the population their fair compensation for the work they do. No doubt Adam Smith would not have starved to death without his mom as he could have hired cooks or maids. But, likely, he would not have enjoyed so much fortune as he did and had a comfortable living environment that allows him to focus on his academic works. The value of domestic work cannot be overestimated, but in most advanced capitalist countries they are uncompensated. When about half of the population are coerced by social pressure to invest time and energy in things that yield no return, “freedom for all” is a broken promise. Such exploitation violates justice and undoubtedly makes the lives of many harder, resulting in discontent. So, it is the government’s responsibility to address it. In addition, in a capitalist system, businesspeople who see themselves as having the freedom to increase profit and purchase more material goods do not realize that this consumeristic mindset and mindless pursuit of wealth is conditioned by the system. In other words, the people who claim to be free are under the influence of the larger capitalist machine that expands continuously through appealing to self-interest and self-interest solely. The façade conjured by the free market makes people think that they are choosing to prioritize affluence and power over poverty and ordinary when they are acting this way because the rapidly producing machine has degraded their moral compass, which allows an individual to truly make a cognizant and free decision.

Third, to awaken the self-interested business people and consumers, the government should regulate the advertisement industry to reverse material obsession so that moral values centered on human rights can be revived. With the rise of capitalism, people, both the employees and the employers develop a new understanding of success and happiness. If one is happy and successful, one must have a decent job, a great house, and an amazing car. This increasingly emphasized causal relationship between affluence and quality of life leads many to see money as the ultimate panacea to any problem they have, even more powerful and transformative than kindness, love, and honesty. As John Berger points out in his criticism of the modern perception of arts and their value: Ways of Seeing, the advertisement industry associates the bottomless ability and desire to purchase to freedom to legitimize and justify mass consumption: “freedom of choice for the purchaser: freedom of enterprise for the manufacturer. The great hoardings and the publicity neons of the cities of capitalism are the immediately visible sign of ‘The Free World’” (Berger 131). Publicity such as ads, magazines, and posters send subliminal messages that material possessions and external changes like jewelry, luxury watches, and makeup and dieting/muscle-gain products make one live with social respect and high-level of wellbeing. Products that they promote are then offered as a beneficial tool that helps individuals achieve their personal pursuits. The more products there are, the more choices people believe they have, and the freer and more empowered consumers feel when they purchase. Yet, this freedom is only an illusion as individuals are conditioned to see monetary gains as the only way to live a wholesome life. Under intentional manipulation of moral values, people believe that callousness and selfishness get them to their dream life, unbridled advertisement industry under capitalism encroaches on public moral standards and free will. As a result, the government must take on the responsibility to regulate publicity. Ads that have problematic lines that tout products untruthfully or misleadingly must not be televised. Such work has already been carried out by the Federal Trade Commission (FTC) to protect consumers’ interests. However, more indirect and subconscious advertising are not disciplined in many Capitalist countries, including US. Legal challenges against subliminal messages have been dismissed on the ground that those messages are not strong and impactful enough to prompt significantly worrisome actions from the viewers or consumers. A law that specifies a degree to which subliminal advertisements should not be allowed must be put into place to prevent further reinforcement of vain material pursuit. Though government should not have the power to determine what advertisements can be put on popular websites like YouTube and Google, it should establish a committee under the FTC to regularly examine ads promulgated on those websites. Ads that do not comply with consumer protection laws must be immediately taken off and hosting websites should be fined.

Fourth, while the principle of safeguarding life, liberty, and pursuit of happiness for all warrants the aforementioned governmental actions, it also limits the government’s power to absolute necessity: the government has no right to interfere with economic activities that do not threaten others’ life, liberty, and pursuit of happiness. For instance, the power to collect information to prevent huge economic fraud does not justify the breaching of confidential documents. And the right to subsidize some domestic industries and institute tariffs to prevent heavy reliance on foreign nations does not warrant corporatocracy, in which corporate interests shape policymaking. When the government imposes excessive intervention, it does not only stifle competition and innovativeness but also limits mass engagement in economic activities by laymen, which is crucial for keeping the economic system flexible and optimal. When the government arbitrarily decides the direction toward which a country’s economy goes, like the early years of the People’s Republic of China and Soviet Union did, economic disasters will likely occur due to the disconnection. The people lacked both the knowledge and the means to advise the government on their economic choices and policymaking, leaving the option entirely to a few who, despite being decently educated, inevitably lack a comprehensive vision of the entire financial network and market. The necessity for mass participation is one of the underlining assumptions of Kate Raworth in her discussion of a new economic model, Doughnut Economics. She states that a necessary step towards revolutionizing economic principles to form the most optimal one in the modern world is using effective framing and visual demonstration “to channel public outrage and mobilize widespread demand for change” (20). It can be easily inferred that response from the public imposes pressure that likely compels government and large corporations to change their mode of conducting trade when it becomes detached from reality or exploitive. When government policies take over the major role in regulating and guiding trade, citizens are less involved in the process and therefore less capable to act as reformative agents to push for changes. Therefore, keeping a high level of mass participation in the economy should be one of the goals of policymaking. Government should ratify policies like the right-to-work law and Equal Pay and Opportunities Act, which provide marginalized groups legal rights and protection in the workplace, encouraging active mass economic activities.

In short, the government must take on the responsibility to prevent businesses from committing human rights violations and crimes that threatens the financial stability of a large number of people, while moderating the larger economic system during crises. It must do so transparently and objectively to keep citizens informed of both governmental decisions and corporate activities. One cannot deny that a government closely monitoring and frequently interfering with the market indeed suppresses competition, which is essential for galvanizing maximum product innovation and desirable price, to some degree. But this moderate decrease in competitiveness is a worthy trade-off to ensure long-term sustainability for all. This benefit is not limited to the economic sector but rather has a huge impact on public safety, life expectancy, and sense of community: A thriving economy that promotes equality and stability lays an essential foundation for a safe and just society.

Works Cited

  • Friedman, Milton and Rose. “Created Equal.” A World of Ideas.  Ed. Lee A. Jacobus. Boston:  Bedford/St. Martin’s, 2006. Print.
  • Jefferson, Thomas. “The Declaration of Independence.” A World of Ideas.  Ed. Lee A. Jacobus.  Boston:  Bedford/St. Martin’s, 2006. Print.
  • Keynes, John Maynard. “The End of Laissez Faire.” A World of Ideas. Ed. Lee A. Jacobus.  Boston:  Bedford/St. Martin’s, 1990. Print.
  • Marçal, Katrine. “Chapter One” Who Cooked Adam Smith’s Dinner? New York: Pegasus Books.  2016.
  • Marx, Karl. “The Communist Manifesto.” A World of Ideas.  Ed. Lee A. Jacobus.  Boston:  Bedford/St. Martin’s, 2006. Print.
  • Raworth, Kate. Doughnut Economics: 7 Ways to Think Like a 21st Century Economist.  White River Junction, Vermont: Chelsea Green Publishing. 2017.
  • Smith, Adam. “The Wealth of Nations.” Main Currents of Western Thought. 4th ed. Le Van Baumer, Franklin, ed. New Haven: Yale University Press USCCB.

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