The government and the market

Mention the government and the market and all academic reflection and civilized discussion dissolves into heated monologues. Politicians are an extreme case.

Why so? Why for instance is it always the government versus the market, instead of, say, which form of organization to choose among government, market, culture and corporation? One reason must be Karl Marx, who reified the conceptual distinction between the production forces labor and capital into a fundamental struggle for power between the class of the laborers and the class of capitalists. A second obvious and related reason must be the deeply ideological Cold War between the United States and Soviet Union of the 1950s-1980s. In any case, it is unfortunate, as an understanding of the relationship between the government and the market is central to economics. How are the government and the market connected? Without any claim as to what is desirable or not, I think it is useful to distinguish between three kinds of connections.

1) The legal relationship
Using her monopoly of force, the government is able to ensure property rights and free exchange of goods and services within her territorial borders. This is the essence of what we may call the legal relationship between the market and the government. The government may be a man, two acres of land and a gun, or it may be an entire country. Moreover, in addition to ensuring property rights and free exchange, the government may ensure quality measurements, break up monopolies, and what have you. It may also choose not to. However, a market by definition means that at the very least property rights and free exchange are ensured. Whoever does that is the government.

2) The political relationship
When it has decided to ensure a market, every government faces the question who should produce which goods and services. Should transport by train be produced by the government or by the market? That is essentially a political question that is answered differently by different governments and different political parties. New technologies or new insights may moreover change their answers over time. The answers given may also involve economic arguments. But in the end it is always a political answer.

3) The relationship of competition
Given its assurance of the market, and given its decision which goods the market and which goods the government will produce, the government competes with the market for customers. If the government decides that air transportation may be produced by the market, but that transport by train will be produced by the government, the government and market compete for travelers. One may agree or disagree with the government’s decision, and one may have a lot to say about the nature of this competition, but a relationship of competition it is.

Politicians around the world: when discussing the government and the market, could you say which of the three relationships above you are talking about? And please make it a discussion based on arguments. Thanks.

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