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The conventional wisdom has it that a balanced budget is the height of economic rationality, that social security should be privatized, and that most adult welfare recipients could and should get jobs. All our social and economic problems, we are told, are due to too much government; if we only left the American free enterprise system alone, the free market would heal all that ails our society and lead to lasting prosperity.

What role does the government play in capitalism?

Challenging these widespread stereotypes and myths, this book starts with the fundamental theory underlying capitalist ideology, showing that even in theory an unfettered free market cannot deal effectively with the many needs of a modern economy. Our society has many social goals to which the great majority subscribe—goals such as sustained full employment, universal health care, and quality education for all. The free market will not, the author argues, bring us quality education for every American child, affordable universal health care, Social Security for the elderly, assistance for the poor, or protection of the environment.

Only an active, participant government can affect positive change in such areas of social concern. It said the regional monopolies had to allow new competitors to link with their networks. To encourage the regional firms to welcome competition, the law said they could enter the long-distance business once new competition was established in their domains.

At the end of the s, it was still too early to assess the impact of the new law. There were some positive signs. Numerous smaller companies had begun offering local telephone service, especially in urban areas where they could reach large numbers of customers at low cost. The number of cellular telephone subscribers soared.

Countless Internet service providers sprung up to link households to the Internet.

Government Influence in Capitalist Outcomes

But there also were developments that Congress had not anticipated or intended. A great number of telephone companies merged, and the Baby Bells mounted numerous barriers to thwart competition. The regional firms, accordingly, were slow to expand into long-distance service. Meanwhile, for some consumers -- especially residential telephone users and people in rural areas whose service previously had been subsidized by business and urban customers -- deregulation was bringing higher, not lower, prices.

American Capitalism and the Changing Role of Government - Harry G. Shaffer - Google Книги

Banks are a special case when it comes to regulation. On one hand, they are private businesses just like toy manufacturers and steel companies. But they also play a central role in the economy and therefore affect the well-being of everybody, not just their own consumers. Since the s, Americans have devised regulations designed to recognize the unique position banks hold. One of the most important of these regulations is deposit insurance. During the Great Depression, America's economic decline was seriously aggravated when vast numbers of depositors, concerned that the banks where they had deposited their savings would fail, sought to withdraw their funds all at the same time.

In the resulting "runs" on banks, depositors often lined up on the streets in a panicky attempt to get their money. Many banks, including ones that were operated prudently, collapsed because they could not convert all their assets to cash quickly enough to satisfy depositors.

As a result, the supply of funds banks could lend to business and industrial enterprise shrank, contributing to the economy's decline. Deposit insurance was designed to prevent such runs on banks. Now, if a bank appears to be in financial trouble, depositors no longer have to worry. The government's bank-insurance agency, known as the Federal Deposit Insurance Corporation, pays off the depositors, using funds collected as insurance premiums from the banks themselves. If necessary, the government also will use general tax revenues to protect depositors from losses.

To protect the government from undue financial risk, regulators supervise banks and order corrective action if the banks are found to be taking undue risks.

The Role of the Government in the Economy

The New Deal of the s era also gave rise to rules preventing banks from engaging in the securities and insurance businesses. Prior to the Depression, many banks ran into trouble because they took excessive risks in the stock market or provided loans to industrial companies in which bank directors or officers had personal investments.

Determined to prevent that from happening again, Depression-era politicians enacted the Glass-Steagall Act, which prohibited the mixing of banking, securities, and insurance businesses. Such regulation grew controversial in the s, however, as banks complained that they would lose customers to other financial companies unless they could offer a wider variety of financial services.

The government responded by giving banks greater freedom to offer consumers new types of financial services. The new law went beyond the considerable freedom that banks already were enjoying to offer everything from consumer banking to underwriting securities.

It allowed banks, securities, and insurance firms to form financial conglomerates that could market a range of financial products including mutual funds, stocks and bonds, insurance, and automobile loans. As with laws deregulating transportation, telecommunications, and other industries, the new law was expected to generate a wave of mergers among financial institutions. Generally, the New Deal legislation was successful, and the American banking system returned to health in the years following World War II.

But it ran into difficulties again in the s and s -- in part because of social regulation. Savings and loans faced one major problem: When short-term interest rates rise above the rate on long-term mortgages, savings and loans can lose money. To protect savings and loan associations and banks against this eventuality, regulators decided to control interest rates on deposits.

For a while, the system worked well. Starting in the s, however, general interest rate levels began rising with inflation. By the s, many depositors started seeking higher returns by putting their savings into money market funds and other non-bank assets. This put banks and savings and loans in a dire financial squeeze, unable to attract new deposits to cover their large portfolios of long-term loans.

In many cases, these ventures proved to be unprofitable, especially when economic conditions turned unfavorable. Government was slow to detect the unfolding crisis because budgetary stringency and political pressures combined to shrink regulators' staffs. The Federal Savings and Loan Insurance Corporation, which insured depositors' money, itself became insolvent.

Americans have taken a number of lessons away from the post-war experience with banking regulation. First, government deposit insurance protects small savers and helps maintain the stability of the banking system by reducing the danger of runs on banks. Second, interest rate controls do not work. Third, government should not direct what investments banks should make; rather, investments should be determined on the basis of market forces and economic merit.

Fourth, bank lending to insiders or to companies affiliated with insiders should be closely watched and limited. Fifth, when banks do become insolvent, they should be closed as quickly as possible, their depositors paid off, and their loans transferred to other, healthier lenders. Keeping insolvent institutions in operation merely freezes lending and can stifle economic activity. Finally, while banks generally should be allowed to fail when they become insolvent, Americans believe that the government has a continuing responsibility to supervise them and prevent them from engaging in unnecessarily risky lending that could damage the entire economy.

In addition to direct supervision, regulators increasingly emphasize the importance of requiring banks to raise a substantial amount of their own capital. Besides giving banks funds that can be used to absorb losses, capital requirements encourage bank owners to operate responsibly since they will lose these funds in the event their banks fail. Regulators also stress the importance of requiring banks to disclose their financial status; banks are likely to behave more responsibly if their activities and conditions are publicly known.

The regulation of practices that affect the environment has been a relatively recent development in the United States, but it is a good example of government intervention in the economy for a social purpose. Beginning in the s, Americans became increasingly concerned about the environmental impact of industrial growth. Engine exhaust from growing numbers of automobiles, for instance, was blamed for smog and other forms of air pollution in larger cities. Pollution represented what economists call an externality -- a cost the responsible entity can escape but that society as a whole must bear.

With market forces unable to address such problems, many environmentalists suggested that government has a moral obligation to protect the earth's fragile ecosystems -- even if doing so requires that some economic growth be sacrificed. Environmentalists achieved a major goal in December with the establishment of the U.

Environmental Protection Agency EPA , which brought together in a single agency many federal programs charged with protecting the environment. The EPA sets and enforces tolerable limits of pollution, and it establishes timetables to bring polluters into line with standards; since most of the requirements are of recent origin, industries are given reasonable time, often several years, to conform to standards. The EPA also has the authority to coordinate and support research and anti-pollution efforts of state and local governments, private and public groups, and educational institutions.

Regional EPA offices develop, propose, and implement approved regional programs for comprehensive environmental protection activities. Data collected since the agency began its work show significant improvements in environmental quality; there has been a nationwide decline of virtually all air pollutants, for example.

However, in many Americans believed that still greater efforts to combat air pollution were needed. Congress passed important amendments to the Clean Air Act, and they were signed into law by President George Bush Among other things, the legislation incorporated an innovative market-based system designed to secure a substantial reduction in sulfur dioxide emissions, which produce what is known as acid rain.

This type of pollution is believed to cause serious damage to forests and lakes, particularly in the eastern part of the United States and Canada. The liberal-conservative split over social regulation is probably deepest in the areas of environmental and workplace health and safety regulation, though it extends to other kinds of regulation as well. The government pursued social regulation with great vigor in the s, but Republican President Ronald Reagan sought to curb those controls in the s, with some success. Regulation by agencies such as National Highway Traffic Safety Administration and the Occupational Safety and Health Administration OSHA slowed down considerably for several years, marked by episodes such as a dispute over whether NHTSA should proceed with a federal standard that, in effect, required auto-makers to install air bags safety devices that inflate to protect occupants in many crashes in new cars.

Eventually, the devices were required. Social regulation began to gain new momentum after the Democratic Clinton administration took over in For related reading, see: How are capitalism and private property related? Voluntary trade is the mechanism that drives activity in a capitalist system. The owners of resources compete with one another over consumers, who in turn compete with other consumers over goods and services.

All of this activity is built into the price system, which balances supply and demand to coordinate the distribution of resources. These concepts—private ownership and voluntary trade—are antagonistic with the nature of government. Governments are public, not private, institutions. They do not engage voluntarily but rather use taxes, regulations, police and military to pursue objectives that are free of the considerations of capitalism.

Nearly every proponent of capitalism supports some level of government influence in the economy. The only exceptions are anarcho-capitalists, who believe that all of the functions of the state can and should be privatized and exposed to market forces.


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Classical liberals, libertarians and minarchists argue that capitalism is the best system of distributing resources, but that the government must exist in order to protect private property rights through the military, police and courts. In the United States, most economists are identified as Keynesian, Chicago-school or classical liberal. Keynesian economists believe that capitalism largely works, but macroeconomic forces within the business cycle require government intervention to help smooth it out.

Chicago-school economists tend to support a mild use of monetary policy and a lower level of regulation. In terms of political economy , capitalism is often pitted against socialism.