Do most economists think government being involved in markets is a bad thing? The answer to that probably depends on the market. If markets are efficient, there’s probably no need for government to get involved. If markets are inefficient, there’s probably a good reason for government to interfere to attempt to increase efficiency and so there could be an economic argument in favor of government intervention. So the question now is whether markets are efficient or not.
The reason I bring up the topic is because of something professor Komai of the economics department brought up in my managerial economics class today. (Dr. Komai is definitely one of the best professors I have had at this university.) She said only a small amount of economists are totally against government intervention, but they seem like a majority (because they make a lot of noise). The reason, she says, is that most economists do agree that government probably should not be involved in perfectly competitive markets, because perfectly competitive markets are efficient. At the same time, however, perfectly competitive markets exist virtually nowhere. Thus, when markets are not perfectly competitive, there is market inefficiency and perhaps a good reason for government to get involved to try to increase the efficiency of the market.
Most markets are oligopolies and a small amount are monopolies (which are even more inefficient). Therefore, there are compelling economic reasons for government to get involved to try to increase competition or otherwise reduce inefficient behavior. This is one argument in favor of government involvement in markets—there are others as well—but this one is particularly convincing.
One example, which was brought up in class, is the Clayton Antitrust Act of 1914. It is one of the many antitrust laws passed throughout American history and is specifically aimed at preventing the rise of corporate power. The late nineteenth century and early twentieth century were interesting times. This was the time of when the Republican Party was still a fairly young party (it was formed in the middle of the nineteenth century). At some level, Republicans of this era represented the true ideals of Republicanism. William H. Taft and Theodore Roosevelt, for example, were completely against big corporations. The history of these presidents, particularly their domestic economic policy, is quite fascinating, and there is great literature and documentaries on this topic. These early Republicans are what were called “trust busters.” They saw government power as one counterweight to corporate power, which they found subversive. So they busted trusts, so to speak, and they increased regulations. Roosevelt’s Square Deal endorsed these principles and was totally supportive of progressivism. Those were the ideals of early Republicanism. And I believe many of these ideals have been lost in today’s Republican Party.
Update (3/31/2010): I just want to clarify that I do not mean to misconstrue the position of Dr. Komai. She has made it clear to me in class that she prefers to stay in the center or the middle of issues. It’s not my intention to brandish her as a leftist of some sort who is automatically in favor of government intervention in markets. That’s not my position either.
The point that I think ought to be taken here is that market fundamentalism is misguided. We often here that governments are inefficient and that we should “just let the markets work.” It might certainly be true that governments are inefficient, but less heard is the fact that markets can also be inefficient. I personally do not think this message is conveyed a lot—certainly not as much as the message of government inefficiency is. So my point isn’t to say governments are great, that we should have intervention everywhere, and so on and so forth; instead, I am pointing out that markets are not as great as they are lauded by some on the right, particularly market fundamentalists and Austrian economists. It’s simply my feeling that when people are taught about markets, especially in courses that introduce the principles of economics, they usually are not hearing the complete side of both stories. What’s being projected, I think, is skewed a bit. That’s the part I take issue with. We can, of course, always quibble about the right balance of things—but that’s not quite my objective here.