Hello. I’m Craig and this is Crash Course
Government and Politics and today we’re
going to turn to a topic that is near and
dear to our wallets at Crash Course: economics.
Now, I know that dedicated fans are saying:
“Hold on Craigers, you have a whole series
about economics. Tell me about government.” To those
fans, I say: “you’re right…and don’t call me Craigers.”
But this episode is going to be about the
role that government plays in the economy,
specifically, the way that government creates the
market economic system that we know and love.
[Theme Music]
Before I get into the ways that government
creates a market economy, let me be right
up front and say that we’re going to posit
that without some government, it wouldn’t
be possible for a market economy to exist.
[gasp] Whaaaaa?
I realize that this is a bit controversial,
with many people believing that markets are
natural phenomena that follow laws like “supply
and demand” that are analogous to real physical
laws like, say, gravity. Which is also a movie
starring George Clooney - he aged so well.
This is an interesting construct and one that
has important political ramifications, because
if you believe in it, then basically there’s nothing that the
government can, or should, do to improve the economy.
I’ll leave it to commenters to argue this
point, but I stand by my statement:
We wouldn’t have a market economy
without government.
So economically-minded political scientists,
AND politically-minded economists, will tell
you that there are a number of ways that government
structures the economy in the U.S. I’m going
to go over eight of them, although there might
be more.
So, in no particular order, here it goes. The government
creates and maintains a market economy by:
establishing law and order;
defining rules of property;
governing rules of exchange;
setting market standards;
providing public goods;
creating a labor force;
ameliorating externalities; and
promoting competition.
I think most of us can agree that a big part
of the government’s job is to establish
law and order. This idea goes back at least
as far as the Enlightenment and Thomas Hobbes,
but since this is not Crash Course: Political
Philosophy, I’m going to move on.
Law and order helps to structure the economy
by providing predictability.
It is much harder to engage in trade or production
for profit if you suspect that what you have
to trade or sell may be taken away by bandits,
like the Hamburglar.
But -- only -- in that case only if it’s
burgers that you are actually trading.
But it’s not just that the government, if
it’s doing its job, can protect us from
being robbed in the literal sense of the Hamburgler
stealing our delicious, delicious burgers.
The government creates a legal system that can punish
people who commit fraud, and knowing that they can
be punished prevents people from committing fraud.
Or at least I hope it does. Most of the time it does.
Don’t do fraud kids. The second way that
the government structures the economy is by
defining rules of property. Now there are
many people who will tell you that property
is an inalienable right, sort of like something
given by God. I’m looking at you John Locke.
And John Locke would respond, “don’t tell
me what I can’t do” but I would suggest that
without government what you think of as your property
might not be as “yours” as you think or want it to be.
But isn’t this sweet polka dot button-up
I’m wearing mine? Well, it is because I
paid for it and we have laws that say that
payment for a good confers a title to it – we
see this especially with land, or as it’s known to
the law as “real property” or perhaps “real estate.”
We don’t actually receive written titles
when we buy most things, but according to
the law, if I can establish ownership by proving
I paid for this shirt or somebody left it
to me in their will or something then it’s
mine. And if someone takes it from me, I can
bring the law down on them - the courts, the legal
system, or maybe the sheriff will help me get it back.
A really concrete example of the way the laws
create and protect property rights are trespass
laws, which allow you to tell those noisy
kids to get off your lawn. Without trespass,
who’s to say it’s not their lawn?
Basically ownership of anything is a bundle
of rights establishing what you can do with
that thing, whether it’s your car, or your
house, or your eagle. And without legally
established ownership rules, we can’t buy
or sell or punch anything.
And speaking of buying and selling, another
way that the government structures the economy
is through setting and governing rules of
exchange. Let’s go to the Thought Bubble.
In most states there are complex rules that
explain how and when, or even if you can sell
something. For example some localities, (like
Indiana) have so called “blue laws” that
prevent you from buying or selling alcohol
on certain days. Some counties in some states
are completely dry, meaning that you can’t
buy or sell alcohol at all, and for a brief
(terrible) period in the US – prohibition
– the Eighteenth amendment to the Constitution
prohibited the “manufacture, sale, or transportation
of intoxicating liquors” Manufacture, sale,
and transportation, sound like the three main
ingredients in an economy to me.
Some exchanges are still flat-out forbidden
by laws in the U.S.. Many drugs are called
controlled substances for a reason, and that
reason is that they are subject to government
control. Some drugs are prohibited outright
and if you make or sell or buy them you can
be punished by the government. There are also
laws preventing you from selling yourself
into slavery, or from selling your body through
prostitution, or selling parts of your body
like your kidneys. Some economists may question the
wisdom of these rules, but they exist and by making
and enforcing them the government can exert powerful
control over what can and cannot be exchanged.
Thanks, Thought Bubble. Probably less controversial
than the rules governing exchange is the government’s
role in setting market standards.
This is something governments have been doing
for a very long time, and you’ve probably
learned about it in history class as the government’s
setting up weights and measures.
This may not seem like such a big deal until
you consider that if you are paying someone
for a pound of chick peas, you need to know
what a pound is...
if you’re going to get the right amount
for that sweet hummus.
This goes for measures too. If I am buying
an acre of land, I want to make sure that
I’m getting 4,046.86 square meters of land,
or 43,560 square feet. And if I buy an acre
in Scotland, I’m going to get even more
since a Scottish acre is the equivalent of
1.27 U.S. acres. Plus no one will look at
me funny when I’m eating my haggis.
Basically this means is that the government
insures that buyers and sellers are operating
on the same playing field. This used to be
even more important when currency contained
precious metals, but I don’t want to get
into a big argument about pennies and nickels
-- that's John Green's thing, and we've all
established that I'm not John Green.
This brings us to public goods. Public goods are
things and services that the government provides that
can be enjoyed by everyone and, once provided, cannot 
be denied to a particular subset of the population.
One example is public transportation: in many
places the government provides bus or subway
services to residents, not for free, but at
highly subsidized costs, although if you’ve
ridden the New York Subway recently it doesn’t
always seem like the subsidies are big enough.
In many cases the government steps in to provide
public goods when markets wouldn’t. It’s
not likely that private companies would provide
an air-traffic control system, and even if
they did, it would have to be highly regulated
by the government anyway because you don’t
want different cities and states enacting different
rules about air-travel. That would be a literal disaster.
Also, if it were up to unregulated markets,
there wouldn’t be any flights to places
with small populations because they wouldn’t
be profitable.
A really good example of the government providing
a public good where the market wouldn’t
step in is the rural electrification projects
of the New Deal, the most famous of which
sprang from the Tennessee Valley Authority.
It wouldn’t have been profitable for power
companies to provide electricity to rural
towns and farms, so the government stepped
in and provided it. And since without electricity
it’s pretty hard to watch Crash Course,
I’m glad they did.
We'd have to do, like, a Crash Course Live
Play.
And I'm not good at live theater.
You might have heard that the government is
not a “job creator” and in some ways that’s
true, except for government jobs like firefighters
and public school teachers and, if we’re
talking the federal government, soldiers and
sailors. But there are other ways that government
efforts help to create a labor force.
The main way this happens is through compulsory
education laws. States require that kids go
to school up to a certain age and this is to ensure,
or at least try to ensure, that when they
become adults they will have a level of competence
that will enable them to be productive workers.
Of course, employers could provide the necessary
training at their own expense, but why would
they do it if the government provides it for
them?
Government also helps create the workforce by
providing student loans, which help people pay for college.
And that's why college is so easy to pay for
now.
Right?
Wink.
There are government-run training programs
and, I suppose, the potential for the government
to employ more people, like it did during
the Great Depression with programs like the
Works Progress Administration and the Civilian
Conservation Corps.
Now if you’ll allow me to put on my economist’s
hat – Stan, do we have budget for an economist’s hat?
No. Apparently economists wear very expensive
hats. I will try to explain what the government
does to ameliorate negative externalities. I love my
externalities ameliorated. Especially the negative ones.
An externality is an external effect that
is a byproduct of a market transaction. They
can be positive or negative and can also be
seen as the difference between the private
cost and the social cost of economic behavior.
Here’s an example. Driving is an economic behavior.
Back in the 1970s gasoline included lead, which
made engines run better but also polluted the air with
lead, which, as we now know is very bad. Very, very bad.
Buying leaded gasoline and running your car
on it was a private economic transaction but
air pollution was a very public cost that neither the
seller of the gasoline nor the purchaser had to pay.
And air pollution was very costly in terms
of public health. So the government ameliorated
this by outlawing lead in gasoline and creating
regulations that limited air pollution generally.
What this did was force companies and, by extension,
purchasers to pay for these negative external costs.
Regulation is one way to deal with negative
externalities. Another is through taxes, which
we’ll deal with it in another episode.
The last way that the government creates our
market economy, at least the last way I’m
going to talk about, is by promoting competition.
According to our old friend Adam Smith, the
essence of a functioning market system is
competition, and in a perfect world competition
would ensure that people got the best products
at the best prices.
But history has shown that corporations and
individuals have often tried to stifle competition
and create monopolies. If there’s only one
firm selling a product, that firm can charge
whatever it wants, and this monopoly
condition doesn’t usually benefit consumers.
At least not as much as it benefits monopolists.
So government can and has stepped in to create
laws to regulate monopolies. The best known
of these are the anti-trust laws, which are
sometimes used against big corporations, like
Standard Oil or more recently, Microsoft.
And the government can also grant anti-trust
exemptions that allow monopolies, as it did
for Major League Baseball. Either way, the
government, under the Commerce Clause in the
Constitution can pass laws that promote or
inhibit competition, although usually it tries
to make the marketplace more, rather than
less, competitive.
So that's why I say the government has a big
role to play in making a free market economy.
You may not be convinced that without government a
free market system wouldn’t be possible, and that’s ok.
You can think what you want. It's a free market.
Thanks for watching. See you next time.
Crash Course Government and Politics is produced
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Crash Course was made with the help of all
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