Capitalism Requires Government
"Americans need to realize that our economy has thrived not in spite of government, but in many ways because government."
Without a whole host of government rules, capitalism could not exist. Even regulations and social programs help
sustain a market economy by fixing many of its serious social and economic problems.
One of the most common and misleading economic myths in the United States is the idea that the free market “natural” – that it exists in some natural world, separate from government. In this view, government rules and
regulations only “interfere” with the natural beneficial workings of the market. Even the term “free market” implies can exist free from government and that it prospers best when government leaves it alone. Nothing could be further
from the truth. In reality, a market economy does not exist separate from government – it is very much a product government rules and regulations. The dirty little secret of our “free” market system is that it would simply not exist we know it without the presence of an active government that creates and maintains the rules and conditions that
allow it to operate efficiently.
Government Rules Make Markets and Capitalism Possible
Markets, like governments, are very much social constructs. The market is a set of behaviors that is structured by
rules, and many of the most important rules have been developed and enforced by government. Without these our prized free-market economy would be a stunted and feeble version of what we see today. To see how this is case, lets looks at these essential “rules” – the vast infrastructure of laws and policies that make a modern capitalist
Limited Liability Laws. Capitalism requires capital – lots of it. But without limited liability laws, investors are unlikely risk investing their money in businesses. In the 19th century, before the passing of laws that limited the liability investors, anyone who put money into a business that then went under could be held liable for the debts of the
company. They could have their personal assets seized and could be financially ruined. Needless to say, this
discouraged investment. Without limited liability laws, the economy would not have access to the capital it needs grow and prosper.1
Property Rights. Without the right to own property and dispose of it as you wish, capitalism as we know it could exist. These legal rights are created and protected by the government. Moreover, in the U.S., the federal courts have
extended to corporations the same property rights given to citizens. Corporate property rights – one of the main instruments that insulate business from government power – can be created and maintained only by government.
Law and Order. A market system cannot work well without a functioning criminal justice system. Otherwise, organized
crime would easily take over large sectors of the business community. Extortion, bribery, kidnapping, and murder
would become the reigning corporate model. Without the rule of law, our economy would resemble the “mafia
capitalism” that Russia has suffered from in its transition to capitalism.
Bankruptcy Protection. Business is inherently risky and one of the largest risks is business failure, particularly during
recessions and depressions. In the 19th century, before the creation of bankruptcy laws, business failures would
usually saddle entrepreneurs with large and ongoing debts, making it impossible for them to make a fresh start often putting them in debtors’ prison. Investors and creditors also often failed to get any of the money due to them.
Bankruptcy laws protected otherwise healthy businesses that were temporarily short of funds. And these laws allowed
entrepreneurs to be eventually freed from crushing debts. Along with limited liability, bankruptcy rules formed a financial safety net for entrepreneurs. It is important to note, however, that bankruptcy laws were passed not simply of concern or sympathy for failed entrepreneurs, but also as a way to lessen economic risk and therefore encourage
more investment and economic growth.
A Stable Money Supply. Without reliable money, markets would be based primarily on barter and thus be extremely
limited. In the U.S., before the Civil War, almost all paper money was issued by private banks – not the government.
This was an unreliable and incredibly chaotic system. Sometimes merchants would not even accept certain
currencies. It also meant there was no real control over the money supply – which has a crucial impact on inflation
and economic growth. Widespread commerce and a stable economy both require a stable and dependable money
system – one in which consumers and merchants have faith. This can only be provided and maintained by the government.
Patents and Copyrights. Large portions of our economy would grind to a halt if the government did not grant patents
and copyrights. Without this massive intervention into the free market, the drug, music, publishing, and software
industries could not exist. Bill Gates likes to think of himself as a self-made man, but he would not be one of the
richest men in the world if the government did not make it illegal for anyone but Microsoft to copy and sell Windows.
Banking Regulation and Insurance. As we have seen recently, a capitalist economy depends heavily on stable to finance growing businesses. But banks are inherently vulnerable to “runs” – where worried depositors all seek take out their money at the same time. Banks cannot survive runs because they have loaned out most of the money
deposited with them and therefore cannot pay it out to a large number of depositors at once. Before the passage banking regulations and federal deposit insurance, banks regularly had runs and failed. The main reason that no disastrous runs on banks (and money market funds) during the financial panic of 2008 was that government there to guarantee those deposits.
Corporate Charters. Capitalism today is corporate capitalism. But the corporation itself is a creation of government.
Corporations can come into being only through charters: the legal instruments by which state governments allow
businesses to incorporate. These charters and state business laws define what a corporation is, how it is organized,
how it is governed, how long it may exist, who has a say in decision making, the rights of stockholders, the extent liability, and so on. Most states also retain the right to revoke the charters of corporations that break the law or harm
the public interest, though this power is seldom used these days.
Commercial Transaction Laws. Businesses could not operate effectively without laws governing commercial
transactions. Few would risk doing business on a wide scale unless there was some way of making and enforcing
contracts. Who would sell goods if they couldn’t be sure they would be paid, and who would buy goods if they couldn’t
be sure they would receive them? The Uniform Commercial Code is a set of legal rules that determines, among things, what a valid contract is, how contracts can be enforced, and various remedies for fraud, default, etc. It is 800 pages long and covers every aspect of commerce in great detail, including laws governing the sales of goods,
payment methods, receipts, warrantees, titles, shipping of goods, storage of goods, how sales are financed, and leasing of goods. It is the legal infrastructure that allows business to be conducted smoothly and reliably.
International Trade Law. Global capitalism would be impossible without trade. Governments create the legal
frameworks – the treaties and international trade laws – that facilitate and make this trade possible. “Free trade” misnomer because it implies that it is international trade that exists free of any political framework. But this is hardly
the case. The North American Free Trade Agreement, for instance, takes up two volumes and is over 900 pages – covering such things as tariffs, customs, dumping, corporate and investor rights, intellectual property rights, financial
services, government procurement, and dispute resolution procedures. It also establishes a secretariat, a
commission, dispute panels, scientific review boards, eight industrial sector committees, and six working groups oversee implementation of this agreement. It turns out that free trade requires a great deal of regulation.
Enforcement of Laws. All of these rules and laws that facilitate business and markets have to be enforced, otherwise
they are worthless. Just as international trade treaties require elaborate enforcement mechanisms, so do all our
national laws that facilitate the business process. And this is no small effort. We and our governments spend billions
of dollars every year to provide police to protect private property, courts to interpret and enforce contracts, and agencies
to protect patents, oversee banks, and act as watch dogs in the stock and bond markets. It is revealing that most suits are not brought by individuals harassing corporations – as conservatives would have it – but by businesses
suing other business. The courts are indispensable for resolving business disputes and thus ensuring the smooth
operation of the economic system.
To see how just how essential these government contributions are to the workings of a free market system, you
merely have to imagine what it would be like if these measures didn’t exist. Or if we didn’t enforce these laws. Imagine
that investors were liable for all debts of a company, that there were no patents, copyrights, or property rights, that
contracts couldn’t be enforced legally, that there was no official and stable money supply, and so on. In such a markets would be very limited, and economic growth severely stunted. It would hardly resemble the economic world
we now live in.
Conservatives would like us to think that there can be a strict boundary between public and private in modern
economies. But this is impossible. As the points above make clear, markets and capitalism are quasi-public entities
– made possible by a myriad of government rules and laws that establish many of their basic inner workings. We think of the “private market” as existing separately from the public sphere, but it does not.
Football and Capitalism: The Rules Make the Game
Consider this analogy: free-market capitalism is constituted by government laws in the same way that sports are
constituted by their rules. When we watch football, for instance, we usually see it as a freewheeling game with exciting
runs and daring passes. But in reality, football is a highly circumscribed and regulated activity. It is only made possible
by a large numbers of rules and regulations that cover everything ranging from the size of the field and the ball, number of downs, how scoring occurs, how tackling and blocking must take place, what constitutes a legal play, so on. And without referees to interpret and enforce these rules, football as we know it would descend into chaos. defining nature of these rules is shown by the fact that there are different kinds of football, depending on the rules. Canada, for instance, the field is much larger, teams have one more player, and there are only three downs. In League football, the clock rarely stops, the fields and goal posts are much smaller, and substitutions are very limited.
The rules make the game.
Just as rules can create different kinds of football, government laws can create different kinds of capitalism and
market relations. This clearly shows how market economies are actually political constructions – with their basic
institutional arrangements being developed and managed by government rules.