Government Is Part of the Market

Why the private and public sectors need each other

Public dollars put a man on the moon, but they did so much more than that.

On July 20, 1969, the men of the Apollo 11 mission realized the late President Kennedy’s vision. They walked on the moon before the end of the decade, and the United States achieved victory against the Soviet Union in what we now call the Space Race. The moment is burned into our cultural memory; millions of Americans — indeed, millions of people around the world — remember exactly where they were as they watched the television broadcast of the lunar landing. This is no surprise either. It was an undeniable triumph of the American way of life over the Soviet way of life, over communism. It was an event worth remembering.

Hatred against communism continues to abound in America. This is perfectly understandable. The communist states of the Cold War were among the most repressive in all of history. The handful that remain into the Twenty-First Century, such as North Korea, have failed to change that narrative. Americans continue to believe, accurately, that communism is a deadly method of governance. Capitalist democracies are the best system that we have yet observed.

This antipathy for communism and love of a free market of individuals, however, approaches pathological levels. A massive bloc of the voting population, perhaps as high as 40%, has come to have immense distrust of anything connected to government. These sentiments have manifested themselves in the emergence of charter schools, calls to privatize Social Security, a push for a flat tax, deregulation of fossil fuels, the end of Net Neutrality, and a general agenda of slashing the number of public employees. One can perhaps surmise that the vast majority of this 40% maintain a fond pride for the success of America in the Space Race, a race that was won by our government and funded by public dollars. Americans are not without some level of irony, it would seem.

This pathology is most likely rooted in a simple misunderstanding, an error in the conceptualization of what government is. The language of the Cold War era appears to have done us few favors on this front. The idea that a free market is inherently and exclusively private is the unhappy result. This is, however, incorrect. The public sector is not some peculiar entity that is governed by different laws of nature than the private. A better way to look at government under the American system (and most other democratic systems) is as a corporation of which all citizens are equal shareholders, one that exhibits far more self-restraint and internal checks and balances than any other company.

While a lone firm is interested in numeric profits — that is, more money gained than spent — the government as a company does not have the luxury of a precise balance sheet. It pursues the growth of the whole national economy, and this is something that even the brightest experts can only estimate within a margin of error. Much of this has to do with the fact that not every dollar can be traced. More of it still is based on the fact that every single asset has to be valued in monetary terms, and there is never a single, consistent method of appraisal.

Even when the wealth of the economy is adequately assessed, other measures need to be considered as well, such as standard of living, infant mortality rates, and even general happiness. The latter is actually crucial. I recall my professor in Economics 101 stating that dollars are supposed to be measures of human happiness, that economics is simply the study of trends of happiness rather than trends of wealth. It is hard to say what else a dollar might represent, at its most fundamental.

This may explain why the government makes efforts to ensure that all citizens benefit, that gains should exist collectively rather than simply at the aggregate. After all, what kind of corporation would issue dividends to some of its shareholders but not to others? This may be the only truly significant difference between the government and other companies. Being all-encompassing, government must always have an eye for the collective. Individuals firms, which deal only with a fraction of those same “shareholders and clients,” have little reason to think beyond the scope of their operations.

While free markets, as we understand them today, have only been around since the Eighteenth or Nineteenth Centuries, governments have been around longer. The states of the ancient and medieval eras achieved collective benefits, with far greater imperfection than that of the United States, but the theory of collective benefit was still at work. Just consider the underlying premise of feudal societies: if peasants work the fields and provide food for the country, then the lords will protect them from danger and ensure the stability of the realm. Government thus provided a system in which a lot of people had a lot of food and a lot of safety.

Of course, the systems were more complicated than that. A plethora of other laws were issued to counter threats to the collective that were perceived by leaders. Consider the tradition of dueling as a means of solving disputes, which spread over Europe as the Germanic tribes migrated south and formed their kingdoms. These kings took note of the fact that revenge, even formalized revenge, had a tendency to spiral out of control, killing their subjects and therefore depriving the country of labor and soldiers for defense. These kings then introduced weregilds, prices that were to be paid by the offender in the event of injury or death. Instead of revenge, individuals or their families were paid their compensation, the matter was considered resolved, and thousands of unnecessary deaths were avoided. The benefit to the collective should be obvious here.

Times have changed. Relatively few people will fight to the death over insults anymore. We live in a more enlightened society, thankfully. We also live in a more advanced society, where new technology and greater populations have opened the doors to problems that our ancestors of the feudal era would have never imagined. The scale at which human decisions have consequences is so great that it is difficult for individuals — still wielding the brains of a hunter-gatherer species that had limited resources and little potential — to understand them completely. This was arguably true even on the topic of revenge hundreds of years ago, but it is true today of almost every facet of our society. Let us then return to the Space Race as a microcosm of this trend.

America would have never put a man on the moon without the government, plain and simple. Private firms have only just started to venture into space on their own, and they still only exist because of the groundwork laid down for them by the government’s efforts in the preceding decades. A lot of dirty work had to be done before companies could hope to make space travel possible and profitable. Individuals acting autonomously would never have gotten us where we are now, as they had no reason to do so.

The government, however, saw a collective need for space exploration. It presented both understandable, military advantages as well as political significance. In a world where several countries were flipping to communist systems, the superiority of Western capitalism and democracy needed to be made apparent. President Kennedy did not have the luxury of merely assuming that other nations would agree that the American way was superior to the Soviet way. While no individual would have mustered the resources and willpower to put a man on the moon by 1969, these individuals certainly desired the preservation of the American system and the freedom it allowed them. The government thus filled this void, and it is clear that this project proved popular. In essence, it could be argued that there is a market for government programs.

Left to their own devices, individuals in a free market will prove very productive. Several needs will be met, and with each passing day innovations will be discovered. Nevertheless, even the most efficient individuals will have blindspots that prevent them from perceiving problems for the collective. The executives of Ford Motor Company, for example, could not perceive that some of the engineers under their employ might have been better used in developing vehicles for space exploration. It is unlikely that anyone in Ford was opposed to the Space Race, but how many would have actually thought to do it on their own?

It is in moments like these that the government becomes a necessary part of the market. Individuals are good at operating within a capitalist, democratic system, and they are good at understanding their firms as entities in that system, but they are poor at understanding the system as an entity unto itself. Thriving markets, for example, imply certain consistencies, in the health of workers, in the cycle and flow of money, or in the safety of the streets. A sufficient lapse in any of these things can lead to systemic failure. Consider, for a moment, how a victorious Soviet Union in the Space Race might have increased the risk of systemic failure in the United States. The justification for public programs is thus made apparent.

Systemic failure is not the only thing meant to be avoided through the state as an actor in the market. The maximization of the system is also only possible with a vibrant government that tackles the threats to the collective, due again to the blindspots of private individuals. Suppose a factory, which is the primary employer of residents in a town, is spilling poisons into the local river. As the town’s water source, the contamination of the river will inflict negative health effects on the town’s population. This means that the workers at the factory will not only be less healthy, but so will the workers of every other business in that local economy, all of which support the factory’s operations indirectly. The government may then try to impose a regulation to prevent the dumping of poisons, which the company that owns the factory would likely protest, citing the burdens of the regulation’s cost. What they would fail to realize is that they are already paying a cost, in the decreased productivity of their unhealthy workers. In order for these workers to maximize their output, they need to be at optimal health, but since poor health is not something that is often considered on the company’s balance sheet, while an explicit regulation is, the company then erroneously protests the regulation as imposing an inefficiency on the market.

Yet, poor health has costs. It not only decreases productivity, it requires individuals to spend money on treatment, money that could be spent on other goods and services to develop other sectors. The real imposer of inefficiency on the market is, therefore, the factory polluting the river. One must be mindful of the fact that factories such as this are all across the United States and that their poisons will go through every town downstream on their way to the ocean. Thus, it is not hard to imagine that, sans regulation, a nationwide health crisis — and consequently a weaker economy — would be the result. The only conceivable solution to a dilemma of this magnitude is government.

Keep in mind, this is not a stealth argument for state ownership of market assets or even that government should be the preeminent player in the market. Ideally, the government will account for as little of a percentage of GDP as possible. The main idea is that government provides a utility that is demanded by the market and cannot be provided by a private sector of individuals. Even if one contends that a corporation is more than just the individuals that compose it, it is still administered by individuals who are driven primarily by individual goals and a balkanized bottom line. Ergo, it is still subject to blindspots.

With that said, let us also look to further evidence that government is not altogether distinct from the market. The way that government operates or can operate still makes it similar to a private company, and the most obvious way this is expressed is through the use of money to promote its agenda. Government, in theory, should not have to pay for anything; it could use force. It could have, during the Space Race, ordered engineers to produce the necessary rockets and lunar rovers, with the threat of imprisonment or even execution, but it did not do that. Under the American system (and most Western systems), people who are employed for public projects are paid for their services, as if they were working at any other firm.

This may come off as a platitude, and to an extent it is, but the implications are important. This shows that the idea of market forces is in play, and we see it in play in other areas. For example, in most companies, the best pay is reserved for the positions of higher rank and for the skills of greater necessity. If one wishes to reach that higher rank and earn the better pay, they have to work hard to prove their competence and productive value over that of their colleagues. Similarly, by paying more for the skills that are scarcest, a company increases the chances that these skilled workers will come to work for it.

The government operates with a similar mindset. Let us look at how it compensates a Private (E-1) in the U.S. Army. The annual pay comes to $19,199. A civil engineer for the U.S. Forest Service can expect to make $46,609 per year. This is not because a civil engineer is more important than a solider who defends their country. Indeed, to be a soldier is a dangerous line of work. America could probably last a year without civil engineers, but it seems unlikely that it would last that long without an army. Nevertheless, there are millions of people who are able to work as entry-level members of the military but not nearly as many people who can work as civil engineers, so in order to entice the latter to work for the public, the government has to pay them more for their scare labor.

The logic of incentives is additionally clear in the Federal Bureau of Investigation. A standard FBI agent can make as much as $62,787 per year. The Director of the FBI, in addition to the extra authority, earns $172,100. Thus, if an agent in the FBI wants to move up and make more money, they are provided a pathway for advancement. They need only to demonstrate their superior value over other agents. Again, this is not to say that the Director is more important than the agent, but by staggering the rewards for public service unequally, it creates incentives toward which public employees can aspire. This hierarchical pay scheme applies to every federal agency, meaning that the market forces that drive competition and innovation in the private sector are still present in the public sector.

The point here is to dispel the frequent idea that government is a uniquely different entity that is immune to market forces, as is often argued by neoliberals. Unlike the feudal states that preceded it, the United States is a meritocracy, with many mechanisms to ensure that work is done ethically and without wasting the taxpayer’s dollars. Cheating and complacency may occur here and there without consequence, but such an accusation by neoliberals implies that the same never occurs in the private sector. Given enough people, private sector or public, there will always be malefactors. Replacing government programs with private enterprises does not solve this problem and may end up creating more.

Some government programs simply cannot be replaced by the private sector because the nature of the service makes it unprofitable to individuals, even if it provides benefits to the collective, as was mentioned before. The solution by neoliberals at this stage would be to close the programs without replacing them. In fact, when enough neoliberals win control of the government, their goal is often to make broad slashes to public funding and to lay off several public employees, with the argument that the recuperated funds can go back to the taxpayer. This is committing the flaw of seeing efficiency only in terms of balance sheets. Even programs that cost more than they produce in revenue, if they produce any revenue at all, have benefits to the collective and the market as a result.

Consider the possibility that a single thing can possess multiple functions, instead of just one. Take the human eye as an example. If someone were to ask what the function of the eye is, one might answer that it is to see. They would be correct that this is its primary function, but the human eye also possesses a secondary function. Compared to most other animals, the sclera (white) of a human eye is very prominent, leaving the iris and pupil easy to distinguish. The contrast between the iris/pupil and the sclera enables a person to see if someone else is making eye contact or looking away. If the capillaries in the other person’s sclera fill up with blood and give their sclera a more reddish hue, then a witness to this event could conclude that they are undergoing some kind of stress. Being a social species that relies on intelligence and cooperation, human beings indubitably benefit from this extra dimension of communication.

Returning once more to the Space Race, we see more secondary functions. First, let us identify the primary function: getting America to the moon before the Soviet Union and the associated political glory. Secondary functions can be found in many areas. One such function was that it gave several Americans employment, and this is common to every government program. People with incomes are able to go out and buy goods, providing all businesses with a consumer base. In short, it provides more liquidity to the economy. More specific to the Space Race, however, was the development of science and technology. Several of the discoveries in engineering and physics that were made in the race to the moon were later absorbed by the private sector.

Plenty of today’s basic items are the product of the advancements made in the Space Race. The smoke alarm was originally invented to detect fires which would have destroyed the spacecraft and doomed the astronauts. Today, they keep nearly everyone from being incinerated in their homes. The memory foam mattresses that allow people to sleep with less joint pain were invented in 1966, in order to increase safety for crew members on these missions. The GPS system in smartphones is made possible by the satellites that the Space Race got into orbit. There are more examples of spillover inventions, but this should suffice to make the point.

One must not assume that these inventions would have never come about without the public sector, but it would have taken much longer because there was no immediate profit in their development to entice that generation of entrepreneurs, and our livelihoods would be all the worse for it. Given the fact that so many mysteries of science are yet unanswered, the hidden miracles and cures to our woes will likely need government to stumble upon them accidentally, even if research (and not sticking it to the Russians) is the primary function of much of these efforts, because individuals cannot build a five-year plan around undiscovered information.

Some might wonder what kind of secondary functions exist outside of a scientific context. It is true; to rely too heavily on the example of the Space Race belittles the whole point. Still, secondary functions can easily be found in other areas. Consider public health care. While the basic goal of public health care is to make Americans healthier (and therefore happier), secondary functions are not hard to determine. One is the increase in worker productivity that comes from improved health.

An effort in Europe was made to improve the health of a sample of workers over a period of twelve months. The results estimated a return on investment of about £3.73 in extra productivity for every £1 spent. Another component of the study estimated an 8.5% increase in worker productivity. It stands to reason that, if the entire population has health care, which would improve their long-term health, then productivity across the entire economy will add up, allowing businesses to flourish. Unfortunately, the United States does not have a comprehensive public health care system like most of Europe, so the full benefits of this are yet to be realized domestically.

Another secondary function of public health care is, as was mentioned before in the allegory of the factory, the removal of health costs from patients which can then be spent on other sectors in the economy, and facts show that public health care is cheaper. There are probably other secondary functions to public health care that, with enough thought, could be identified. Rather than dwell on that tangent, though, it is important to understand why secondary functions are important in this discussion.

The value of secondary functions should be plain to all, whether it is that of the human eye, the Space Race, health care, or anything else. Unfortunately, secondary functions like the ones I described tend have their benefits more directly on the collective than on any individual or firm. As such, they are overlooked on the balance sheet of a firm and regularly disregarded by the private sector. This is not intentional. Remember, this is the product of a blindspot. When made aware of the collective benefits to the market of things like health care, education, infrastructure, and so on, it is unlikely that any business would want to do without them. They just do not know how to tackle these riddles alone.

This is why government is an integral part of the free market. Without schools to make the next generation of employees, without roads to allow the easy flow of goods, and without financial regulations to keep a universal currency stable, most businesses would be far less productive than they are. With government meeting the collective demand of the market, all business operations are allowed shortcuts by default, and output approaches maximization. This is the ideal, capitalist system.

The mistake is to parse markets from governments and assume that they must be in conflict with each other. Healthy markets provide a good tax base for the government, and a stable state provides the consistency by which entrepreneurs can develop predictable business models. It is important for Americans to understand this symbiotic relationship and not devolve into the polarized thinking that one must either favor corporate anarchy or a sprawling, communist state. Some argue that one system is more fair. Some argue that one system is what works.

What is often the case, however, is that what is fair is also what works. The 40% of voting Americans who have a bad relationship with government and a good one with the market might want to sit down and think about just how much the two are intertwined by necessity. To limit the government and the collective benefits it provides to the market is, in the final analysis, to limit the market as well. The success of the United States and its triumph over the Soviet Union are rooted in the ability of the American system to draw from both private and public forces as needed. Neoliberals who try to dismantle this system in the name of the market will therefore only manage to disappoint themselves.

I discuss politics, economics, art, video games, and other interests.

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