I’ve seen a few things like this, and whilst I agree with the sentiment partially – framing the crisis as ‘government’ or ‘market’ has lost relevance because they have amalgamated and are now one and the same – it seems to imply that big government is somehow associated with crony capitalism, and by extension, that cutting back state spending and regulation is a vital part of reforming capitalism.
But are there any foundations for this argument? No matter how small government is, it will always have the power to:
- Use public money (for bailouts);
- Use force to protect vested interests
Thus it seems a complete non-sequitur to say that big government and big business are part of the same problem.
As usual, free market proponents have done our job for us, taking the rug out from beneath their own feet with Public Choice Theory (PCT). At its most basic level, this implies that governments will make concessions to special interest groups for votes, such as oil subsidies, which cost the average voter close to nothing but benefit certain groups significantly.
PCT suggests that democratic capitalism will always have a government that gives concessions to corporations. Libertarians seem to think this is an argument in favour of capitalism, but of course it brings us to Lipsey and Lancaster’s Theory of the Second Best. We are forced to accept the reality of capitalism: the capitalist class can use government apparatus to advance its own interests. On top of this, there is also no substantial justification that making government smaller will stop this process. Thus, we must conclude that limiting regulations need to be imposed to protect the public from these realities.
Naturally, the crisis offers a clear example of this problem in action. Post-Great Depression, three main regulations were implemented: government guarantees and insurance, Glass-Steagall, and a plethora of financial market limitations. With ‘free markets’ as the intellectual justification, the latter two were swept away, leaving just the former. According to ‘free market’ reasoning, this is good because it more closely approximated the ideal, frictionless state of neoclassical economics. However, according to Lipsey and Lancaster, it may well have been counter-productive. Score one for the Theory of the Second Best.
Our version of capitalism has always involved the government and the wealthy in bed together, and barring some sort of revolution this looks set to continue. Thus, dismantling the state will do nothing but benefit those on corporate welfare, and false equivalences between big government and big business should not be taken seriously.