Big Government and Big Business Do Not Go Hand in Hand

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:

– Legislate;

– 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.


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  1. #1 by Clay Forsberg on December 11, 2011 - 12:59 am

    Nice post. As you so rightly say … decoupling the two “institutions” will be very difficult. Defanging the government will do nothing than tilt the balance of power wholly in the hands of the corporate behemoths. And gutting the foundations of capitalism is not the answer either.

    I believe the only way to take back our streets is to … well, “take back our streets.” The government serves certain purposes, some of them they should, and some we can find other ways (more efficient ways) to accomplice the same goals. Why can’t we bond together as communities to identify needs and help solve them ourselves on the grassroots level. And the power of a helping hand is contagious, producing results far beyond what we thought possible.

    Government is the only institution that’s influence can be diminished. Is there a law that says that we have to shop at Wal-Mart or Target or Home Depot? There was a time when these giant box stores weren’t on every other corner in every town in the country. Out of every dollar spent at a locally owned business, 45 cents stays in the community – providing the capital, privately and publicly, to nourish our neighborhoods. Out of that same dollar, only 15% stays around, with the bulk of it going to either oversees tax havens or the pockets of already bloated C-level executives.

    The longer we keep handing over our futures to those that have no real interest in our wellbeing, the deeper this hole we’re digging will be. We have the power, whether it’s with our benevolence or our pocketbooks – to take back the control … to back our futures. We just have to have the “where-with-all” to change our behavior and put up with the small inconveniences.

    It’s time to choose – Main Street over Wall Street, and Main Street over Capitol Hill.

    • #2 by Unlearningecon on December 12, 2011 - 5:19 pm

      Thanks for your post. I agree that currently, the only feasible way to combat our problems is through grassroots political movements, for example setting up credit unions.

  2. #3 by Blue Aurora on December 13, 2011 - 8:58 pm

    As someone who is not a Westerner, I notice the parallels with the Asian Financial Crisis back in the 1990ies. Just like now, there are accusations of cronyism and corruption on the part of government officials and wealthy businesspersons. I find these parallels ironic.Then again, aren’t they to be expected in speculative euphoria that is followed by debt deflation, a la Irving Fisher’s “Booms and Depressions” (1932)?

    • #4 by Unlearningecon on December 13, 2011 - 11:52 pm

      I assume you mean they are ironic because the West was all too ready to lecture Asia when they got into trouble?

      • #5 by Blue Aurora on December 14, 2011 - 1:54 pm

        Yes, I did mean that.

        By any chance, have you read Irving Fisher’s Booms and Depressions?

      • #6 by Unlearningecon on December 14, 2011 - 5:06 pm

        I admit to not having read any Irving Fisher although I plan to soon.

      • #7 by Blue Aurora on December 14, 2011 - 6:25 pm

        So I take it that you’ve downloaded that PDF link I gave to you? If so, wise decision. His debt deflation analysis is worth looking into.

      • #8 by Unlearningecon on December 16, 2011 - 3:58 pm

        I have downloaded it, bit busy at the moment though (exam time!)