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Chapter 26
Public Goods
and the Role
of the
Government
4-1
Karl Marx
And Socialism
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Our Situation
• The Classical Theory of Economics
ADAM SMITH:
“Involuntary Unemployment is
Impossible.
The economy is self-correcting
and self adjusting.”
WRONG!
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The Situation in 1868
• workers-including children-spent 14 hours a
day, 6 days a week on the job
• factory work was unsanitary and unsafe with
no guarantee of compensation for injury or
illness
• 80% of factory workers lived in poverty
huddled in ghettos and tenements
• business cycles made workers the victims of
either high inflation or high unemployment
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How Did This Happen?
• All wealth is a direct result of combining Labor with the
other Tools of Production
LABOR THEORY OF VALUE
• The concept of Private Property has separated the worker
from access to the other Means of Production
ALIENATION
• Private Ownership allows the Capitalist to seize the Surplus
Labor Value of the worker as Profit by paying Subsistence
Wages
EXPLOITATION
• There is a Contradiction between actual production and
rewards of that production evident in the existence of Social
Classes
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Marx’s Market Failures
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EXTERNALITIES
IMPERFECT
COMPETITION
INEQUITY
ASYMMETRIC
INFORMATION
BUSINESS
CYCLES
PUBLIC
GOODS
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Level of Real Output
Marx’s Theory of the Business
Cycle
Peak
Peak
Peak
Trough
Trough
Time
 Twin Problems of the Business Cycle
•
•
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Unemployment
Inflation
Three Facts About Economic Fluctuations
In spite of Marx’s theories, economic
fluctuations are somewhat irregular and
unpredictable.
FACT 1:
11,000
$
U.S. real GDP,
billions of 2000
dollars
10,000
9,000
8,000
7,000
6,000
The shaded
bars are
recessions
5,000
4,000
3,000
2,000
1965
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1970
1975
1980
1985
1990
1995
2000
2005
Three Facts About Economic Fluctuations
FACT 3: As output falls, unemployment
rises.
12
Unemployment rate,
percent of labor
force
10
8
6
4
2
0
1965
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1970
1975
1980
1985
1990
1995
2000
2005
An Interesting Aside About Economic Fluctuations
FACT?:
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Some Economists believe
Technological Cycles have become
shorter.
Alternatives Considered
Unions
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Alternatives Considered
government
intervention
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SOCIALISM
• GOVERNMENT BY DIRECT POPULAR VOTE
• PUBLIC OWNERSHIP OF THE MEANS OF
PRODUCTION
–
–
–
–
–
COMMUNICATION
TRANSPORTATION
FINANCE
EDUCATION
HEALTH CARE
• PROGRESSIVE INCOME TAX
• REDISTRIBUTION OF INCOME THROUGH
CREATION OF A SOCIAL WELFARE SAFETY NET
• ELIMINATION OF DISCRIMINATION
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Alternatives Considered #1
REVOLUTION
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Friedman and Galbraith
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“The proper guardians of the public interests are
governments, which are accountable to all citizens. It is
the job of elected politicians to set goals for regulators,
to deal with externalities, to mediate among different
interests, to attend to the demands of social justice, to
provide the public goods, and to organize resources for the greater
good.”
John Kenneth Galbraith
The Economist Magazine
January 2005
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John Kenneth Galbraith
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All truly important economic activity takes place within giant corporations.
Large dominant firms are immune to competitive pressure.
Wages and prices are artificial creations of large corporations.
Consumers are manipulated by advertising.
The United States is a planned economy run by large corporations.
The government in a liberal society is the ‘public conscience’ which must
– enforce law and order and protect property rights
– serve as a balance to the power of large corporations.
– protect human rights: resolve inequity, prevent discrimination and
exploitation
– promote full employment and a stable economy through taxing and
spending
– model social responsibility: correct externalities, promote culture, and
eliminate pollution
– Provide community investment in public goods such as schools,
transportation, communication, and healthcare.
• 4 Taxation
is the price paid for membership in civilized society
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Roosevelt’s
Second Bill of Rights
In our day these economic truths have become accepted as selfevident. We have accepted, so to speak, a second Bill of Rights
under which a new basis of security and prosperity can be
established for all—regardless of station, race, or creed.
Among these are:
•The right to a useful and remunerative job in the industries or shops or farms or mines of
the nation
•The right to earn enough to provide adequate food and clothing and recreation
•The right of every farmer to raise and sell his products at a return which will give him and
his family a decent living
•The right of every businessman, large and small, to trade in an atmosphere of freedom
from unfair competition and domination by monopolies at home or abroad
•The right of every family to a decent home
•The right to adequate medical care and the opportunity to achieve and enjoy good health
•The right to adequate protection from the economic fears of old age, sickness, accident,
and unemployment
•The right to a good education
All of these rights spell security. And after this war is won we must be prepared to move forward, in
the implementation of these rights, to new goals of human happiness and well-being.
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ADAM SMITH
The Capitalist
Response
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“There is one and only one social responsibility of
business – to use its resources and engage in activities
designed to increase its profits in open and free competition without
deception or fraud.
Businessmen who talk about corporate social responsibility are unwitting
puppets of the intellectual forces that have been undermining the basis of
a free society for decades; in fact, they are preaching pure and
unadulterated socialism.”
Milton Friedman New York Times
13th September 1970
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Milton Friedman
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Economic freedom promotes political freedom.
The only role of the government is to provide order and protect property rights.
Government intervention in the market is ineffective because of
– the rational ignorance of voters,
– the special interest effect from lobbyists,
– the short-sightedness of politicians.
Taxation and spending by the government make the economy less stable.
A uniform flat ax with no deductions is more fair than a progressive income tax.
Social welfare programs don't help the poor; they reward poverty and prevent
investment in human capital.
Free public education is foolish. Anything that is perceived as free is undervalued and
abused.
There is no justification for licensing or regulation; government regulations inhibit the
freedom of individuals to produce and consume as they choose.
The only true solution to the problem of global conflict and poverty is the end of all
trade barriers.
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Friedman’s Government Failures
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RATIONAL
IGNORANCE
RENT-SEEKING
AND
SPECIAL INTERESTS
SHORT-TERM
THINKING
DEADWEIGHT
LOSS
CROWDING
OUT
BUREAUCRATIC
CAPTURE
Friedman and Galbraith
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Chapter
Conclusions
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