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Public Square Econ 1 3 Civics "Democracy is the worst form of government except for all those others that have been tried." -Winston Churchill What Are the Roles Of Government? The political structure wraps around the economic system in what is called the political economy. The constitutional framework, elected officials, political parties, special interest groups, the media, the bureaucracy and citizens compose important elements of the political economy. Their influence and power can be used to advance images of equity and efficiency in society. If personal liberty is favored, the political structure grants economic freedom to capitalists to pursue their interests. Capitalism permits inequalities while pursuing optimal production from scarce resources. If paternalist/materialistic decision-making is favored, socialism is applied to a definition of justice, despite potentially insufficient resource utilization. America is a mixed economic system, dominated by capitalism where normally business firms organize resources to cater to customers in various marketplaces. Yet the political system allows a socialist influence through government programs like education, welfare, and urban transportation. Federal, state and local governments provide about one-third of the total national output, while government controls on capitalism affect the costs of production for many goods and services. Government's role is observed fivefold in America’s mixed economy. First, the government regulates economic activity. Second, the government provides public goods that markets would otherwise fail to produce efficiently. Third, the government Public Square Econ 2 redistributes income through transfer payments. Fourth, the government attempts to stabilize the aggregate economy through fiscal policy or through monetary policy of the banking system by the Federal Reserve (a government agency). Fifth, the government collects taxes and borrows money to acquire the necessary funds to finance its operations. We will inspect most of these roles in subsequent chapters. Key Point: The roles of government are observed five ways and are determined within the political economy. What Are Political Systems? At the polar extremes, political systems are either democratic or authoritarian. A democratic system provides individual autonomy with political and economic freedom. An authoritative system allows little of these things. Instead of tolerance for diversity of opinion, political power is concentrated either in a traditional monarchy, a dictatorship, or an oligarchy of elite rulers. Communism is another type of authoritative system, where only one political party has a set of leaders to rule a country. Freedom loving people prefer democracy, which allows various forms of political and economic equality, active participation of citizens and majority rule. There are two basic forms of democracy. A direct democracy involves citizens voting on issues, while an indirect democracy utilizes elected officials to represent the interests of citizens. In America, direct democracy is seen at the local and state levels through citizens’ initiatives, but indirect democracy is the norm for local, state and federal governments. Democracies rely on a constitutional framework that guarantees certain rights of citizens and provides a government structure to facilitate the political process. There are two primary Public Square Econ 3 constitutional frameworks - parliamentary and presidential. The parliamentary system, such as the one found in the United Kingdom, allows citizens to elect members of Parliament. A majority party is determined by the count of members within parliament. In-turn, the members of the majority choose the Prime Minister who leads the government. Political power is unified between the head of state and majority party of parliament; public policy decision-making is said to be simpler. The presidential system separates powers between branches of government, where the President is not elected by members of a parliament, but by a vote of citizens in every state. What otherwise could be called parliament is instead called Congress in America, where representatives are elected by citizens. The President may not be from the same political party as the majority of representatives in Congress. Powers are separated and political decision-making is more cumbersome. America’s constitution begins with these words, “We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.” The founders believed that a presidential constitutional framework would best achieve the aforementioned goals. They were concerned about authoritative governance, wanted majority rule, representative government and the rule of law protecting citizens from politics. They also wanted to disperse political authority via a separation of powers between and among officials and federal/state governments. America was founded as and continues to be a democratic-republic. That is, government decision-making and policy is made with the consent of the governed. Within the constitution are citizen protections assuring freedom to own property, enter into private contracts and pursue their own Public Square Econ 4 personal, political and economic interests. In addition, rights involving freedom of religion, speech, assembly, petition, and the press are allowed. The Bill of Rights, the first ten amendments to the constitution, guarantees these most basic rights. Twentyseven amendments have been added since the constitution was approved in 1787. The constitution and its amendments therefore established that America has a rule of law juxtaposed with majority rule through its democratic process. The idea is that majority rule cannot necessarily supplant the rule of law. For example, the majority, through their elected representatives, cannot determine your religious practices, nor should it confiscate all of your property. Key Point: A democratic republic allows for both majority rule and the rule of law. How Is American Government Organized? One of three branches of the American federal government, the judicial branch, determines whether decisions and actions by government, business firms and individuals are consistent with the constitution. At the highest level is the Supreme Court, where nine justices (including one Chief Justice) decide the merits of disputes between parties. The nine are appointed by the President and confirmed to life appointments by the Senate, a branch of the Congress. Beneath the Supreme Court are Appellate and District Courts that handle matters not yet deemed worthy of review by the supreme justices. Congress, the legislative branch of government, is bicameral, containing both a Senate and a House of Representatives. Senators from each of fifty states are elected to six-year terms of office; there are two from each state. The House of Representatives has 435 Representatives, one elected per Public Square Econ 5 district. The districts are allocated by states in proportion to their share of the national population. Representatives serve two-year terms. Both Senators and Representatives may run for reelection. Each chamber of the Congress has a leader. The person who is principally in charge of the Senate is called the Majority Leader. The Speaker of the House, who comes from the majority political party, heads the House. Congress has the power to set budgets, tax, spend, declare war, regulate interstate commerce and make laws consistent with the constitution. Since Congress is bicameral, the decision-making on these issues is not easy. A bill becomes law after thorough review by many elected officials. A bill has to be approved by each chamber of Congress. The process involves committees of representatives scrutinizing, amending and approving the legislation for full consideration of all members in their chamber. Invariably the House version of a bill will be different than a Senate version, and a conference committee of representatives from both chambers will be formed to unify the bill into one piece of legislation for approval by a vote of both chambers. The bill becomes law when the President signs it, but the President may reject it with a veto. The Congress can override the veto with a two-thirds vote of both branches. This is difficult to do. Since a presidential signature is important, the President has ample power to persuade Congress toward legislation favored by the executive branch of the government. Besides being able to influence and submit legislation for consideration by Congress, the President is responsible for carrying out laws, directing agencies, negotiating foreign treaties, nominating judges and acting as commander in chief of the armed forces. The President has a Cabinet who head important administrative departments of the government. The President is elected to a four-year term and may be reelected once. Citizens of each state vote for a presidential Public Square Econ 6 candidate, represented by electors who in-turn vote for the candidate via an Electoral College. As the 2000 election of G.W. Bush proved, the election is an indirect democratic process through the states. President Bush won the election by winning the majority of electoral votes but not a majority of the nation’s popular vote. America’s political system is organized in part to respect sovereignty of states. Smaller states with fewer voters have greater influence in presidential elections because the Electoral College system provides two electors (just for being a state) and the additional electors in proportion to its population. The total number of electors for a state is equivalent to the number of congressional members from both the House and Senate for that state. Note that the Senate representation in Congress is different than House representation as well. There are two senators from large populated states like California, and still two senators from smaller states like Wyoming. However, the House representation is proportional to the population, where California contains vastly more representatives than Wyoming. Federalism is the word that describes America’s political system of central government and states. Power is shared with the states through electing the President and members of Congress. In addition, the constitution empowers states to have their own constitutions, governors, legislators and rule of law as long as they are consistent with the principles of the national constitution. In federalism, the power is shared with the states, but federal power is superior. This is different that a confederate approach to government, where state power is superior to the national government. Key Point: Political power is separated through three branches of government and federalism between nation and states. Public Square Econ 7 4 Ideology “Everyone is entitled to his own opinion, but not his own facts.” -Daniel Patrick Moynihan Does Economics Have an Opinion? Labels that tag economics with a particular political doctrine are not very helpful. The discipline on various occasions has been branded alternatively liberal, conservative or whatever is between. If an economist contends that an increase in wages is predictably appropriate for the labor market, then she may be labeled as a person with a liberal ideology. If the same economist argues that the most effective method of increasing wages is greater demand for what labor produces, then she might be considered a conservative. Labeling her work does not help her develop more accurate perspectives, but it serves to categorize it according to commonly understood worldviews. Economics is not liberal or conservative as a general rule, but, generally, a positive science. It does not normally follow an ideological agenda but instead attempts to determine principles free of values. Economists ask the question ‘what is?’ For example, what is the expected outcome upon software engineers when the demand for new generation software increases? Under such a scenario, an economist would likely find that software engineers’ wages tend to rise because their employment service became more significant to others. The example demonstrates how positive economics provide a clear presentation of how principles are derived. In this case, a greater demand for software leads to an increase in wages of the software engineers. By delineating the relationship between software demand and wages, Public Square Econ 8 the outcome is better understood. The outcome may be supported or possibly refuted based upon the criterion presented. Personal values need not enter the analysis. Economists themselves certainly have personal values just like other people. However, the best economic science is one that attempts to be value free. Nonetheless, it is almost impossible to be completely objective. Simply selecting areas of investigation is sometimes related to an economist’s values. Should the economist investigate the wages of software engineers or should she instead examine the market for lesser skilled workers? Empathy for lesser skilled workers may influence the choice. Once more, personal values might shade the framework of her study. For example, affection to families of despair may lead to a rigorous examination of whether or not firms pay competitive wages (as opposed to understanding whether or not workers are productive). Another form of value laden economic analysis involves the economist attempting to understand what ought to be. This is very much normative analysis, and not positive economics. It is unashamedly overlaying personal values within the economic analysis. For example, an economist might attempt to solve the problem – what ought to be the wage scale of lesser skilled workers? Once such a problem is solved, the economist can also lend support by providing predictions concerning the policy goals. A doubling of wages for lesser skilled workers by government decree may be the objective. However, economics would predict that employment opportunities would diminish because firms would have to contend with higher payrolls. Expressing values is not wrong. Values are very important and many economists find it necessary to express their values. (Read carefully and understand that I occasionally do this.) However, it is not really honest to do this in a stealth manner, where positive economics is claimed but normative economics is provided. (My expressed values are especially Public Square Econ 9 noticeable when I use the word ‘should’ in some of the sentences of this book.) Key Point: Positive economics involves determining ‘what is’, while normative economics contains personal values deciding ‘what ought to be.’ What Does The Public Value? Economists’ personal values are not necessarily more interesting or important than public values. After all, public values ultimately impact the benefits and costs of individual, business and government decisions. Government decision-making is often explained by the values of politicians, bureaucrats and special interest groups. Sometimes policies seem to go in opposite directions. For example, positive analysis unveiled a conflict in government policy with regard to tobacco growers. Agricultural policy had promoted tobacco farming by mechanisms that helped support the price of tobacco at higher than free market levels. At the same time, government had crusaded against the tobacco industry with litigation seeking monetary damages from the manufacturers of cigarettes. Positive economics would point-out the conflict in policies and address potential solutions. The simple explanation for conflicting policies is that government decision-making appears to be irrational, inconsistent and without clear purpose. This is certainly true from a macroperspective. However, from the micro-perspective, policy conflicts may be explained by the diversity of values among the parties who affect the decisions. Choices made within government are influenced differently by different people. The chair of the Agriculture Committee that affects tobacco farm prices has different opinions than the Attorney General who pursues legal action. Public Square Econ 10 Completely uniform public values do not seem to exist. Certainly, there are some that are nearly universal – most Americans value the liberties provided by the Bill of Rights such as freedom of speech. However, some liberty rights are very much in conflict. For example, the Second Amendment assures Americans the right to bear arms. Some people view this as the right of law-abiding citizens to protect their property, while others see the Second Amendment as a means for violent people to commit crimes. More debatable are values that transcend the constitutional framework. What goods and services should government provide? Is a strong national defense necessary? Should the government redistribute wealth and income? Are laws limiting individual freedom to choose necessary? These are questions that have been debated for centuries. Yet, a consensus has not been found because of the diversity of opinions among people. Cultural heritage, intellectual exposure and life experience determines individual values. Culture is multidimensional by itself. For example, one aspect is religion. Most people claim to believe in God, but the diversity of faith is seen in the many religions within America. This is true within the dominant Christian faith. There are many denominations, but more striking is the intensity of commitment. Observed are evangelicals, casual church attendees and people who claim but do not practice Christianity. Intellectual exposure has many aspects as well. For example, the so-called cultural revolution of the infamous 1960s certainly transformed many college students; where later some became professors teaching those values to a new generation. Finally, life experience is certainly the most diverse. Each person lives and interacts with families, friends, acquaintances and even adversaries. For example, a personal encounter with a street corner beggar may affect individual attitude toward the poor. The beggar could have been truly needy due to unforeseen circumstances, or instead someone able but unwilling to work. Depending upon the Public Square Econ 11 perception of the beggar, the individual may develop a sweeping generalization about the circumstances of street people and public policy that seems fitting for their situation. Key Point: Public Values are difficult to identify in the aggregate because they are composed of diverse individual values. Are There Different Visions of Reality? Different values often lead to different opinions concerning public policy. However, people of similar values also differ about political solutions to problems. For example, most Americans value an economy designed to promote growth and job opportunities. For some, such an economy requires minimal government involvement – allowing entrepreneurs the freedom to develop jobcreating businesses. Others contend that government should take an active role in providing jobs to guarantee full employment. Therefore, not values, but different visions of reality, concerning the framework of society and the characteristics of individuals within it, explain the differences in opinion. Mental constructs that people have about themselves are fundamental in understanding the differences that values cannot explain. There are sharply different ideas concerning the truth about human tendencies. The various views may or may not seem correct, but they certainly provide the basis in which many derive their political opinion. Although views are diverse, there might be two primary visions of behavior that help define political ideology – the constrained and the unconstrained visions. One vision sees humans constrained by their present intellectual ability and the amount of time to apply what they know. Furthermore, humans have a tendency to strongly focus on themselves, and may behave in a manner conflicting with economic progress. Therefore, a nation is unable to progress Public Square Econ 12 unless its economic system and legal framework mitigate human failings. For example, the US Constitution disposes political power among the branches of government. It does not allow central power to rest with any individual for fear of self-serving political policy. Besides decentralized political power, checks on selfcentered individual behavior come from families, religious and moral teaching, and the interaction of buyers and sellers in the marketplace. The second primary view of reality is that society is unconstrained to do well, while people (and especially their leaders) are basically loving, concerned citizens. People are able to control self-interest for the betterment of the society’s general interest. The economic system should be arranged to harness the collective goodwill that has unlimited potential for improving society. People with unconstrained vision often conclude that society can find identifiable common purpose. Great leaders would advance the political agenda for the sake of all people. Constitutional checks and balances of power may not be as necessary because leaders are not normally consumed by selfserving political policy. The unconstrained vision requires people to trust their leaders, even if government must limit some aspects of individual freedom when it is outside the bounds of the common purpose. This model is similar to the way families operate. Members of a family often share common values, and therefore, the choices made by parents are within the best interest of the individual members of the family. The decisions are wise and dedicated to the general welfare of all. The assumption is the same when the family model is applied to the nation; society is better-off when individuals comply with common values and decisions that their political leaders advance. The process of achieving desired social outcomes is then directed via government. This certainly conflicts with people holding the constrained vision. In their eyes, the constituency, its leaders and government bureaucrats are too Public Square Econ 13 diverse and, thus, society is incapable of determining and administering good public policy. The conflict between visions of reality leads to debates about concepts such as equity. Those with the unconstrained vision often argue that criteria can be defined. For example, some people contend that it is just to honor senior citizens with government programs that allow comfortable income and medical care in retirement. Because it is just, all members of society presumably gain when seniors are assisted. Those holding the constrained vision disagree. They argue that it is not necessarily more just to confiscate income from some and redistribute it to others. For example, some taxpayers have less income than the retirees who receive the benefits do. They contend that such government policy cannot promote collective goodwill because it cannot be explicitly defined. Society is not necessarily better-off when some must sacrifice for the sake of others. Key Point: Different views of human potential and constraints lead to different political philosophies. What Governing Framework Is Preferred? Consistent with the unconstrained vision of reality is communitarianism philosophy of governing, where individuals are responsible not only to themselves but society. This implies that the relationship between self and society is predetermined by the collective will. Modern communitarianism has historical precedence in America. Since the mid-1800s, local groups have formed with common goals sometimes centered about religion, business or educational interests. However, the communitarianism philosophy on a national scale significantly emerged in the 1930s and has grown into a movement that includes both academic and political activists. Public Square Econ 14 The government becomes the center of a communitarian society (perhaps the nurturing parent) that collects contributions to provide programs for the common values. This implies that the individual not only shares part of his/her income through involuntary tax collections, but also may qualify to receive goods or services that are deemed worthy by the community. Federal taxation and subsidy to higher education is an example. In addition, the government may find it necessary to regulate economic activity to promote societal goals. For example, the federal government once required freeway speed limits in the name of energy conservation. Moreover, individuals are expected to demonstrate their commitment to society’s goals. Obeying speed limits would be an example of how individuals act responsibly for the sake of energy conservation of the larger community. Opposed to communitarianism ideology is rugged individualism. An individualist may certainly obey laws such as speed limits. However, her desire to obey laws is not from a zealous obligation to contribute to societal goals such as energy conservation. Most subscribing to individualism recognize that pursuit of individual initiative should only be restricted when significant harmful consequences fall upon someone not a party to the activity. So, for example, society needs speed limit laws not to preserve energy but to prevent reckless endangerment toward other drivers. Reckless endangerment toward others is immoral behavior that may be prevented through laws of government. Most immoral behavior such as reckless endangerment is well understood by the natural laws or orderly principles that have stood the test of time. Those holding the view of individualism contend that in most cases government is reprehensible when it interferes with individual pursuit of self-satisfying actions. Ideas about governing beyond a legal framework that protects individual liberty are not supported by the philosophy of individualism. Government Public Square Econ 15 programs such as federal taxation for higher education or energy conserving speed limits are not within the realm of this ideology. Instead, individuals should be allowed to keep the money that would otherwise be taxed for higher education even if the funds might pay for gas-guzzler driving. This does not imply that community is unimportant to individualists. However, they contend that voluntary community service is better than the alternative – using the coercive power of government. Promoters of individualism prefer to be ‘left alone’ by government. They would like to make their own decisions free of interference by a controlling authority. In its purest form, the system of governance they prefer is called laissez-faire. They believe that it is morally correct for an economic system to allow the expression of individual initiative. Economies dominated by capitalism provide a close juxtaposition to the laissez-faire ideal. Individuals are free to own resources and pursue profit in their own self-interest. Buying and selling of goods and services is not directed by government but by prices. The prices of resources and products lead to decisions to produce and consume. Under a system of laissez-fair, competition among individuals is easily observed. An individual increases her standard of living by providing labor or products that are better than others do. However, this presents a magnificent irony. Competitors seek the most desirable way to use their labor or to provide the most preferred products to sell. They can only sell what buyers will buy. So, the competition among sellers is transformed into voluntary cooperation with buyers. This is vastly different from the communitarian model of governing. On a national scale, goals and objectives are predetermined and individual responsibility is an obligation. Democracy provides the preeminent means of amalgamating the set of goals and objectives among diverse people. As we will learn in another chapter, special interest politics unfortunately befuddles perfect democracy. Therefore, communitarian ideals Public Square Econ 16 are sometimes difficult to realize. Even without special interest politics and with true majority rule, democracy is imperfect. Government enactment and enforcement of legislative decisions compels many individuals to adhere unwillingly to the majority rule. The irony is that some people in the communitarian society are forced to cooperate involuntarily. Key Point: People have preferences for either communitarianism or individualism. How do Liberals and Conservatives Differ? Intellectuals who call themselves classical liberals embrace laissez-faire economics. They believe that society is better-off with a weak central government, but instead operates most efficiently with decentralized political administration and economic liberty for the individual. The democratic process should not strip away individual rights in favor of majority rule. Instead, the constitution and laws are in-place to guarantee both political and economic freedom. In other words, majority opinion does not supplant an individual’s pursuit of her happiness. Liberalism seeks change in the current political economic system. However, the adjective, classical, is another name for tradition. It might seem the term, classical liberal, is an oxymoron. However, classical liberals honor the traditional concept of liberalism as it applies to individual liberty. History shows that most people of the world had been ruled by autocratic and sometimes ruthless regimes, and individual liberty once was a transforming concept. Just centuries ago, the change to libertarian principles began to emerge. As the twentieth century closed, many countries with long histories of oppression liberalized their economic systems to model America (or various other Western nations). With newfound economic freedoms, people Public Square Econ 17 naturally have come to desire political liberty as well. Americans who have enjoyed liberty for over two centuries are presented with circumstances different than the emerging countries of the world. Today, classical liberals find themselves not quite in vogue but seeking change again. Modern liberalism has taken the forefront among liberal thinkers and politicians. Modern liberals in America have favored larger government that often corresponds to a reduction in the liberties of individuals to act in their own self-interest. Many people subscribing to modern liberalism hold the unconstrained view of reality where humans, collectively, are unlimited in their abilities to do good works. Many liberals have communitarian ideological ideals. Yet, other liberals promote a paternal government without seeking responsibility from all constituencies. This involves government’s active role in taxing, providing social services, and creating opportunities and better living conditions for people of lesser circumstances. This is a socialist ideal. However, such programs provide benefits at an opportunity cost that may not appear equitably distributed to all people. Therefore, modern liberals must contend with the arduous problem of identifying the worthiest victims of the economy and redressing their circumstances. Liberals are not alone in recognizing that the power of government is a necessary instrument in support of their ideology. Conservatives, the defenders of the status quo, need government to act in their behalf. Conservatives tend to embrace classical liberal ideals, and recognize that government is necessary to guarantee individual political and economic rights. For example, a good judicial system is necessary to protect property rights and contracts. In addition, modern conservatives show a tendency to support a strong national defense – again to protect political and economic liberties. Conservatives do not normally favor the use of extensive government regulation of economic activity, nor provisions that redistribute income and wealth among members of Public Square Econ 18 society. Instead, they promote individual responsibility for their own actions, risks, successes or failures. This is a capitalist ideal. Nonetheless, some conservatives feel at liberty to use government to shield their businesses against would-be competition. Conservatives are fiscally cautious except for the funding of the legal system and national defense. Conservatives support the reduction of both taxes and spending on social services from government budgets. Liberals defend higher taxes and spending. They tend to be fiscally progressive. For example, liberals will call for greater government involvement in healthcare even if taxes must be increased. Conservatives resist such programs. There is another perspective in delineating the difference between conservatives and liberals. Some people are socially conservative, while others are socially liberal. Social conservatives support traditional cultural convictions. For example, some trust religious manuscripts as directives from God, embrace nuclear families, and are opposed to abortion of living fetuses. At one time in history, these ideas were generally accepted by the American culture. Today’s social liberals emphasize alternative ideas. For example, some promote secular humanism, toleration of alternative lifestyles, and women’s’ choice concerning abortion. Recognize that social liberals are not always fiscally liberal. Those who call themselves libertarians tend to be both socially liberal and fiscally conservative. Contrary, social conservatives are not always fiscally conservative. Some call on government to provide programs that support their ideals. Key Point: Conservatives and liberals differ in ideological origins, the size and scope of government. What is the Efficiency-Equity Trade-off? Mixed economic systems occur because politicians and voters are Public Square Econ 19 ideologically diverse. Fiscal conservatives tend to favor less government and by implication more market activity. Fiscal liberals prefer government to alter some of the outcomes from the marketplace and provide social programs. The US Constitution provides the framework for debate and compromise. For example, different ideological groups may dominate the House of Representatives and the Senate. A bill cannot become law without passage from both chambers (and approval of the President in most cases). Compromise often occurs. The nation, therefore, has a mix of both capitalist and socialist elements in its economy. The efficiency of the economic system decreases while the socialist economy becomes a relatively greater presence. The highest level of efficiency is obtained when individuals and the businesses they control are able to use resources to produce the maximum amount of goods and services valued most highly by consumers. Under the incentive to earn maximum profits, producers strive to achieve the least-cost optimal use of resources toward this end. However, a growing government requires involuntary taxation and often imposes regulations reducing the likelihood that resources are available to be used more efficiently by the private sector. In addition, some firms will be obligated to redirect resources away from production but to the lobbying of political officials who set government policy. At the same time, government administrators do not have the zeal to optimally use the resources at their disposal. They do not have a profit incentive, but instead receive mixed signals from the diverse set of political leaders. Lastly, the accumulation of resources by government leads to diminishing returns (i.e., declining marginal productivity) while the size and scope of government increases. The above analysis does not imply that efficiency would be at its highest with the complete absence of government. Many conservatives recognize the need for a legal system that protects property rights and mediates contractual disputes. In addition, Public Square Econ 20 there are public goods that the private market fails to provide adequately, such as national defense. However, when the socialist economy is used for other means, efficiency has a tendency to decline. Many liberals desire equity improvements through government, but ultimately the economy sacrifices efficiency. This means that the distribution of income, goods or services may be fairer in a communitarian sense. However, with less efficiency, there is less total income, goods or services to distribute. There are at least two competing standards of equity. The first is more palatable to the ideals that many liberals support. Income, goods or services should be redistributed more equally than what occurs in the marketplace. The coercive power of government is needed to achieve this form of equity, while the efficiency of the economic system declines. The second standard of fairness is that individuals should be allowed to purchase goods or services through earned income according to their productivity. They may keep or voluntarily distribute them to other people. This standard of fairness is not in conflict with the efficiency of the economy, but reinforces it. Positive economics cannot decide on an appropriate definition of equity. It can only describe whether or not a potential trade-off with efficiency exists. Value laden normative economics may prefer government involvement in the redistribution of income, goods or services. A more egalitarian mixed economy may be preferred to an economy with greater levels of income, goods or services for the average citizen. Equity, as defined, conflicts with the efficiency advantage of the capitalism. Key Point: Economic efficiency is sacrificed when government seeks a more equal distribution of income, goods or services. Public Square Econ 21