Market Economy: Crash Course Government and Politics #46

Summary

In this Crash Course Government and Politics episode, Craig explains the critical role of government in shaping the market economy. He discusses how government establishes law and order, defines property rights, governs exchange rules, sets market standards, provides public goods, creates a labor force, addresses externalities, and promotes competition. These functions are essential for the existence and proper functioning of a market economy, challenging the notion that markets are purely natural phenomena.

Takeaways

• 🏛️ The government plays a crucial role in creating and maintaining a market economy, contrary to the belief that markets are natural phenomena.
• 👮‍♂️ Establishing law and order is fundamental for the government to ensure predictability and prevent theft or fraud, which are essential for economic activities.
• 🏠 Defining property rights is vital; without government, what is considered 'yours' might not be as secure, affecting the ability to buy, sell, or own property.
• 🛡️ Trespass laws exemplify how the government protects property rights, allowing owners to control access to their property.
• 📜 The government sets rules of exchange, including complex regulations that dictate what can be bought or sold, and when, impacting economic transactions.
• 🚫 Prohibitions on certain exchanges, like drugs or body parts, demonstrate the government's power to control what can be legally transacted in the market.
• 📏 Market standards, such as weights and measures, are set by the government to ensure fair trade and understanding of transactions.
• 🚌 Public goods, like public transportation and air-traffic control, are provided by the government because they are not viable for private markets to supply.
• 🏫 The government contributes to the labor force through compulsory education, student loans, and job training programs, preparing individuals for productive work.
• ♻️ Amelioration of negative externalities, such as pollution, by the government helps correct market failures and protect public health and the environment.
• 💼 Promotion of competition by the government through anti-trust laws prevents monopolies and ensures a fair and competitive marketplace.

Q & A

What is the main argument presented by Craig in this Crash Course episode?

Craig argues that without some form of government intervention, a market economy would not be possible, contrary to the belief that markets are natural phenomena.

How does the government contribute to the establishment of a market economy according to the video?

The government contributes to the establishment of a market economy by establishing law and order, defining rules of property, governing rules of exchange, setting market standards, providing public goods, creating a labor force, ameliorating externalities, and promoting competition.

Why is law and order important for the economy as explained in the video?

Law and order is important for the economy because it provides predictability, which is essential for trade and production. Without it, the risk of theft or fraud could deter economic activities.

What role does the government play in defining property rights?

The government defines property rights through laws that establish ownership and the bundle of rights associated with owning property, which is crucial for buying, selling, and trading assets.

How does the government regulate the rules of exchange in the economy?

The government regulates the rules of exchange by setting laws that dictate how, when, and even if certain goods or services can be bought or sold, such as through 'blue laws' or prohibitions on certain substances.

What is an example of the government setting market standards?

An example of the government setting market standards is the establishment of weights and measures, ensuring that buyers and sellers agree on the quantity and quality of goods being exchanged.

Why does the government provide public goods, and what is an example mentioned in the video?

The government provides public goods because markets often fail to supply them due to their non-excludable and non-rivalrous nature. An example mentioned is rural electrification projects, like those by the Tennessee Valley Authority.

How does the government help create a labor force?

The government helps create a labor force through compulsory education laws, student loans, and government-run training programs, ensuring a skilled and capable workforce for the economy.

What are externalities and how does the government ameliorate negative externalities?

Externalities are the external effects of a market transaction, which can be positive or negative. The government ameliorates negative externalities by regulating or taxing behaviors that impose costs on society, such as by outlawing lead in gasoline.

What is the government's role in promoting competition in the market economy?

The government promotes competition by enacting laws like anti-trust laws to prevent monopolies and ensure fair market practices. This helps maintain a balance where consumers have access to a variety of products at competitive prices.

How does the video address the idea that markets are natural phenomena?

The video challenges the idea that markets are natural phenomena by asserting that government intervention is necessary for the existence and functioning of market economies, and that the belief in markets as natural phenomena can have significant political implications.

Outlines

00:00

🏛️ Government's Role in Structuring the Economy

This paragraph introduces the topic of government's influence on the economy, emphasizing that a market economy cannot exist without some form of government intervention. Craig, the host, humorously engages with the audience by acknowledging the existence of a dedicated series on economics and playfully addressing his fans. He asserts that government is essential for creating the conditions necessary for a market economy to function, challenging the popular belief that markets are self-regulating entities governed by natural laws akin to gravity. The paragraph outlines eight ways in which the government structures the economy, such as establishing law and order, defining property rights, governing exchange rules, setting market standards, providing public goods, creating a labor force, ameliorating externalities, and promoting competition. The discussion on law and order highlights its role in providing predictability and protection against theft and fraud, which are crucial for trade and production.

05:01

🚌 Public Goods and Government's Impact on the Labor Force

The second paragraph delves into the concept of public goods, which are services provided by the government that benefit everyone and cannot be withheld from any group. Examples include public transportation and air-traffic control systems. The government's role in providing public goods is contrasted with the market's tendency to avoid unprofitable ventures, such as rural electrification projects during the New Deal era. The paragraph also addresses how government policies contribute to the creation of a labor force through compulsory education, student loans, and job training programs. The discussion on externalities explains how government regulations and taxes can mitigate the negative impacts of economic activities, such as air pollution from leaded gasoline. The segment concludes with an examination of government's efforts to promote competition through anti-trust laws and other measures, which aim to prevent monopolies and ensure consumer benefits. The host concludes by reiterating the government's significant role in shaping the market economy, inviting viewers to form their own opinions on the matter.

Keywords

💡Market Economy

A market economy is an economic system in which the production and distribution of goods and services are determined by supply and demand in a free market. In the video, the role of government in creating and maintaining a market economy is emphasized, suggesting that without government intervention, a market economy would not be possible. The script discusses how government establishes law and order, defines property rights, and sets market standards, all of which are essential for a market economy to function.

💡Law and Order

Law and order refers to the maintenance of public safety and social control through the enforcement of laws. In the context of the video, law and order is crucial for the economy as it provides predictability and security for trade and production. The script mentions that without law and order, individuals might fear theft or fraud, which would hinder economic activities.

💡Property Rights

Property rights are the rights of an individual to own, use, and transfer property. The video explains that the government defines and protects property rights, which is essential for economic transactions. It gives the example of trespass laws, which allow individuals to claim and protect their property from unauthorized use.

💡Rules of Exchange

Rules of exchange are the legal and regulatory frameworks that govern the buying and selling of goods and services. The video script discusses how the government sets these rules, which can include restrictions on certain goods like alcohol or drugs, to control what can be exchanged in the market.

💡Market Standards

Market standards are the regulations that ensure fair and consistent practices in the marketplace, such as standardized weights and measures. The video uses the example of ensuring that a pound of chickpeas is actually a pound, which is crucial for fair trade and consumer trust.

💡Public Goods

Public goods are goods and services that are non-excludable and non-rivalrous, meaning that they can be enjoyed by everyone without diminishing their availability to others. The video gives examples like public transportation and air-traffic control systems, which are provided by the government because they are not likely to be provided by the market due to their high costs or lack of profitability.

💡Labor Force

The labor force consists of all individuals who are employed or are actively seeking employment. The video explains that the government contributes to the creation of a labor force through compulsory education laws and student loans, which prepare individuals for productive work and help finance their education.

💡Externalities

Externalities are the indirect costs or benefits that result from an economic activity and affect third parties who are not directly involved in the activity. The video uses the example of leaded gasoline, where the private transaction between buyer and seller resulted in a public cost of air pollution. The government addressed this negative externality by regulating the use of lead in gasoline.

💡Competition

Competition in a market refers to the rivalry among sellers trying to attract and retain customers. The video emphasizes the importance of competition for a healthy market economy, where the government can intervene to prevent monopolies and promote fair competition, as seen with anti-trust laws.

💡Monopolies

A monopoly is a market condition in which one firm controls the entire supply of a particular product or service. The video discusses how monopolies can lead to higher prices and reduced choice for consumers, which is why the government uses anti-trust laws to regulate them and maintain a competitive market.

Highlights

Government plays a crucial role in creating and maintaining a market economy.

A market economy cannot exist without some form of government intervention.

Government establishes law and order, which provides predictability for economic activities.

Property rights are defined and protected by government laws, ensuring ownership.

Government sets rules of exchange, including what can and cannot be legally sold.

Market standards, such as weights and measures, are set by the government to ensure fair trade.

Public goods like public transportation and air-traffic control are provided by the government where markets fail.

Government creates a labor force through compulsory education and student loans.

Externalities, such as pollution, are addressed by government regulations to protect public health.

Promoting competition is a key role of government to prevent monopolies and ensure consumer benefits.

Anti-trust laws are used by the government to regulate monopolies and promote a competitive market.

Government's role in the economy is often misunderstood, but it is essential for a functioning market system.

The government's involvement in the economy is a topic of debate, reflecting different political ideologies.

The video discusses the historical context of government's role in the economy, referencing figures like Thomas Hobbes.

The concept of property as an inalienable right is challenged, emphasizing the need for government to define property laws.

The government's role in setting market standards is compared to historical practices of establishing weights and measures.

The New Deal's rural electrification projects are cited as an example of government providing public goods where the market would not.

The video humorously points out the government's indirect role in creating jobs through education and training programs.

Negative externalities are explained with the example of leaded gasoline and the government's response to address it.

Transcripts

Hello. I’m Craig and this is Crash Course Government and Politics and today we’re

going to turn to a topic that is near and dear to our wallets at Crash Course: economics.

Now, I know that dedicated fans are saying: “Hold on Craigers, you have a whole series

about economics. Tell me about government.” To those fans, I say: “you’re right…and don’t call me Craigers.”

But this episode is going to be about the role that government plays in the economy,

specifically, the way that government creates the market economic system that we know and love.

[Theme Music]

Before I get into the ways that government creates a market economy, let me be right

up front and say that we’re going to posit that without some government, it wouldn’t

be possible for a market economy to exist. [gasp] Whaaaaa?

I realize that this is a bit controversial, with many people believing that markets are

natural phenomena that follow laws like “supply and demand” that are analogous to real physical

laws like, say, gravity. Which is also a movie starring George Clooney - he aged so well.

This is an interesting construct and one that has important political ramifications, because

if you believe in it, then basically there’s nothing that the government can, or should, do to improve the economy.

I’ll leave it to commenters to argue this point, but I stand by my statement:

We wouldn’t have a market economy without government.

So economically-minded political scientists, AND politically-minded economists, will tell

you that there are a number of ways that government structures the economy in the U.S. I’m going

to go over eight of them, although there might be more.

So, in no particular order, here it goes. The government creates and maintains a market economy by:

establishing law and order; defining rules of property;

governing rules of exchange; setting market standards;

providing public goods; creating a labor force;

ameliorating externalities; and promoting competition.

I think most of us can agree that a big part of the government’s job is to establish

law and order. This idea goes back at least as far as the Enlightenment and Thomas Hobbes,

but since this is not Crash Course: Political Philosophy, I’m going to move on.

Law and order helps to structure the economy by providing predictability.

It is much harder to engage in trade or production for profit if you suspect that what you have

to trade or sell may be taken away by bandits, like the Hamburglar.

But -- only -- in that case only if it’s burgers that you are actually trading.

But it’s not just that the government, if it’s doing its job, can protect us from

being robbed in the literal sense of the Hamburgler stealing our delicious, delicious burgers.

The government creates a legal system that can punish people who commit fraud, and knowing that they can

be punished prevents people from committing fraud. Or at least I hope it does. Most of the time it does.

Don’t do fraud kids. The second way that the government structures the economy is by

defining rules of property. Now there are many people who will tell you that property

is an inalienable right, sort of like something given by God. I’m looking at you John Locke.

And John Locke would respond, “don’t tell me what I can’t do” but I would suggest that

without government what you think of as your property might not be as “yours” as you think or want it to be.

But isn’t this sweet polka dot button-up I’m wearing mine? Well, it is because I

paid for it and we have laws that say that payment for a good confers a title to it – we

see this especially with land, or as it’s known to the law as “real property” or perhaps “real estate.”

We don’t actually receive written titles when we buy most things, but according to

the law, if I can establish ownership by proving I paid for this shirt or somebody left it

to me in their will or something then it’s mine. And if someone takes it from me, I can

bring the law down on them - the courts, the legal system, or maybe the sheriff will help me get it back.

A really concrete example of the way the laws create and protect property rights are trespass

laws, which allow you to tell those noisy kids to get off your lawn. Without trespass,

who’s to say it’s not their lawn?

Basically ownership of anything is a bundle of rights establishing what you can do with

that thing, whether it’s your car, or your house, or your eagle. And without legally

established ownership rules, we can’t buy or sell or punch anything.

And speaking of buying and selling, another way that the government structures the economy

is through setting and governing rules of exchange. Let’s go to the Thought Bubble.

In most states there are complex rules that explain how and when, or even if you can sell

something. For example some localities, (like Indiana) have so called “blue laws” that

prevent you from buying or selling alcohol on certain days. Some counties in some states

are completely dry, meaning that you can’t buy or sell alcohol at all, and for a brief

(terrible) period in the US – prohibition – the Eighteenth amendment to the Constitution

prohibited the “manufacture, sale, or transportation of intoxicating liquors” Manufacture, sale,

and transportation, sound like the three main ingredients in an economy to me.

Some exchanges are still flat-out forbidden by laws in the U.S.. Many drugs are called

controlled substances for a reason, and that reason is that they are subject to government

control. Some drugs are prohibited outright and if you make or sell or buy them you can

be punished by the government. There are also laws preventing you from selling yourself

into slavery, or from selling your body through prostitution, or selling parts of your body

like your kidneys. Some economists may question the wisdom of these rules, but they exist and by making

and enforcing them the government can exert powerful control over what can and cannot be exchanged.

Thanks, Thought Bubble. Probably less controversial than the rules governing exchange is the government’s

role in setting market standards.

This is something governments have been doing for a very long time, and you’ve probably

learned about it in history class as the government’s setting up weights and measures.

This may not seem like such a big deal until you consider that if you are paying someone

for a pound of chick peas, you need to know what a pound is...

if you’re going to get the right amount for that sweet hummus.

This goes for measures too. If I am buying an acre of land, I want to make sure that

I’m getting 4,046.86 square meters of land, or 43,560 square feet. And if I buy an acre

in Scotland, I’m going to get even more since a Scottish acre is the equivalent of

1.27 U.S. acres. Plus no one will look at me funny when I’m eating my haggis.

Basically this means is that the government insures that buyers and sellers are operating

on the same playing field. This used to be even more important when currency contained

precious metals, but I don’t want to get into a big argument about pennies and nickels

-- that's John Green's thing, and we've all established that I'm not John Green.

This brings us to public goods. Public goods are things and services that the government provides that

can be enjoyed by everyone and, once provided, cannot be denied to a particular subset of the population.

One example is public transportation: in many places the government provides bus or subway

services to residents, not for free, but at highly subsidized costs, although if you’ve

ridden the New York Subway recently it doesn’t always seem like the subsidies are big enough.

In many cases the government steps in to provide public goods when markets wouldn’t. It’s

not likely that private companies would provide an air-traffic control system, and even if

they did, it would have to be highly regulated by the government anyway because you don’t

want different cities and states enacting different rules about air-travel. That would be a literal disaster.

Also, if it were up to unregulated markets, there wouldn’t be any flights to places

with small populations because they wouldn’t be profitable.

A really good example of the government providing a public good where the market wouldn’t

step in is the rural electrification projects of the New Deal, the most famous of which

sprang from the Tennessee Valley Authority.

It wouldn’t have been profitable for power companies to provide electricity to rural

towns and farms, so the government stepped in and provided it. And since without electricity

it’s pretty hard to watch Crash Course, I’m glad they did.

We'd have to do, like, a Crash Course Live Play.

And I'm not good at live theater.

You might have heard that the government is not a “job creator” and in some ways that’s

true, except for government jobs like firefighters and public school teachers and, if we’re

talking the federal government, soldiers and sailors. But there are other ways that government

efforts help to create a labor force.

The main way this happens is through compulsory education laws. States require that kids go

to school up to a certain age and this is to ensure, or at least try to ensure, that when they

become adults they will have a level of competence that will enable them to be productive workers.

Of course, employers could provide the necessary training at their own expense, but why would

they do it if the government provides it for them?

Government also helps create the workforce by providing student loans, which help people pay for college.

And that's why college is so easy to pay for now.

Right? Wink.

There are government-run training programs and, I suppose, the potential for the government

to employ more people, like it did during the Great Depression with programs like the

Works Progress Administration and the Civilian Conservation Corps.

Now if you’ll allow me to put on my economist’s hat – Stan, do we have budget for an economist’s hat?

No. Apparently economists wear very expensive hats. I will try to explain what the government

does to ameliorate negative externalities. I love my externalities ameliorated. Especially the negative ones.

An externality is an external effect that is a byproduct of a market transaction. They

can be positive or negative and can also be seen as the difference between the private

cost and the social cost of economic behavior.

Here’s an example. Driving is an economic behavior. Back in the 1970s gasoline included lead, which

made engines run better but also polluted the air with lead, which, as we now know is very bad. Very, very bad.

Buying leaded gasoline and running your car on it was a private economic transaction but

air pollution was a very public cost that neither the seller of the gasoline nor the purchaser had to pay.

And air pollution was very costly in terms of public health. So the government ameliorated

this by outlawing lead in gasoline and creating regulations that limited air pollution generally.

What this did was force companies and, by extension, purchasers to pay for these negative external costs.

Regulation is one way to deal with negative externalities. Another is through taxes, which

we’ll deal with it in another episode.

The last way that the government creates our market economy, at least the last way I’m

going to talk about, is by promoting competition. According to our old friend Adam Smith, the

essence of a functioning market system is competition, and in a perfect world competition

would ensure that people got the best products at the best prices.

But history has shown that corporations and individuals have often tried to stifle competition

and create monopolies. If there’s only one firm selling a product, that firm can charge

whatever it wants, and this monopoly condition doesn’t usually benefit consumers.

At least not as much as it benefits monopolists.

So government can and has stepped in to create laws to regulate monopolies. The best known

of these are the anti-trust laws, which are sometimes used against big corporations, like

Standard Oil or more recently, Microsoft.

And the government can also grant anti-trust exemptions that allow monopolies, as it did

for Major League Baseball. Either way, the government, under the Commerce Clause in the

Constitution can pass laws that promote or inhibit competition, although usually it tries

to make the marketplace more, rather than less, competitive.

So that's why I say the government has a big role to play in making a free market economy.

You may not be convinced that without government a free market system wouldn’t be possible, and that’s ok.

You can think what you want. It's a free market. Thanks for watching. See you next time.

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Crash Course was made with the help of all these free marketeers. Thanks for watching.