4 - 1 Chapter 26 Public Goods and the Role of the Government

4 - 2 Karl Marx And Socialism

4 - 3 Our Situation The Classical Theory of Economics ADAM SMITH: “Involuntary Unemployment is Impossible. The economy is self-correcting and self adjusting.” WRONG!

4 - 4 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

4 - 5 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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4 - 7 BUSINESS CYCLES IMPERFECT COMPETITION PUBLIC GOODS ASYMMETRIC INFORMATION Marx’s Market Failures INEQUITY EXTERNALITIES

4 - 8 Fig top

4 - 9 Marx’s Theory of the Business Cycle Level of Real Output Time Peak Recession Expansion Trough Growth Trend  Twin Problems of the Business Cycle Unemployment Inflation

Three Facts About Economic Fluctuations $ The shaded bars are recessions U.S. real GDP, billions of 2000 dollars FACT 1: In spite of Marx’s theories, economic fluctuations are somewhat irregular and unpredictable.

Three Facts About Economic Fluctuations FACT 3: As output falls, unemployment rises. Unemployment rate, percent of labor force

An Interesting Aside About Economic Fluctuations FACT?: Some Economists believe Technological Cycles have become shorter.

Alternatives Considered Unions

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

Alternatives Considered #1 REVOLUTION

Friedman and Galbraith

“ 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 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. Taxation is the price paid for membership in civilized society

In our day these economic truths have become accepted as self- evident. 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: Roosevelt’s Second Bill of Rights 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.

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

Milton Friedman 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.

CROWDING OUT RENT-SEEKING AND SPECIAL INTERESTS BUREAUCRATIC CAPTURE DEADWEIGHT LOSS Friedman’s Government Failures SHORT-TERM THINKING RATIONAL IGNORANCE

Friedman and Galbraith

Chapter Conclusions