Public Economics

A Concise Introduction

José Luis Gómez-Barroso

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000432893
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

Public Economics: A Concise Introduction provides a concise and non-technical overview of the role of government in the economy.

Using the questions 'why?', 'what for?' and 'how?', the text initially surveys the place of the public sector in a market economy. It then considers the possible reasons which could justify government involvement. Next, the book examines the aims of state economic activity, and the instruments which a government has at its disposal. Lastly, the final chapter provides an illuminating tour of economic history and history of economic thought in relation to government economic activity.

The book offers an international focus throughout, with examples taken from all over the globe. Readers are supported with a range of pedagogical features, including example boxes, chapter objectives and summaries, and end-of-chapter multiple choice and reflection questions.

Public Economics: A Concise Introduction will be a valuable text for students on courses in public economics, welfare economics, public finance, public policy and related areas.

1

STATE ACTIVITY IN THE ECONOMY

A global perspective

DOI: 10.4324/9781003173731-1

1 Introduction: public activity rather than public intervention

Economics textbooks usually dedicate a chapter to explaining the reasons for government intervention in the economy, a term that has been almost universally adopted by economists. Political discourse employs similar expressions, perhaps without fully considering what they imply. But words have meanings, and choosing “intervention” is not, of course, insignificant. This particular expression implies that the actions of one independent entity (“the economy”) can be interfered with or overseen by a second entity (“the government”). In this sense, the economy appears to be separate from politics. It has its own rules and can function autonomously; only in exceptional circumstances is external interference admissible.

This is a limited, if not an outright-erroneous, point of view. Societies are organized politically and grant some bodies (representatives and governments—generically speaking, “the state”) the power to order social life. The economy is not merely an annex to society but is rather a fundamental part of it, from which it can be deduced that states have the power to organize economic activity. And they can do so without restrictions. States can and do intervene in the economy, as long as they act within the values that society agrees on. When a government blocks the development of a mining operation in an area that has scenic value, it isn’t invoking any of the textbook reasons that allow public intervention. Its decision is not based on efficiency (perhaps it is cheaper to extract minerals there rather than from some nearby site) or fairness (that district may have the highest unemployment rate in the country), but instead, it is defending a certain value (the protection of certain areas) because society approves of it. In addition, beyond specific cases, the economy doesn’t really have the ability to self-organize. Its rules do not always arise spontaneously; an authority that has coercive power to dictate at least some of the rules of the game and enforce them is needed.

The conclusion is that the state does not intervene in the economy, but rather, it carries out (more or less profound) activity in economic life, as part of the foundations on which its existence is based. This does not in any way impede a government from deciding to limit its own activity within the economy to specific circumstances. But conceptually, the situation is different: governments can limit their actions, but a priori, they have no reason to do so.

Even in cases in which a state decides to limit itself, the functions assumed by the state in the economy are much more important than suggested by a simple intervention. The government organizes and even decides on many aspects of the economy; it also supplies, buys or provides incentives. However, this is all perfectly compatible with the fact that the interaction between supply and demand (i.e., the market) is the primary mechanism to decide what is produced and how what is produced is distributed. This compatibility can be seen in practice: in the first quarter of the 21st century, the majority of the almost two hundred nations on the planet can be classified as mixed economies, which means that although they have organized their economies on the basis of a market model, the public sector maintains a significant role in that organization.

The market therefore remains the starting point to study state activity, rather than intervention, in the economy. However, such activity is usually analysed through a piecemeal approach, one that should be altered. A rigorous study of state activity in a modern economy must start with studying what causes the state to occasionally arrogate the power to supplant or complement the market, which is followed by an analysis of the specific functions that it assumes in those cases and which culminates in an examination of the instruments that it employs to carry out those functions. Why, what for and how are the three basic questions that must always be answered. The key to obtaining a truly comprehensive understanding of state activity in the economy is to find a coherent link between those steps and to broadly analyse each, but with the depth that economics requires.

READING 1.1 AND SUDDENLY, THE PANDEMIC! THE INTERVENTION THAT NOBODY COULD HAVE EXPECTED

If any state decision in the economy really deserves to be called an intervention, it is undoubtedly that of paralysing (or seriously restricting) a country’s economic activity. If any state decision were to be thought of as unjustifiable, and therefore implausible, it would be precisely that one.

When, on 30 December 2019, health officials in the Chinese city of Wuhan reported that they were treating cases of pneumonia of unknown cause, no one expected events (in the economic field) to take the course that they did in the following weeks. Even on 26 January 2020, when China imposed the first restrictions on economic activity, it was not reasonable to venture that within a mere two months, the states of practically the whole world were going to take measures that would bring about the greatest global economic standstill on record.

A team from Oxford University,¹ with the help of hundreds of contributors from all over the world, updated on a daily basis the list of countries where decisions had been taken to close workplaces. A visual presentation of the results (on the world map) was published on the Our World in Data website.² Figure 1.1 shows the world scenario as of 1 April 2020. Although the image amplifies the real situation at that time, in which conditions were not always uniform within countries (a country is coded as “required closures” if at least some subnational regions have required closures), it is impressive nonetheless.

The economic shutdown was not inevitable. In fact, not everyone agreed that the closure of industries and many of the services that could no longer be offered at a distance was the best response to stop the spread of the disease, and despite the picture given in Figure 1.1, not all governments shared this idea or at least not all took equally strict measures; we will return to this debate in Reading 3.2. The conclusion, then, is that in the many places where economic activity was reduced to a minimum, this was the result of a decision that forced the economy into the background. Pandemics, of course, are not mentioned in textbooks among the reasons that are usually invoked to justify public intervention. Even at the height of the health crisis, a large majority of markets could have continued to function (and probably would have wished to continue), but at least in some cases, many people believe that the economy should be subordinated to the protection of other values that society prioritizes.

FIGURE 1.1 Workplace closures declared in the wake of the COVID-19 pandemic—as of 1 April 2020

1 Hale, T., Angrist, N., Cameron-Blake, E., Hallas, L., Kira, B., Majumdar, S., Petherick, A., Phillips, T., Tatlow, H., and Webster, S. (2020). Oxford COVID-19 Government Response Tracker. Blavatnik School of Government, Oxford University: https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker.

2 https://ourworldindata.org/grapher/workplace-closures-covid.

2 The market economy as a common system to organize economies

The market is a place (physical or not) in which exchanges take place. Someone offers certain goods that someone else is interested in. If they reach an agreement in which the former transfers the goods to the latter in exchange for other goods or services or in exchange for something with symbolic value (any type of money) and if this action is not sporadic but repeated frequently (regardless of whether the same actors are involved or of whether the same conditions are agreed on), then a market has been created. This act has been recurring ever since human societies evolved beyond self-sufficient communities of hunter-gatherers: exchanges, ergo markets, are the basis of economic activity, and this activity is at the heart of all social development.

This interweaving of economy and society is bidirectional: the way a society is organized is conditioned by the surrounding economic context, while the economy is mediated by the existing social (political) order. Ultimately, this means that the economy is not merely a set of spontaneously emerging markets but rather a complex system that has norms that protect, condition, control or orient those markets. Simple economic activities can be regulated. Gathering firewood or mushrooms in the woods or molluscs in the ocean might require a licence or be prohibited except on specific dates; their sale might require passing a health inspection, obtaining a permit or be restricted to a specific place. These are not modern requirements; although their content has evolved, some have existed for centuries.

Such supervision or control is carried out because, obviously, society decides that it should be so. Whoever has the authority to represent society in taking such decisions depends on the place and historical moment. If we generically refer to the person or institution who exercises that authority as the state,¹ we can conclude that the state plays a decisive role in the economy. Except for extreme situations in which the state represses private initiative, the characteristics of any economy are shaped by the interaction between agents who act in the markets and the public sector.

1In the rest of the book, state will be used as a generic term to refer to any expression of government, regardless of its function or territorial reach. In addition, the terms government, public sector and public administration, although not precise synonyms, will be used interchangeably.

Even so, the markets remain the machinery of the economy. Without the mediation of public action, the market (understood as all particular markets grouped together) would be the only mechanism to resolve basic questions about the economy: how a society’s resources are organized, what they are used for and how the goods and services produced with them are distributed. The procedure is simple. A set of prices emerges from the exchanges that take place. Some goods and services are more expensive (more valued) than others, and those who possess them can exchange them for larger quantities of others. Because they are valuable, more people become interested in producing those goods or services or investing resources in them. Quantities and distributions emerge from this interplay that adjusts dynamically. When considered on the whole, public actions do not radically change that outcome, and so the market remains the basic mechanism that organizes economic activity. Therefore, the majority of economies, even if they are mixed, are market economies.

This is a globally valid statement today. However, in certain cases, the state heavily alters the results generated by the market. In fact, these constituted the norm in many eras in the past in which the economy was at the service of a sovereign. In more-recent times, governments of command or planned economies totally replace the markets in decisions on how to use resources and who receives the goods that are produced. This situation represents one of the poles in a state–market axis. The other pole, in which zero public activity occurs, is exceedingly implausible because at the very least, the state has to ensure that the obligations assumed in the exchanges are fulfilled. Between these two extremes, any situation is imaginable. Although we frequently use models or even ideologies to group countries, in reality there are no two states in which public activity in the economy is identical, or to put it another way, no two states have the same conviction on the suitability of leaving the market to achieve certain objectives on its own, be it a common objective or one specific to a certain economic sector or segment of the population.

In conclusion, despite all the nuances and clarifications that can be introduced, the market is always the starting point for any theoretical or applied study of the economy and also for the study of state activity in the economy.

READING 1.2 THE INDEX OF ECONOMIC FREEDOM

Grouping countries according to which type of economy they fit into is not easy. We have no established categories but rather different situations in which either the market or public activity is prevalent. Some governments leave certain sectors completely in the hands of private enterprise while maintaining strict control over others. In other countries, the situation may be inverted, or they can adopt intermediate positions. Even in countries that manifestly declare an ideological position (specifically, they claim to follow a socialist model), the real situation does not entirely comply (or does not comply at all) with that declaration.

One possible way to classify economies is provided by the Index of Eco...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of readings
• List of figures
• About the author
• Preface
• 1 State activity in the economy: a global perspective
• 2 Reasons for state economic activity
• 3 Objectives of state economic activity
• 4 Instruments of state economic activity
• 5 Conclusion: state or market?
• 6 State activity throughout history: theory and reality
• Index