The Public and Private Sectors

The early European settlers in North America did not burst on the scene with a desire to set up strong central governments. In fact, many moved to the new continent to get away from repressive governments or church leaders who would not allow groups to have the fom to which they thought they were entitled. Probably most of the settlers moved to North America because of economic reasons. They simply could not earn the type of income they thought they should be able to earn and when the land companies offered the opportunity to try out a new land, they jumped at the chance. Of course, moving to a new country is far more complex than the first couple sentences indicate but our concerns in this class are limited to one part of the process. What we want to remember is that early settlers for the most part did not arrive on the continent ready to establish strong central governments. Most of the people shared some common belief about how people get along together in sort of a Social Contract wherein you didnt steal from each other, helped each other out when you could, and that sort of thing. If there was a dispute, some system of resolution needed to be in place. An elder of the church or some trusted individual probably played the role of mediator. It was certainly more civilized than fighting it out to the tune of might makes right. When the United States was first formed 150 years after the first settlers arrived, it was with the concept of limited government. The role the government played was pretty much limited to providing public goods. Public goods are those goods, which have substantial spill-over benefits. They are the goods from which everyone benefits but in way where it is difficult or impossible to assign a s specific cost to the beneficiary. We all benefit from the presence of a police force but how do you assign a value. It would not work to do it on a contract basis. Think of the scenario as a mugger in a park approaches you some afternoon. Three protection companies approach you to bid on the protection job. I will stop this mugger for $45, Says the first. I can do it for $44, Bids the second. Ooops, I see blood. That ups the bid to $56. Says the first. Well, you get the idea. Youre being mugged while contractors are bidding on saving you. It wouldnt work that way. Instead, we all contribute to a police force, the muggers know that there is a strong likelihood that a police officer will be in the vicinity, and they avoid the park. How much is that worth to you? It is pretty hard to put a price on it and even harder to collect that price. After all if everyone else in town has paid the taxes for the police force, you dont really need to because your contribution is insignificant enough that it doesnt make a difference. Further, you know the police officer is not going to approach you during a mugging and ask for identification so he can check to see if you taxes are paid up. We can do that with cable TV. No pay: No watch! We can exclude those from the cable service who dont pay. We cant exclude people from police protection because of the taxes they pay or dont pay. A public good is a good from which we all, or most of us, benefit but we cannot assign a specific price to the good or service provided and, even if we could, we might not be able to collect the price when the service is rendered. In the earliest days of the US, we considered such things as roads, public wharves, court systems, local police, national defense, and education as public goods provided by the government. From the beginning of the US, there was a limited role for government to play. That role was supported by taxes, which seemed like the collective way to pay for a collective benefit. It wasnt until the late 1800s that the role expanded. Of course, the number of public goods increased as more people needed more roads and more children needed more schools but the government rarely went beyond the provision of public goods. The industrial revolution changed all that! Prior to the industrial revolution, producers were limited by the energy source they chose to use. In New England, for example, expansion was constrained by how much energy could be generated by a mill wheel. Given the size of the stream, is was unlikely businesses would ever get too big. After the industrial revolution, however, when power could be generated in vast amounts, big businesses could operate. Some got to the point where they

were monopolizing entire industries. John D. Rockefellers Standard Oil at one time controlled over 95% of all the oil reserves in the US. Congress saw a problem and stepped in with the Sherman Anti-Trust Act in 1890. The benefits derived from a market system were being undermined by the presence of monopolies. The act was one of the first major attempts to regulate business. Thus began the second role for government to play in the US. Congress began to put into place some rules and regulations forcing businesses to organize and operate in specific ways. For the next 40 years, the role of government didnt change much. Some public goods production increased in the First World War and the rules about corporate organization expanded with the Clayton Act in 1914. The way in which the government intervened in the economy did not expand again until the 1930s. During the Depression of the 1930s, it appeared that something fundamental had broken down in the economy. Eric Severied said, People were going hungry and farmers were killing little pigs. People were sick and doctors were going broke. What was the sense of all this? Their own training in marketplace economics trapped economists of the day and no new ideas emerged until John Maynard Keynes argued for government intervention to stimulate the economy. These ideas eventually worked their way into public policy. The phrase from the constitution, provide for the public welfare took on new meaning as all sorts of social programs from social security to farm subsidies were passed during the FDR New Deal years. This led to a further expansion in the role the government played in the economy. The role of the public sector has evolved in size and in focus over the past 200 years from providing only basic public goods to regulating industry and redistributing income. Most likely, we will forever be making adjustments to the role the government plays but it is unlikely that we will ever abandon any of the three major thrusts entirely. In fact, the USA working with the G7 appears to be expanding the roles beyond the boarders of the US to begin looking at the global economy rather than just the economy in the US.