Weight of Government's Hand on Capitalism's Scale

To advocate a new, robust stimulus package, as in my last column, invites some predictable comments. Government is inefficient, politically motivated in its choice of winners and losers, and out to pad its own wallets.

Of course, those who make these criticisms assume the market economy will do better. I have been told repeatedly that although private business makes mistakes markets are always "self-correcting." In my critics' vision, numerous businesses compete. Consumers have a relatively good understanding of the products they are purchasing. All share a willingness to abide by property relations and a commitment to economic growth.

One might call this model farmers market capitalism. This is the world in which Adam Smith's invisible hand works to allocate resources efficiently. Lazy or inefficient farmers don't survive and the quest to make more money serves a larger social good.

Whether this model ever worked as advertised is an open question. Some see in Smith's invisible hand the will of a beneficent and omnipotent God. They regard the model as fundamentalist theism by other means. Even in its own idealized terms, this model, with its insistence on numerous competitors, may forgo some of the large-scale technologies that advance long-term economic growth. Even the idealized model may harbor some tensions of its own.

The larger question today, however, is whether a model that so dominates the American political psyche has anything to do with most economic activity today. Consider recent headline items. Asked by Nancy Pelosi to explain from where the billions to bail out AIG and other financial megastars was coming, Ben Bernanke argued than any attempt to assess where and under what conditions its money was flowing would amount to "a takeover of monetary policy by the Congress."

Along similar lines, the White House has recently come under fire for assuring the drug industry it will oppose a House proposal to allow the government to negotiate drug prices and extract additional drug company savings. The White House may eventually have to back down, but the mere negotiation of such a secret agreement speaks volumes.

Had a reader arrived from Mars or from a Milton Friedman text, he or she might assume our government was standing up for the principles of the free market. The Fed should regulate interest rates absent any evil political intervention -- like cheapening the currency to help debtors. Drug companies should negotiate with individual consumers, just like tomato lovers.

The only problem is the government has already intervened massively in both industries -- on the side of corporations. Drugs are already priced well above the cost of production thanks to government patents. Purchase of these overpriced drugs is subsidized through Medicare's prescription drug program. The resulting corporate windfall is defended as encouraging research on new drugs. Most of the money, however, goes to misleading ads and development of generally superfluous me-too drugs. As several orthodox economists have pointed out, the U.S. would get more for its drug dollars through increased funding of basic research and by offering prizes directly to pioneering research scientists.

Thanks to the Fed's secrecy, we know less about its largess, but research on Goldman Sachs by Nomi Prins shows that the firm is profitable only by virtue of loan guarantees and other subsidized assets from the Fed. Business Week has also recently exposed the ways many large investment banks are now gambling with taxpayer money to resume the high-risk strategies that landed them -- and U.S. taxpayers -- in deep trouble.

Both industries in turn recycle some of the vast profits into campaign contributions (hundreds of millions in the last quarter). Key legislators in rural states, where media buys are relatively cheap, are the biggest beneficiaries.

So much for "capitalism" as an alternative to the wasteful government. Most government programs, at least by measure of size, aren't the child of grass-roots or populist uprisings. They are a collaborative effort of government and the corporate sector. Corporations are the senior partners. The results have been harshly inegalitarian and wasteful.

I value farmers markets, but we should not return to an economy modeled on them. If we want justice and efficiency, our responsibility is not to end government's role but to embrace the complicated, perpetual tasks of limiting corporate power and renegotiating a more democratic and transparent government.