Whose economic interest does govt serve?

Most countries are now embracing mixed economies. Most of these economies are neither pure capitalism nor socialism.

Both the State and private companies participate in the economies as producers or entrepreneurs.

Private firms make and provide goods which are divided into two units.

These units are offered to whoever is prepared to pay for them. The one who is not prepared to pay is excluded from enjoying the benefits.

A manufacturer of textile goods can easily exclude those who do not want to pay for his goods.

A bus operator can refuse to issue a ticket to someone who wants a free ride.

The State provides public or social goods. These are generally not divisible. They have to be provided in bulk. It is not possible to serve only those that pay and exclude someone who is unwilling to pay for its services.

Public goods

Take, for instance, police service. If a wealthy person decides to hire policemen to patrol the neighbourhood, thieves will keep away from that area. It will not be to his benefit only, but to the benefit of the whole neighbourhood.

This simply means the neighbours are enjoying the benefits without paying for them. Such beneficiaries are called free riders.

Private entrepreneurs will not undertake a project whose products will be available to free riders. These projects may be essential for the growth of society. Since private businesses will not pay for them, the State must.

Apart from police services, the State usually provide essential services such as electricity and water, street lighting, roads and bridges.

In treacherous harbours the State provides lighthouses for the benefit of all shipping lines.

There is no sharp division between private goods and public or social goods. Education and health services are social goods.

Social goods

The provision of schools and hospitals benefits the community as a whole in that educated ones are more productive than uneducated people; healthy people work harder.

Vaccination against certain infectious diseases results in benefits from which no one can be excluded. If you vaccinate only those who are prepared to pay the unvaccinated may infect others. Their ill-health may be a danger to the whole community.

Perhaps the most recent function of the State is management of the macro-economics growth, price stability and employment.

In the course of managing these economic phenomena interest groups within the society arise. The State either willy-nilly or inevitably serves one interest group at the expense of another.

In the ideal conditions there is low inflation and full employment. But such a condition in a capitalist or mixed economy is difficult to achieve.

To achieve full employment, there must be adequate to high liquidity; there must be liberal credit to enable companies to open new factories or expand old ones.

Inflation

But in so doing there is a general rise of prices that is called inflation. While some people will welcome new opportunities for employment, others will be furious because their savings and pensions are losing their purchasing power.

Devaluation of a currency make exports cheaper and benefits export industries, but at the same time they make imports expensive. Buyers and consumers of those imports will not be happy.

In situations as fluid as these, vocal interest groups can influence the State to bend things to their advantage at the expense of the less vocal ones. Already in Malawi highly organised groups are exerting pressure on the government through strikes.

The State may succumb to these pressures and make concessions. In a slow growing or stagnant economy such concessions injure the voiceless and unorganised groups.

Special interest groups engage in rent-seeking. They spend time not on production of extra goods and services, but on getting the government to change the rules so as to make their business more profitable, for example, by frustrating their competitors.