What is a market? What is government?

We often speak in terms of markets and government without really understanding what we’re saying.

What is a market?  Individuals interacting voluntarily with each other through prices.

What is government?  Individuals interacting with each other through political power.

There are many other ways individuals interact.  A family is one example.  Our friend network is another.  Churches, home owners associations, PTA, work groups, trade groups, the drivers in the group of cars around us on the freeway are still more examples.

I think it’s useful to understand what motivates and facilitates our interactions in these various  structures.  As mentioned above, in markets prices are the coordinating medium.  There are other factors too, but prices are the linchpin.

That’s why markets work well for getting people in the extended order, that is the billions of people we don’t personally know in the world, to cooperate on so many of the things we use daily to improve our lives.  This is the meaning of the Adam Smith’s famous quote:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The coordinating medium in government is different than markets.  It’s driven by elections, the structure for government decision-making (i.e. the constitution and/or generally accepted norms) and force.

The political power machine

What is the tax code?

Many might say it’s how we fund government. But, that’s not really it.  Funding could be accomplished with a flat tax.

The tax code is more than a funding mechanism.  It’s a political power machine. It gives elected officials the power to pick winners and losers.  Here’s some examples:

  • A politician might pick a winner based on what might sound good to voters.  I voted for tax breaks for the poor. Why not vote for low taxes for all?
  • State lawmakers often get to save the day by offering tax incentives to keep businesses from leaving their state so they claim that they kept jobs local in their next campaign and count on support from those workers.  Why not attract even more jobs by lowering tax rates for all businesses?
  • Lobbyists for special interest groups partner with elected officials to get the elected officials to give their special interest groups favorable tax treatment.

The tax code isn’t the only power machine in government.  Any activity of government that involves picking winners and losers has the potential to be a political power machine.

Some other examples of political power machines include granting exceptions to Obamacare, placing tariffs on sugar imports, requiring professional licensing, meeting Department of Education requirements in exchange for dollars for local school districts.

The raison d’etre for such things is to empower elected official.

Politicians are thankful when their citizens keep the debate centered on who they think should win and lose — who should pay the least and most in taxes, for example — because that means they get to keep their power and maybe get more.

So, when you consider whether folks making over $200,000 a year should pay a higher or much higher tax rate than you, keep in mind that it doesn’t matter.  There’s no right answer.  Politicians don’t care too much either.  They just care whether you believe the rate should be different for that group than for others.  As long as you believe that, politicians have power.