Economic Growth in the 21st Century

BY ZENON CHRISTODOULOU Two hundred years after Adam Smith identified the rational economic model which many believe explains the essence of market capitalism, our elected leaders are still unable to combine the virtues of free markets with the growing need for government support. In President Obama’s State of the Union, he pointed out that we don’t need “a bigger government, but a smarter government”; while Senator Rubio warned that more government will “hurt you” and “hold you back “. These divergent opinions are based on very different visions regarding government’s role and the best way to achieve competitive advantage.

Adherents to laissez-faire capitalism encourage unencumbered markets and the Invisible Hand they create as the best means to promote economic efficiencies, ensure the general well-being of societies and create the wealth of nations. Requiring anything more than the rational self-interest of willing and well-informed participants is considered useless and counter-productive. Government intervention, in the form of industry regulations or punitive enforcement, is believed to be unnecessary, as the corrective action of subsequent transactions rewards those who satisfy demand and punishes those who don’t.

Over time, the Invisible Hand’s influence has been observed in virtually every facet of the economy; from labor markets to airline schedules and from seatbelts on busses to medical services. But, as private industry has come to accept and anticipate the powerful effects of dynamic markets, the strengthening clutch of government intervention has emerged as a dominant force which has the ability to alter free market mechanisms.  The wealth of nations is more and more determined by the disparate wealth between nations as governmental policies in the form of industry regulations, interest rates, tax structures and market guarantees increasingly precede economic growth and prosperity.

State sponsored capitalism has expanded its influence over modern societies and many observers claim that the emergence of government’s growing role is an essential element of contemporary economies. Modern governments justify their power over the private sector as higher start-up costs, the need for seamless market coordination, longer time horizons and the noble desire to limit the harm of unintended consequences each require an overarching mechanism to coordinate economic growth and promote social stability. Examples of state sponsored capitalism are common throughout history and recent successes in China, Brazil and the Nordic countries make it is unlikely that the trend towards economic statism will reverse itself any time soon.  

Today’s statism is significantly different than those which brought down the Soviet Union, relegates North Korea to the Middle Ages and has kept Cuba in relative isolation for half a century. The current economic model is able to employ a mix of market sensibilities with the recognized need to encourage unprecedented levels of investment over very long time horizons. The wise combination of these forces will determine which nations succeed in the 21st century and which will be added to history’s growing list of former empires. Without governments’ participation and concessions in the form of favorable regulations, predictable tax structures, the development of supporting industries and a commitment to an educated work force, the essential mega-projects of tomorrow will not materialize. The Invisible Hand, by itself, cannot provide the market cues and guarantees necessary to encourage investment, for example, in energy exploration projects which can cost $500 billion (as ExxonMobil is proposing in the Russian Arctic) or to create an updated energy grid which will span several decades, dozens of states and thousands of municipalities. Tomorrow’s paradigm altering innovations will require substantial buy-in, unwavering staying power and the where-with-all to navigate the halls of government with know-how and know-who.

The government’s expanded role provides it with the increasing ability to design, develop and maintain the fortunes of their choosing and, by doing so, gives it the power to bestow market distorting benefits on selected industries, regions, businesses and donors. Governments and elected leaders, however, have not always shown themselves able to implement the most economically sound decisions on behalf of consumers and businesses. Government sponsored businesses, for example, are typically less profitable, have lower returns on investment and are less innovative than their truly private counterparts. As a result, we are given cause to question whether governments should have such a large influence over the direction of our economy.

The public’s valid concerns include: the lengthy legislative process, which governments are notorious for; the inherent problem of governments regulating themselves; the extreme partisanship which has evolved to maintain the status-quo and job security; the many cognitive biases which lead to sub-optimal choices from incumbent groups, particularly when they are supported by other people’s money; the repressive regulations which are able to discriminate between government sponsored endeavors and private ones; and, the unavoidable need to satisfy campaign contributors. Countless examples shine light on the government’s inability to respond effectively to market signals and to participate as the most effective economic actor. Our national competitiveness, therefore, may be needlessly restrained at a time when we are facing fierce global competition.

With a solid rationale encouraging government’s involvement and equally sound opposition to it, a fundamental conflict exists between the need to coordinate large scale economic development with ‘smart’ government partnerships, as President Obama implied, and the need to take elected leaders out of the decision making process, as Senator Rubio advised. Regrettably, neither political side is able to see the virtues of the other’s position and, as a result, our country is held up in perennial gridlock and is losing ground to better coordinated nations.

Governments are and must be involved with economic development, but their inconsistent policies don’t always provide a stable framework for long-term success. What our economy needs is enough government coordination and oversight so that fledgling and existing industries can compete on an efficient scale, while not overriding market mechanisms, crowding out private investment or suppressing individual creativity and innovation. Myopic cronyism and the belief that individuals are better able to respond to dynamic economic forces than free markets create distortive effects, which alter the efficient allocation of resources and reduce our national competitiveness.

To prevent these detrimental results, truly independent, non-partisan, agencies should be created to coordinate public policies with the initiatives of private industry. These agencies must have a clear understanding of global economics, a respect for market forces, an appreciation of workforce development and the latitude to operate outside campaign and political frameworks. We have witnessed, for instance, the many successes that public private partnerships can achieve when governments embrace market forces and work alongside the private sector. The cooperation that makes these individual projects possible is scalable and should be expanded economy-wide. By re-formulating economic policies to reflect objective market forces and not the vicissitudes of election cycles, our leadership can provide the ‘smart’ government that President Obama encouraged. Public policies based on market-based principles, not political expediency, will create the hybrid model of economic success in the 21st century.

Adam Smith would be encouraged that two centuries after the Industrial Revolution unlocked the collective genius of vibrant and innovative individuals, we now have the ability to unleash the infinitely greater power of entire nations. To enjoy the significant economic growth that this would yield and to attain the higher level of well-being we rightfully strive for, we must ensure that the Visible Hand of government supports the Invisible Hand of market forces.  Together, they will empower individuals, encourage investment, spark innovation, create growth and guarantee that America will continue to be the envy of the world.

Dr. Zenon Christodoulou
Graduate Professor of Business, Government and Society at William Paterson University; vice chair of the Somerset Democrats

  Economic Growth in the 21st Century