Your Government

First question: What’s the government? What does it do, and what should it do? Politics and media are too busy with the news of the day to talk about the bigger questions of what states are really for. What counts as public and private is one of the most important debates in economics, and in society – before deciding that, we can’t work out what should and shouldn’t be tax-funded, state-supported, or market-led.

Imagine a game of football without any rules. Take this seriously and you’re left with an undetermined number of people meeting at an unspecified location, to do anything that strikes their fancy.  The economy is very similar. Without basic ground rules, it is difficult to imagine how markets could achieve much of anything, let alone coordinate the world economy. The question is whether governments should set those rules, or whether markets can  provide them spontaneously. How far should property, environment, and labor regulation go to protect us without constraining us?

How do we know what areas the government should keep hold of, and where it should stay well out? It depends on who benefits from a good or service, how much it costs to set up and run, what the core incentive behind it is and who asked for it. We’ve all got our preconceived ideas of where government spending belongs and what should be left to the private sector, but it’s probably one of the things people disagree most about. Economics has some helpful tools for getting to the bottom of those debates.

Picking apart how tax works sounds dull, but is one of the most important parts of understanding the economy. We talk about taxes as redistributing wealth, which implies that there’s some kind of pre-existing distribution of wealth that the tax system reshuffles. The thing is, the whole concept of governments relies so heavily on taxation that this language can be misleading. Tax represents everyone in a society pooling some money together to set up the foundations of what that society will look like. So what happens if we can’t pull together enough money?