The idea that a government can and should be judged by their material performance is very common. Ruling parties are often reelected in periods of growth and increasing wealth. They are likewise defeated during recessions and economic crises. Widespread poverty and low levels of economic growth in developing states have deepened social and ethnic tensions, fueled corruption, and limited good governance.
On the other hand, advanced industrialized states have enjoyed both the greatest levels of political stability and the highest living standards in the world. Considerable debate has taken place about the most reliable means of generating wealth and achieving material prosperity. In some senses, this debate reflects the traditional ideological divide between capitalism and socialism. However, since the end of the cold war, the ‘capitalism or socialism?’ debate has developed into a ‘what kind of capitalism?’ debate.
This issue is not merely about how wealth can be generated, but also about how it is distributed. This is closely linked to the balance between the market and the state, and the degree to which government can, and should, modify market outcomes through a system of welfare and redistribution.
The dilemma that comes from using material prosperity to evaluate government performance is about balancing economic growth (the size of the cake) and social justice (how equally is the cake cut).
There are two competing political views on this issue: the free-market view and the social-democratic view.
The Free Market View
The free-market view, advanced by theorists such as Hayek and Friedman, holds that general prosperity is best achieved by a system of unregulated capitalism. From this perspective, economic growth is best achieved by policies that encourage hard work and productivity.
The welfare state should therefore act only as a safety net that protects individuals from absolute poverty (i.e. homelessness and starvation). Although this system does not aim to reduce social inequality directly (e.g. through social benefits and access to public services), supporters claim that it benefits the poor because they receive a small proportion of a bigger cake (which they claim is still bigger than a bigger proportion of a smaller cake).
Supporters of free-market economics refer to this theory as the ‘trickle down’ effect. Supporters of this view argue that big social budgets lead to higher taxes, which limits economic growth. They claim that high taxes limit economic growth because:
• It stops employees from striving to earn more (because higher earnings will lead to paying more tax)
• It stops employers from starting, or expanding a businesses (because it will be more expensive)
• It pushes companies out of the country (because they will want to move to countries with lower taxes)
The Social-democratic View
The rival social-democratic view highlights the moral and economic benefits of equality. Social democrats argue that unlimited economic freedom can produce great inequality by concentrating wealth in the hands of a very few. This in turn can polarize society, causing conflicts between owners and laborers, rich and poor, and urban and rural populations.
The value of policies that promote social justice is that they make sure that all citizens have a stake in society (citizens support the political system because they gain from it). Supporters of this view claim that free-market policies run the risk of promoting social exclusion. They argue that social exclusion can lead to the growth of an underclass where crime and social unrest are more likely.
Long-term and sustainable prosperity therefore requires a framework of fair distribution and effective welfare.
Social democracies seek to achieve greater equality through:
• Taxes, which make high levels of social expenditure possible while redistributing wealth from rich to poor.
• Trade, which is promoted but balanced with preserving domestic industry and jobs.
• Government regulation and even ownership of important sectors of the economy.
Supporters of free market economics criticize social democratic systems because they limit economic growth. They claim that the high costs of welfare states limit economic growth and discourage private enterprise. They also claim that the public sector is inefficient because it requires large, and complex bureaucracies which have less incentive to outperform their competitors (as they would in a free market).
