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Statism is a term used to describe a system that involves a significant role for the state in economic or social affairs. In economics, the term "statism" refers to any economy where state planning plays the dominant role, or the advocacy of such a system.

Democracy and the politics of statism

It is worthwhile to consider the ideal model of democratic government and the reality of what happens when politicians come into the scene. Ideally, citizens demand government actions to “fix” situations of “market failure” – cases where the market leads to less-than-efficient outcomes, such as when a used-car salesman lies about the quality of the cars he sells. Ideally, taxpayers consent to the use of their money to correct the asymmetrical information problems (in other words, crooked car salesmen who know more about the car than the consumer and have an incentive to lie about it) by say, mandatory information stickers on used cars. Politicians rarely have the sole interest of the public in mind because human nature dictates that man is self-interested, and when he cannot compete for customers, he competes for power. The bureaucrat who makes his living inspecting car dealerships is unlikely to suggest to his superiors that a consumer protection agency would be better at his job, or that bringing a mechanic to the dealership is a cheaper solution to government intervention. He is more likely to suggest that more regulations be placed on used car lots so that he may hire assistants or increase his work hours. Meanwhile, the consumer knows little of such inefficiencies in the inspector’s work, because the best judge of the efficiency of inspecting used cars – the government inspector himself is the one least likely to reveal the inefficiencies of his job -- because they may lead to his demotion or loss of work. The point is not that regulation of used car dealerships is harmful to consumers, but that government bureaucracy is inherently inefficient and self-promotional, and the costs of such inefficiencies must always be balanced with the potential benefits.

There is another, more dangerous aspect of government regulation. The used-car dealership rarely takes regulation lying down. Rather, it will hire lobbyists, create ad campaigns to raise public support, court politicians, and in various other ways attempt to influence public policy. It is undeniable that business has such influence with the policy-makers of the United States. The problem is that as soon as an industry seeks to influence the government, it begins to compete on two levels – the competition for market power and the competition for bureaucratic power. Firms no longer strive to produce the best product at the lowest price, but for political “pull” – and the ones that win the war of pull are rarely the ones that are the most efficient. Thus, firms try to out-regulate each other out of existence rather than out-compete each other. Such is the inevitable side-effect of government regulation. What this means, is that for every government action, there will be a reaction by business, or in other words, if you want to get business out of government, you must get government out of business.

It is crucial to recognize that government is not especially good at producing any one good – it is only capable of forcibly transferring wealth from one party to another. Taxes, tariffs, licenses, and regulations either take wealth or create barriers to market entry, and private and corporate welfare, agricultural subsidies, tax-breaks, and regulations give wealth and monopoly powers to other parties. There are many arguments for such transfers of wealth, and it is impossible to answer them all in a short space, but it is sufficient to consider the previous two arguments, as they inevitably corrupt any good intentions legislators have when they enact such legislation.

When one considers the above effects of market regulation, it is easy to see why politicians have such a bad reputation. Many reformers propose further regulations and agencies to oversee politicians’ actions and finances – but this only increases the size of government. The real solution was provided to us by the Constitution of the United States -- while imperfect, it contained built-in limits on the power of government to intervene in the market. When the government remains small and stays out of the regulation business, businesses have little interest in lobbying government because their livelihood is not at stake, and consumer groups have little success in imposing regulation because of court oversight of legislation. Such is the ideal size of government. When it strays into the market, it immediately becomes too big and acquires tremendous incentives to expand more and more.

See also