Essential Schumpeter: The Reality of Government

Welcome to the essential ideas of Joseph Schumpeter. One of Schumpeter's many unknown

contributions to economics was his insights into the reality of how

government functions. He realized that to understand

government you must first understand the people involved, be they voters,

politicians, or bureaucrats. Schumpeter observed that these people are not

selfless or benevolent who, somehow stopped worrying about their own

self-interest just because they joined the political process. Instead, people

involved in government have personal preferences, and self-interests, just like

the rest of us, that affect their actions and decisions. Let's demonstrate this

with an example using "Protectionstan" and "Openstan". These neighboring

countries both love milk and cheese. Openstan enjoys free trade and dairy

products, resulting in lower prices and more choices. But Protectionstan does

not. Why this striking difference in the two countries? Schumpeter's answer is

government. In Protectionstan, the dairy producers pay a portion of their revenue

to an industry association that lobbies the government to limit the number of

producers, how much each can produce, while limiting dairy imports. This

association spends a lot of money helping to elect politicians who support

these restrictive policies, and lobbies bureaucrats to ensure the market

protections stay in place. Why? Because producers in Protectionstan

enjoy higher revenues and profits as a result of the protections.

This means that people in protection stand pay higher prices and get less

choice. Openstan, on the other hand, has completely open trade and dairy products

meaning that both domestic and foreign farmers can produce and sell without the

limitations present in Protectionstan. The absence of barriers and increased

dairy competition in Openstan means that consumers pay lower prices and

enjoy more choice in what dairy products they can buy. Schumpeter's insights into

the nature of government and the role of people in the political process

significantly advanced our understanding of government decisions and actions. For

more information on Joseph Schumpeter, visit EssentialSchumpeter.org and to

learn about more essential scholars visit EssentialScholars.org