Market Failure and Government Failure
The market can screw things up. Individual people and corporations screw things up all the time, and it’s not uncommon for the market as a whole to screw things up. But it’s important to remember, when looking to government to correct or prevent market failure, that the government can screw up, too.
There are several reasons to prefer private screwups to public screwups:
- The government tends to screw up bigger than the market when it screws up. There are some truely huge corporations these days, but none come close to rivalling the financial resources of the federal government, nor do any of them share the government’s enormous non-financial power except through their ability to influence how the government wields its coersive power (a factor which is itself a consequence of government intervention — regulatory capture doesn’t happen when there’s no regulation to capture).
- When the government screws up, it’s less likely to fix itself than the market. When a business screws up, it tends to lose money, which makes it highly motivated to fix itself. When a government agency screws up, it argues that it would have done a better job if only it had more money and power, and it often gets it.
- It’s easier for an individual to escape from a bad private decision than a bad public decision. When I go to the store, I have a lot more candidates to choose from than when I go to the polls, and when I leave the store I always leave with exactly what I voted for.
- When the market as a whole screws up and fails to fix itself, the government can intervene. When the government screws up and fails to fix itself, there’s no further appeal left in reserve.
This is not to say that there’s no role for government in the economy. The market does have pervasive blind spots — the Public Goods problem, externalities, etc — where it will definitely screw up, but where the government has a chance of getting things right. And as my last bullet point acknowledges, there are other situations where the market fails and government must intervene. My point is that we should be careful about calling for the government to set things right, always remembering that the government itself is far from perfect.
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12 comments
You’re making some pretty sweeping claims, but in the end, your actual position is… small. Man, let’s hear a full-throated denunciation of the State as an immoral devourers of vast stretches of the commonweal!
Ultimately, you make “Libertarianism” sound a lot like the Liberalism I espouse. Since we disagree so often around the specifics, I’ve got to wonder where our philosophical differences actually lay? Or are we going to convert you to the Democratic Party in short order?
Remember, not too long ago, I wrote a post that claimed that “we are all moderates”? Right now, I’m following up on that theme. We’re both Americans who more-or-less like our country’s institutions and philosophical traditions, and this gives us huge areas of agreement. The small area where we disagree looms large, both because it’s a small slice of a very large pie, and because human congnative processes tend to focus on differences more than similarities.
I think our core difference is that I am much more reluctant to resort to coersion than you are. Or, looking at it from your perspective, I do not see the exercise of economic power (barring cases of fraud, breach of contract, or a full monopoly over a true necessity) as a form of coersion on the level of the state’s ability to impose fines, prison sentences, and executions on those who disobey it.
We’re looking at “screw up” from slightly different perspectives here.
When a corp screws up, it doesn’t automatically loose money if the mistake wasn’t related to the business.
If a paint manufacturer spills a thousand tons of waste into a public lake, there is no automatic loss of money and no business reason to fix the problem. A small public outcry might be heard if it’s a slow news day or if the lake has cute ducks, but the government must step in at this point for the screw up to be fixed.
As you said, the externality problem almost always vexes markets and requires government intervention.
You prefer to let the market give something a try and only let the government step in afterwards to fix the most blatant screw ups whereas I usually prefer to put rules in place *before* someone can munchkin the system.
You prefer to let the market give something a try and only let the government step in afterwards to fix the most blatant screw ups whereas I usually prefer to put rules in place *before* someone can munchkin the system.
Where did I say that? Certainly, if it’s clear that the market will get it wrong (such pollution), then the government can step in in advance. What I said was we should be careful not to assume that the government will get it right. I think there are cases where the market gets it wrong, but the government will get it more wrong. And I think there’s a tendency to push for over-broad corrections to unexpected market problems, like the sub-prime mortgage problem, where the market (both borrowers and lenders) systematically undervalued a certain type of financial risk.
I also favor government solutions which focus on correcting the flaws in the system that create opportunity for munchining, rather than mandating the “correct” behavior for all time. Either way would address the market failure, but mandates create more opportunity for government failure.
It’s impossible to completely avoid bad decisions. They will happen. Sometimes the costs and benefits are not visible for years. In my experience as a safety-critical systems engineer, it’s very useful to make failures immediate and obvious (short feedback/visibility), and to mitigate the impact of undetected failures (mitigation/failure modes effects analysis).
Libertarianism is about mitigating the scope of the decisions and having them made by the people who will experience the costs and benefits.
That does not really address externalities such as pollution. I can see some allowances for addressing those. Otherwise, I can’t really distinguish between wanting government to “do something” and wanting to tell people how to live their lives.
When I was thinking about this entry, one of the key points was that “In most cases, the costs of private mistakes are borne primarily by those making the mistakes. But when the government makes a mistake, we all bear the costs.” But I seem to have missed that poin while typing it up.
The problem with viewing government as “larger” than megacorporations–aside from the fact that it sidesteps the issue that megacorporations could not exist at all without government–is that it assumes government is one monolithic entity. However, quite a few corporations are bigger than quite a few governments. What are we talking about here? The government of Canada? The government of Ecuador?
But let’s say we’re just talking about the U.S. Might my local city, township, county, or state government be smaller than any of the corporations that do business in them?
Also, even with the U.S. Federal government: can it honestly be referred to like it’s one gigantic behemoth? Does an Air Force General really have more than the haziest notion of what gets done at the EPA or the Department of Transportation or the Department of Education? Does the chief NASA administrator have some sort of power over the Food Stamp program?
Also, regulatory jiggering isn’t the only thing corporations–which, I will never stop pointing out, are state-created, state-sustained legal fictions, soulless golems–do to interfere in a free market. Adam Smith wrote at length about the great necessity for moral behavior because he acknowledged outright that businesses without morals were bad for society. He also railed against what he called “absentee ownership” as pernicious and destructive–and that’s exactly what publicly-traded corporations are; the people who own them have practically no connection to the people who run most of them. These corporations are able to do all sorts of things to destroy the individual entrepreneur and the family owned business. And, these corporations used to routinely do things like force people to work in very dangerous circumstances, for 12, 15, 18 hour days, 7 days a week, until government came in and said that was unacceptable and they had to stop it and treat employees and customers and competitors in fair ways.
Lassez-Faire is nice in theory, and we may wish to argue that in some areas we need more of leaving the market to its own devices, but I find it pernicious and odd that libertarians and, conservatives of all people (who 100 years ago were the most anti-corporate, anti-trust people you could find) have been so enamoured of the successful Reagan-era reforms that they seem to think that anything and everything can be better if we just get rid of government and let multinational corporations do whatever the hell they want to do.
The government is not monolithic, true, but it is controlled by a pyramid of democratic institutions at the peak of which stand 545 people (435 Representatives, 100 Senators, the President, and 9 Supreme Court Justices). Together, they direct the allocation of $3 trillion and they direct an unrivaled institution for applying force. The Air Force General may not know or care what the EPA is up to, but if WalMart were to rebel against the authority given to the EPA by Congress, they would answer to the Air Force.
Shareholders are absentee owners of corporations, but by the same token voters are absentee owners of the government. The same problems apply, but more so because the government answers to no other authority but itself, while corporations do.
Coporations don’t “force” people to do things the same way governments do. If Microsoft tells me to work in a poorly-ventilated coal mine for 18 yours a day, the worst they can do to me if I refuse is fire me. If the government told me to do the same thing, they could shoot me.
I’m confused. Am I one of naive, irresponsible Lassez-Faire advocates you’re complaining about, or am I the closet Left-Liberal that Punning Pundit accuses me of being? As I said in the post itself, I see a significant legitimate role for the government the economy; I merely think that we are too quick to look to the government for solutions, as we tend to forget that the government has problems of its own.
When corporations basically control the economy, that may mean they can’t shoot you (although historically, they have been known to do that–see the history books on what they used to do to labor organizers) but they can prevent you from having anywhere decent to live or from eating regularly. It’s nice to say that you have the “freedom” to quit, but when you’ve got kids at home that “freedom” comes at a steep price. If you live in a community where the only employers are Wal-Mart (and by the way, I’m not a Wal-Mart basher), a few gas stations, and a video rental store, what does quitting your job mean to you and your kids’ future?
I don’t think you are naive and irresponsible. I’ve just reached a point in my life where I find libertarian arguments on the wonders of the market far less attractive or obvious than I used to. It’s not obvious to me that government answers to no authority other than itself; it very much appears to me that it answers to the voters. And to the other branches and departments in government, which are frequently in disagreement with each other. And to the market, to which it often capitulates.
what does quitting your job mean to you and your kids’ future?
At a minimum, it means you have to move and start over somewhere you don’t have connections, which is not an attractive prospect. I’ve done it myself, but I don’t have kids and I have a fair buffer of savings. I’ll admit it’s not a pleasant prospect, but it’s less unpleasant than the prospect of defying the will of the state.
Yes, the government does answer to the voters, and it must respond to the other groups you brought up, the same way a corporation answers to its customers, shareholders, employees, and suppliers and must respond to its competitors.
I think I see where you’re coming from; I’ve drifted towards the center myself over the last several years, although not as much as you have. I think I’m more suspicious of government power than you are, and I have more faith (but definitely not total faith) in the market.
It’s less unpleasant than defying the will of the state? You mean, losing my house, my savings, and all material security is much less unpleasant than circulating a petition, writing my congressman, or getting a lawyer and going to court?
Not seeing it.
Like you, I’m actually more centrist than I may sound on these things, and am by and large sympathetic to much of your view; I think Milton Friedman, in particular, made some extremely important arguments and demonstrated some undeniable proofs about the efficacy of markets. But then, if you talk about Friedman, one thing you’ll notice is that from his writing’s it’s *very* clear he was no uber-libertarian; his particular genius was not in claiming we need less government so much as we need to reinvent government mechanisms to try to get the beneficial effects of individual freedom of choice and at least some level of competitiveness to those government systems.
I mean less unpleasant than going to jail or getting shot. Governments can and do do that. In a fully functioning free society, it only happens when necessary, but even highly functional societies like ours fall short of the ideal from time to time.
Your reading of Friedman is a bit different than mine. I remember him arguing strongly for reducing the scope and impact of regulation, for lowering taxes, and for lowering the scope of government services. He did definitely want to keep much more government than a typical Ron Paul or Bob Barr supporter would want, and he did spend a lot of time talking about how to accomplish most of the goals of current government intervention with a smaller footprint, and I largely agree with him on those counts. Friedman was a major influence on the development of my political philosophy.
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