Let's flip Arnold's line of reasoning around to examine the merits of government action.
1. Government action relies on government actors behaving in the public interest.
2. Governments are optimal only under conditions of perfect altruism of government actors.
3. The conditions for perfect government are rarely satisfied.
4. There are many instances of government failure.
5. Therefore, government does not work.
There are many examples of market failure that cannot be overcome by libertarian market processes, and I believe libertarians would agree with at least some of them. They usually involve "public goods" where competitive actors would be duplicative and inefficient. Thus, a system of laws, the justice system, national defense, public safety (police, fire firefighters), airline safety, and numerous other examples are more efficiently handled through the polity rather than markets.
To take the last example, one might argue that markets could handle airline safety *over time* as airlines or monitors of airlines develop reputations for optimal safety management. An anology might be the automobile industry where Toyota, Volvo, and the erstwhile Saab have (or had) reputations for building the safest cars. But lapses in car safety result mainly in fender benders. Airline safety is a more complicated and fraught endeavor. Few people - maybe test pilots - would want to be the guinea pigs testing a new airline before it develops a good reputation. Moreover, there are vast economies of scale to verifying airline safety. If, say, the FAA (or a private corporation paid for by public monies) verifies that American Airlines and Boeing aircraft are safe, then passengers don't need to pay for another verification service - a classic public good. If we had to rely on the market to verify an airline's safety, who would pay for the service? Airlines paying for the "good housekeeping seal" would not result in credible safety ratings. If some passengers paid for such a service then other passengers could free ride; there would be a suboptimal amount of verification.
Another argument against government is that politicians and bureaucrats are self-motivated and so don't act (optimally) in the public interest; thus, bureaucracies are inefficient. But corporate bureaucracies also can be inefficient and faulty because of similar principal/agent problems. For example, corporations designed and manufactured the Ford Edsel, the Chevy Corvair, new Coca Cola, the Boeing 787 Max, complex, opaque financial instruments, and numerous other failing goods and services. That government at times produces faulty outcomes is not in itself a reason to preclude using government in situations where it has a comparative advantage - for the provision of public goods.
"Public goods" are not defined by the idea that competitive actors would be duplicative and inefficient. Competitive actors are ALWAYS duplicative and inefficient, relative to an IDEAL monopoly actor (say, the theoretical government). Competition wins *over time* because despite the inefficiency it innovates. Public goods are defined by the need to make them "non-excludable" i.e., no-one can be denied them, therefore no-one wishes to pay for them (because they would receive them anyway).
In fact, airline safety could be handled by markets *over time*. As you point out, safety of all sorts of products is handled by market mechanisms all the time. Quite dangerous activities including scuba diving (to pick an example) are "regulated" by market forces. One of those mechanisms is the "good housekeeping seal" mechanism which, as it turns out, is naturally non-excludable. Governments tend to get into that business; but it's not the only safety mechanism and in fact part of what keeps Airbus and Boeing at the top of the airliner market is their reputations relative to, say, Comac. And, yes, airlines DO have safety reputations to maintain, and people really do think twice about riding on some airlines. There's a lot to be said for those market mechanisms, which are often so good you don't even notice them.
That said, it's true that there are services best provided by government; and it's also true that large corporations are prone to the same inefficiencies, errors and malincentives as government. The easiest way to grasp this is to understand that government is a large corporation. It's a very special kind of corporation - a heavily-armed monopoly - but a large corporation nonetheless.
Scuba diving and driving automobiles are very different activities from flying on common carrier air transportation because the former two are individualized activities. I do however agree that some airlines have developed good reputations and others not. But if airline safety isn't a great example for you of a public good, there are plenty of others beside national defense, the court system, and public safety that would be utterly impractical to provide through private corporations. Another example is streets and by-ways. (Highways could be and are run by private corporations in some cases.) It'd be an absolute mess if streets and by-ways were organized by multiple suppliers. That's not to say the government has to design, build and maintain them, and in fact many such services are contracted out. But some actor needs to be the arbiter of which streets get built and which ones not. If not the government, then who - and how? New York City couldn't function with two Fifth Avenues and two 42nd Streets or duplicative, exclusive grids of streets and avenues.
I am no expert on all the different varieties of libertarianism, but I think many or most of them recognize that there are certain tasks that are better done by government, defense of the country for example. To accept that markets can't do everything better than government doesn't mean one can't still think that markets can do most things better than the government, but the latter is doing them anyway. For most of the US's existence until the 1930s, the total of federal, state, and local spending rarely exceeded 10% of GDP by much, except during major wars; the government is more than four times bigger now, having taken on many more jobs that the market used to handle.
Also, most of your examples of corporate failure I don't think can be blamed on corporate bureaucracies having principal/agent problems the way the government does. Yes, the Edsel, Corvair, New Coke, etc., were all flops as consumer products, but they weren't intended to be. Nobody knows the future, and those businesses made what, as the saying goes, seemed like a good idea at the time, but they were wrong. That is in contrast to the government, where taxes are taken from the public supposedly for the general welfare but mostly spent to benefit constituencies that help the reelection of the pols in power. That is a principal/agent problem.
I expect you are very familiar with the commercial airline market, so I won't presume to educate you, but I think some clarification might be in order for the benefit of others who aren't so familiar.
It's true that there is a lot of safety-related regulation dealing with design, manufacture, operation, and maintenance of airliners. However, this regulation does not consist primarily of regulators specifying design principles, manufacturing processes, operation procedures, or maintenance practices. All these areas are left to the companies involved, with the FAA evaluating and certifying the processes the companies develop, and monitoring compliance with these processes.
FAA inspectors don't review aircraft designs - they don't have the expertise. They review Boeing's design procedures and rely on Boeing's designers to follow the procedures and use good practices. And the top Boeing engineers work "on behalf of the Administrator" of the FAA in approving designs. Likewise with manufacturing processes. And the same applies to the OEMs for engines, avionics, landing gear, and other major systems.
When it comes to maintenance, FAA inspectors don't inspect planes, engines, or other components, nor do they write maintenance procedures. Rather, OEMs publish Guidelines for Continuing Airworthiness that specify the inspections and maintenance procedures to keep planes safe to operate. Airlines are free to modify these guidelines, but have to do engineering analysis to demonstrate that their new procedures are safe and effective. And again, the airline personnel or engineers at other maintenance providers are "Designated Engineering Representatives", who operate "on behalf of the Administrator" in approving these procedures. If they don't use good engineering practices in performing these duties, they are potentially liable for civil or criminal penalties if something goes wrong.
The FAA has an important role in maintaining quality control, and can shut down operations that aren't safe. But the overall system is very decentralized, with the companies actually doing the work responsible for safety in design, manufacturing, operation, and maintenance. They also have a great deal of room to improve their processes, as long as the new processes are also safe and effective. They don't have to wait for the government to perceive a problem, consider possible improvements, decide on an approach, publish new guidelines, solicit feedback from interested parties, finalize new rules, and then check to ensure the new rules are followed. The overall system looks much more like a market system than a government program. Even though there isn't a "Good Housekeeping" (or more likely "Underwriters' Lab") seal of approval.
Actually, Brian, I learned quite a bit from your comment. I'd say this case is a good example of private-public cooperation, leaving the details to the experts at the private companies but having a "neutral" party - the FAA - ensuring that procedures are sensible and that the airlines and manufacturers follow the procedures. Thanks for the additional info.
I recommend the monograph “Government Failure vs Market Failure” by Clifford Winston of the Brookings Institution. If we compare both government interventions and markets in practice, and not just ideal theory, markets win pretty definitively. (See also Peter Schuck “Why Government Fails So Often and How it Can Do Better”). Public goods is an example where there is a theoretical argument in favor of intervention, but in practice they often cause more unintended negative consequences than they solve.
This does not imply that everything must be left to markets. But it does imply that markets should be our status quo default, that government should “first do no harm,” and that interventions have a large burden--rarely satisfied-- to show that there is reason to think they’ll do more good than harm.
Well said, "SZ." And thanks for the reference to Cliff Winston's book. You've captured what I was trying to convey, albeit extending it usefully ("first do no harm") and the burden of "proof," or at least persuasion.
"1. Government action relies on government actors behaving in the public interest.
2. Governments are optimal only under conditions of perfect altruism of government actors.
3. The conditions for perfect government are rarely satisfied.
4. There are many instances of government failure.
5. Therefore, government does not work."
.
1. There is no such thing as "the public interest." Any politician who claims that is his goal, or any government official who says he adheres to "the public interest" is deeply confused, or lying.
2. Since "perfect altruism"' is impossible, we constitute governments to operate under a liberal order, i.e., strictly constrained solely to fairly narrow powers and responsibilities. Put another way, a government with clear, enumerated powers and with strong legal protections for rights is the optimal government.
3. This is why we do #2 and do well to keep #1 in mind.
4. Correct, and this is one of the best arguments in favor of a small, constrained government.
5. Government as the entity with a monopoly on legal violence works better than the alternative.
Dear "Ken in MIA" - You've missed the point of my ironic argument designed to parallel Arnold's line of reasoning about markets. The core of the fallacious argument is that because #3 is obviously true - "The conditions for perfect government are rarely satisfied" therefore #5 holds - "...government does not work." Of course, the conditions for perfectly efficient government are not satisfied. That does not imply government is *never* the best available locus of efficient action. Similarly, markets not being perfectly competitive does not imply that markets are never the best available locus of efficient action. Indeed, markets are the best way to organize the vast majority - but not all - of society's economic activities. I've already provided a few examples - and there might only be a few - where government is more efficient than markets.
LOL! FWIW, I don't agree with Arnold all the time, but I know him well and think he is one of the most intelligent and insightful people I've ever met, and I've met some very smart people in my time.
The relentless push for technocracy is a transparent attempt to preserve the current oligopoly.
Rising populism will put an end to this. If you thought Trump was bad, then you should do everything you can to put him back in power, because what will come instead of him will make him look like Cyrus the Great.
"Market Failure" is just a negative way to say that there is an unsatisfied need or want that somebody might be able to make some money satisfying. New "failures" keep arising as people's desires change, and they disappear as businesspeople detect them and offer goods or services that satisfy what people want now.
Yeah, supply and demand imbalance is inevitable, and also is normally an opportunity. It only becomes a market failure when the opportunity to innovate and compete is constrained.
It's all well and good to keep going back and forth between the radical extremes; but any good solution will recognize that:
Families are the only way to make grandparents. But sometimes they fail to do so. Even when they are succeeding as best they can, they can do better with other systems around them.
Families without markets fail to scale beyond subsistence 'everything' which basically amounts to hunter/gatherer or at best small scale agriculture and resource extraction. Markets are the best solution to specialization and trade.
Even decent markets and pretty good families will sometimes lead to frustrated, envious, people or people groups. They may resort to ultimately suboptimal solutions for the community - like false advertising, breaking contracts, theft, and ultimately violence. Upholding and nurturing the virtues of honesty, generosity, and gratitude are the roles traditionally assigned in the West to one set of civic institutions (the Church). Repressing the rewards of bad action (beyond the scale of the family) has been the province of the Government. If the market gets to the point that reputation can't handle falsehoods and family units can't manage violence, then you need a government.
The leaders of any of these institutions become excessively invested in the institution and not so much in its function. Any organization eventually evolves to the sole purpose of self-aggrandizement. All government and market structures (as opposed to the overall class of 'government' and 'market') should probably have a natural lifespan. Families certainly have a natural lifespan, and if they fail at their mission of raising new people, they end fairly dramatically. So they are more self-correcting and at the same time more vulnerable; but their collective ends without replacement and at scale are also the concomitant end of all governments and corporations.
Rick T. Your quibbles are well placed. I agree that "...markets can do most things better than the government..." As a trained economist, I believe in the virtues of market forces in most instances. And my examples of failed goods (the Edsel, New Coke, etc.) were not the best I could've presented, but there are plenty of other examples in the corporate sector of inefficient principal/agent decisions, e.g. executive compensation, the mal incentives of option packages, leverage, and others.
As for your comment - "Nobody knows the future, and those businesses made what, as the saying goes, seemed like a good idea at the time, but they were wrong..." - A similar comment applies to government. Not everything the government does is wrong, but even when it tries to do the right thing, it errs some of the time.
I agree that government does too much and has become bloated. We could eliminate entire federal departments without adversely affecting the lives of most Americans except for special interests favored by those departments. Education, Energy, and Commerce (except for data-gathering bureaus) come to mind. To quote Governor Mario Cuomo (D-NY), “We should have only the government we need, but we must have... all the government we need.”
I think a strong political argument for a generally anti-government bias is that when the government does something wrong, it (or the agency or department responsible) doesn't go bankrupt as a result. I think it's much easier to find parts of the economy gratuitously influenced by the state than to find missing markets that might exist due to state intervention because it's much harder - often impossible in fact - to reverse government takeover of a market.
Mark - I don't disagree in many cases, except for the public goods I cited. They're not cases of missing markets where Arrow-Debreu time-and-state-contingent commodities need to fill in to complete markets. Markets for public goods, even if they existed, don't work. For example, how could one have a market for a legal code that supports economic contracts and public safety? How could one have a market for national defense?
I agree that many instances of government intervention are ill-conceived. It was predictable (I have no documentation to prove but did predict) when the Obama administration monopolized the student loan industry that it would end in financial disaster. But that is a case where no market failures needed correcting. In fact, the government created moral hazards that didn't exist before it monopolized lending. And here we are, "forgiving" hundreds of billions of dollars of student loans.
“…in the long run the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster.”
--- John Cowperthwaite, Hong Kong financial secretary, 1961-1971
Jason Furman's emphasis on the idealized concept of perfect competition and its imperfections, with corresponding government interventions to solve, them is typical--I've read Arnold's summary but have not watched Furman's video and hope I'm misunderstanding Furman--and deeply disappointing.
Scanning the comments, I was surprised not to see a reference to Harold Demsetz's concept of Nirvana Fallacy, of which Furman is apparently guilty and which criticizes comparisons of a real-life practical situation or problem ("market failure") to an ideal, hypothetical “solution” (government intervention).
David Henderson has co-authored a little Fraser Institute book which includes an excellent chapter on the Nirvana Fallacy and is supported by a short, also excellent video. Coincidentally, I’m scheduled to present the concept of Nirvana Fallacies to my high school students today.
I’m pleased to know the provenance of “markets fail, use markets” is via Arnold, another of his excellent innovations in phrasing. I recognize it as the conclusion of a sequence:
Harvard : “markets fail, use government”
Chicago: “government fails, use markets”
George Mason: “markets fail, use markets”
The bottom line is that markets have better correction mechanisms than government. Per Arnold, “entrepreneurial innovation and creative destruction tends to solve economic problems, including market failures”.
I've learned a couple of good new things here: private replies are possible and you have a newsletter.
Your CEE is highly underrated. I don't think I use it enough in my classes, although this week I've assigned "Property Rights" by Armen Alchian, "Public Choice" by Wm Shugart II, and "Rent Seeking" by you.
More references to the Fraser book are coming soon for my students. I took Sam Peltzman's course at Chicago Booth (MBA '79) and got to know him pretty well for an MBA student, so discussing him is a highlight.
I have two suggestions for you, if I may. For the CEE, it would be helpful to include a date of publication. Perhaps some articles have this, but I think not all do. Also, you've written about your teaching of numeracy to your Monterrey students. I'd like to teach more numeracy & would love to see how you go about it.
Thanks, John. I actually don't have a newsletter yet. We've just set up the architecture. Thanks for your comments on my Concise Encyclopedia of Economics and on the Fraser book on the UCLA school. After his car safety article came out in the mid-1970s, a friend and I started referring to him as "Seatbelt Sam."
Great suggestions on dating articles. I'll see if someone at Econlib is willing to do it.
I heard the same talk on a Cato podcast and had a similar reaction: this guy--who seems nice and reasonable and smart--doesn't understand what makes a market economy good.
On the upside, if someone could be bothered to talk with him for two hours, he could be persuaded.
If you view markets and supply/demand systems as feedback control systems, many of the apparent market instabilities are understandable. If an increase in demand increases the price which increases the profit margin (the control signal) to the suppliers allowing the suppliers to increase the supply which brings down the price at a new demand level. It is like the thermostat on you home heater, but with thousands of interacting feedback control system.
The mathematics that is used to analyze many interacting control system say in a rocket utilizes complex math with the √-1 = i = imaginary number part of a complex number (they are actually real) to properly consider the time dynamics. These equations show instability points where system will oscillate or fail and the location of those points depend strongly on time delays. If the supply can't respond for years, prices can go extremely high and then when the supply comes in the prices crash as we see in real estate in California. https://www.dropbox.com/s/7go8mum7wmgljsg/Realestate%20oscillation%20Ca.pdf?dl=0 (note California added a huge time delay in the late '70s with environmental and other reviews)
In the case of government planning even supply/demand relationships feedback control system doesn't work even when changes in demand and supply can be instantaneous with no time delays (replacing your thermostat with an off/on switch). With a 5 year plan there is no ability to increase or decrease supply on a relevant time scale and the system will always fail.
System engineers have found ways to get around some of these time lag induced instabilities using PID controllers (proportional, integral, differential) and even more advanced control logic to prevent instabilities and that could be used to prevent what are called market failures (assuming we are talking about real market failures, not just self-interest driven rent seeking claims of failures). For example, limiting environmental, zoning, review on permissions to a month or so would make California real estate return to stable system without unstable oscillations. It would also retire all the political "consultants", lawyers, and environmental "activists" now required. You could also tie taxes to the rate of change in price signal (price - cost/ft2 - inflation) and the integral of the price signal over time. This could also make the system stable and could be used for mining, oil wells, and other slow responding supply issues and most of the claimed market failures would go away.
Good point, government fundamentalism counter balancing market fundamentalism. Wish I had thought of that when I was accused of being a constitutional “originalist”. I was trying to respond to the assertion that libertarians are anti-government. I thought the simple response that we just prefer a streamlined government, according to the constitutional concept of enumerated powers was a winner.
Let's flip Arnold's line of reasoning around to examine the merits of government action.
1. Government action relies on government actors behaving in the public interest.
2. Governments are optimal only under conditions of perfect altruism of government actors.
3. The conditions for perfect government are rarely satisfied.
4. There are many instances of government failure.
5. Therefore, government does not work.
There are many examples of market failure that cannot be overcome by libertarian market processes, and I believe libertarians would agree with at least some of them. They usually involve "public goods" where competitive actors would be duplicative and inefficient. Thus, a system of laws, the justice system, national defense, public safety (police, fire firefighters), airline safety, and numerous other examples are more efficiently handled through the polity rather than markets.
To take the last example, one might argue that markets could handle airline safety *over time* as airlines or monitors of airlines develop reputations for optimal safety management. An anology might be the automobile industry where Toyota, Volvo, and the erstwhile Saab have (or had) reputations for building the safest cars. But lapses in car safety result mainly in fender benders. Airline safety is a more complicated and fraught endeavor. Few people - maybe test pilots - would want to be the guinea pigs testing a new airline before it develops a good reputation. Moreover, there are vast economies of scale to verifying airline safety. If, say, the FAA (or a private corporation paid for by public monies) verifies that American Airlines and Boeing aircraft are safe, then passengers don't need to pay for another verification service - a classic public good. If we had to rely on the market to verify an airline's safety, who would pay for the service? Airlines paying for the "good housekeeping seal" would not result in credible safety ratings. If some passengers paid for such a service then other passengers could free ride; there would be a suboptimal amount of verification.
Another argument against government is that politicians and bureaucrats are self-motivated and so don't act (optimally) in the public interest; thus, bureaucracies are inefficient. But corporate bureaucracies also can be inefficient and faulty because of similar principal/agent problems. For example, corporations designed and manufactured the Ford Edsel, the Chevy Corvair, new Coca Cola, the Boeing 787 Max, complex, opaque financial instruments, and numerous other failing goods and services. That government at times produces faulty outcomes is not in itself a reason to preclude using government in situations where it has a comparative advantage - for the provision of public goods.
"Public goods" are not defined by the idea that competitive actors would be duplicative and inefficient. Competitive actors are ALWAYS duplicative and inefficient, relative to an IDEAL monopoly actor (say, the theoretical government). Competition wins *over time* because despite the inefficiency it innovates. Public goods are defined by the need to make them "non-excludable" i.e., no-one can be denied them, therefore no-one wishes to pay for them (because they would receive them anyway).
In fact, airline safety could be handled by markets *over time*. As you point out, safety of all sorts of products is handled by market mechanisms all the time. Quite dangerous activities including scuba diving (to pick an example) are "regulated" by market forces. One of those mechanisms is the "good housekeeping seal" mechanism which, as it turns out, is naturally non-excludable. Governments tend to get into that business; but it's not the only safety mechanism and in fact part of what keeps Airbus and Boeing at the top of the airliner market is their reputations relative to, say, Comac. And, yes, airlines DO have safety reputations to maintain, and people really do think twice about riding on some airlines. There's a lot to be said for those market mechanisms, which are often so good you don't even notice them.
That said, it's true that there are services best provided by government; and it's also true that large corporations are prone to the same inefficiencies, errors and malincentives as government. The easiest way to grasp this is to understand that government is a large corporation. It's a very special kind of corporation - a heavily-armed monopoly - but a large corporation nonetheless.
Scuba diving and driving automobiles are very different activities from flying on common carrier air transportation because the former two are individualized activities. I do however agree that some airlines have developed good reputations and others not. But if airline safety isn't a great example for you of a public good, there are plenty of others beside national defense, the court system, and public safety that would be utterly impractical to provide through private corporations. Another example is streets and by-ways. (Highways could be and are run by private corporations in some cases.) It'd be an absolute mess if streets and by-ways were organized by multiple suppliers. That's not to say the government has to design, build and maintain them, and in fact many such services are contracted out. But some actor needs to be the arbiter of which streets get built and which ones not. If not the government, then who - and how? New York City couldn't function with two Fifth Avenues and two 42nd Streets or duplicative, exclusive grids of streets and avenues.
Thank you for that. To “flip” the argument is an effective antidote for confirmation bias.
Well said Matt. A two minor quibbles:
I am no expert on all the different varieties of libertarianism, but I think many or most of them recognize that there are certain tasks that are better done by government, defense of the country for example. To accept that markets can't do everything better than government doesn't mean one can't still think that markets can do most things better than the government, but the latter is doing them anyway. For most of the US's existence until the 1930s, the total of federal, state, and local spending rarely exceeded 10% of GDP by much, except during major wars; the government is more than four times bigger now, having taken on many more jobs that the market used to handle.
Also, most of your examples of corporate failure I don't think can be blamed on corporate bureaucracies having principal/agent problems the way the government does. Yes, the Edsel, Corvair, New Coke, etc., were all flops as consumer products, but they weren't intended to be. Nobody knows the future, and those businesses made what, as the saying goes, seemed like a good idea at the time, but they were wrong. That is in contrast to the government, where taxes are taken from the public supposedly for the general welfare but mostly spent to benefit constituencies that help the reelection of the pols in power. That is a principal/agent problem.
I expect you are very familiar with the commercial airline market, so I won't presume to educate you, but I think some clarification might be in order for the benefit of others who aren't so familiar.
It's true that there is a lot of safety-related regulation dealing with design, manufacture, operation, and maintenance of airliners. However, this regulation does not consist primarily of regulators specifying design principles, manufacturing processes, operation procedures, or maintenance practices. All these areas are left to the companies involved, with the FAA evaluating and certifying the processes the companies develop, and monitoring compliance with these processes.
FAA inspectors don't review aircraft designs - they don't have the expertise. They review Boeing's design procedures and rely on Boeing's designers to follow the procedures and use good practices. And the top Boeing engineers work "on behalf of the Administrator" of the FAA in approving designs. Likewise with manufacturing processes. And the same applies to the OEMs for engines, avionics, landing gear, and other major systems.
When it comes to maintenance, FAA inspectors don't inspect planes, engines, or other components, nor do they write maintenance procedures. Rather, OEMs publish Guidelines for Continuing Airworthiness that specify the inspections and maintenance procedures to keep planes safe to operate. Airlines are free to modify these guidelines, but have to do engineering analysis to demonstrate that their new procedures are safe and effective. And again, the airline personnel or engineers at other maintenance providers are "Designated Engineering Representatives", who operate "on behalf of the Administrator" in approving these procedures. If they don't use good engineering practices in performing these duties, they are potentially liable for civil or criminal penalties if something goes wrong.
The FAA has an important role in maintaining quality control, and can shut down operations that aren't safe. But the overall system is very decentralized, with the companies actually doing the work responsible for safety in design, manufacturing, operation, and maintenance. They also have a great deal of room to improve their processes, as long as the new processes are also safe and effective. They don't have to wait for the government to perceive a problem, consider possible improvements, decide on an approach, publish new guidelines, solicit feedback from interested parties, finalize new rules, and then check to ensure the new rules are followed. The overall system looks much more like a market system than a government program. Even though there isn't a "Good Housekeeping" (or more likely "Underwriters' Lab") seal of approval.
Actually, Brian, I learned quite a bit from your comment. I'd say this case is a good example of private-public cooperation, leaving the details to the experts at the private companies but having a "neutral" party - the FAA - ensuring that procedures are sensible and that the airlines and manufacturers follow the procedures. Thanks for the additional info.
I recommend the monograph “Government Failure vs Market Failure” by Clifford Winston of the Brookings Institution. If we compare both government interventions and markets in practice, and not just ideal theory, markets win pretty definitively. (See also Peter Schuck “Why Government Fails So Often and How it Can Do Better”). Public goods is an example where there is a theoretical argument in favor of intervention, but in practice they often cause more unintended negative consequences than they solve.
This does not imply that everything must be left to markets. But it does imply that markets should be our status quo default, that government should “first do no harm,” and that interventions have a large burden--rarely satisfied-- to show that there is reason to think they’ll do more good than harm.
Well said, "SZ." And thanks for the reference to Cliff Winston's book. You've captured what I was trying to convey, albeit extending it usefully ("first do no harm") and the burden of "proof," or at least persuasion.
"1. Government action relies on government actors behaving in the public interest.
2. Governments are optimal only under conditions of perfect altruism of government actors.
3. The conditions for perfect government are rarely satisfied.
4. There are many instances of government failure.
5. Therefore, government does not work."
.
1. There is no such thing as "the public interest." Any politician who claims that is his goal, or any government official who says he adheres to "the public interest" is deeply confused, or lying.
2. Since "perfect altruism"' is impossible, we constitute governments to operate under a liberal order, i.e., strictly constrained solely to fairly narrow powers and responsibilities. Put another way, a government with clear, enumerated powers and with strong legal protections for rights is the optimal government.
3. This is why we do #2 and do well to keep #1 in mind.
4. Correct, and this is one of the best arguments in favor of a small, constrained government.
5. Government as the entity with a monopoly on legal violence works better than the alternative.
Dear "Ken in MIA" - You've missed the point of my ironic argument designed to parallel Arnold's line of reasoning about markets. The core of the fallacious argument is that because #3 is obviously true - "The conditions for perfect government are rarely satisfied" therefore #5 holds - "...government does not work." Of course, the conditions for perfectly efficient government are not satisfied. That does not imply government is *never* the best available locus of efficient action. Similarly, markets not being perfectly competitive does not imply that markets are never the best available locus of efficient action. Indeed, markets are the best way to organize the vast majority - but not all - of society's economic activities. I've already provided a few examples - and there might only be a few - where government is more efficient than markets.
I beg your pardon: I didn’t know you were being ironic - I thought you were being stupid.
But it sounds like we broadly agree, which means you aren’t stupid. Congratulations.
LOL! FWIW, I don't agree with Arnold all the time, but I know him well and think he is one of the most intelligent and insightful people I've ever met, and I've met some very smart people in my time.
The relentless push for technocracy is a transparent attempt to preserve the current oligopoly.
Rising populism will put an end to this. If you thought Trump was bad, then you should do everything you can to put him back in power, because what will come instead of him will make him look like Cyrus the Great.
"Market Failure" is just a negative way to say that there is an unsatisfied need or want that somebody might be able to make some money satisfying. New "failures" keep arising as people's desires change, and they disappear as businesspeople detect them and offer goods or services that satisfy what people want now.
Yeah, supply and demand imbalance is inevitable, and also is normally an opportunity. It only becomes a market failure when the opportunity to innovate and compete is constrained.
It's all well and good to keep going back and forth between the radical extremes; but any good solution will recognize that:
Families are the only way to make grandparents. But sometimes they fail to do so. Even when they are succeeding as best they can, they can do better with other systems around them.
Families without markets fail to scale beyond subsistence 'everything' which basically amounts to hunter/gatherer or at best small scale agriculture and resource extraction. Markets are the best solution to specialization and trade.
Even decent markets and pretty good families will sometimes lead to frustrated, envious, people or people groups. They may resort to ultimately suboptimal solutions for the community - like false advertising, breaking contracts, theft, and ultimately violence. Upholding and nurturing the virtues of honesty, generosity, and gratitude are the roles traditionally assigned in the West to one set of civic institutions (the Church). Repressing the rewards of bad action (beyond the scale of the family) has been the province of the Government. If the market gets to the point that reputation can't handle falsehoods and family units can't manage violence, then you need a government.
The leaders of any of these institutions become excessively invested in the institution and not so much in its function. Any organization eventually evolves to the sole purpose of self-aggrandizement. All government and market structures (as opposed to the overall class of 'government' and 'market') should probably have a natural lifespan. Families certainly have a natural lifespan, and if they fail at their mission of raising new people, they end fairly dramatically. So they are more self-correcting and at the same time more vulnerable; but their collective ends without replacement and at scale are also the concomitant end of all governments and corporations.
That's my first cut at an integrative approach.
Rick T. Your quibbles are well placed. I agree that "...markets can do most things better than the government..." As a trained economist, I believe in the virtues of market forces in most instances. And my examples of failed goods (the Edsel, New Coke, etc.) were not the best I could've presented, but there are plenty of other examples in the corporate sector of inefficient principal/agent decisions, e.g. executive compensation, the mal incentives of option packages, leverage, and others.
As for your comment - "Nobody knows the future, and those businesses made what, as the saying goes, seemed like a good idea at the time, but they were wrong..." - A similar comment applies to government. Not everything the government does is wrong, but even when it tries to do the right thing, it errs some of the time.
I agree that government does too much and has become bloated. We could eliminate entire federal departments without adversely affecting the lives of most Americans except for special interests favored by those departments. Education, Energy, and Commerce (except for data-gathering bureaus) come to mind. To quote Governor Mario Cuomo (D-NY), “We should have only the government we need, but we must have... all the government we need.”
I think that the fad for ESG might be a good example of the principal/agent problem.
I think a strong political argument for a generally anti-government bias is that when the government does something wrong, it (or the agency or department responsible) doesn't go bankrupt as a result. I think it's much easier to find parts of the economy gratuitously influenced by the state than to find missing markets that might exist due to state intervention because it's much harder - often impossible in fact - to reverse government takeover of a market.
Mark - I don't disagree in many cases, except for the public goods I cited. They're not cases of missing markets where Arrow-Debreu time-and-state-contingent commodities need to fill in to complete markets. Markets for public goods, even if they existed, don't work. For example, how could one have a market for a legal code that supports economic contracts and public safety? How could one have a market for national defense?
I agree that many instances of government intervention are ill-conceived. It was predictable (I have no documentation to prove but did predict) when the Obama administration monopolized the student loan industry that it would end in financial disaster. But that is a case where no market failures needed correcting. In fact, the government created moral hazards that didn't exist before it monopolized lending. And here we are, "forgiving" hundreds of billions of dollars of student loans.
One of my favorite quotes:
“…in the long run the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster.”
--- John Cowperthwaite, Hong Kong financial secretary, 1961-1971
More, here: http://sir-john-cowperthwaite.com/quotes
Jason Furman's emphasis on the idealized concept of perfect competition and its imperfections, with corresponding government interventions to solve, them is typical--I've read Arnold's summary but have not watched Furman's video and hope I'm misunderstanding Furman--and deeply disappointing.
Scanning the comments, I was surprised not to see a reference to Harold Demsetz's concept of Nirvana Fallacy, of which Furman is apparently guilty and which criticizes comparisons of a real-life practical situation or problem ("market failure") to an ideal, hypothetical “solution” (government intervention).
David Henderson has co-authored a little Fraser Institute book which includes an excellent chapter on the Nirvana Fallacy and is supported by a short, also excellent video. Coincidentally, I’m scheduled to present the concept of Nirvana Fallacies to my high school students today.
https://www.essentialscholars.org/ucla-school-of-economics
I’m pleased to know the provenance of “markets fail, use markets” is via Arnold, another of his excellent innovations in phrasing. I recognize it as the conclusion of a sequence:
Harvard : “markets fail, use government”
Chicago: “government fails, use markets”
George Mason: “markets fail, use markets”
The bottom line is that markets have better correction mechanisms than government. Per Arnold, “entrepreneurial innovation and creative destruction tends to solve economic problems, including market failures”.
Thanks!
Thanks for the shout-out, John.
David,
I've learned a couple of good new things here: private replies are possible and you have a newsletter.
Your CEE is highly underrated. I don't think I use it enough in my classes, although this week I've assigned "Property Rights" by Armen Alchian, "Public Choice" by Wm Shugart II, and "Rent Seeking" by you.
More references to the Fraser book are coming soon for my students. I took Sam Peltzman's course at Chicago Booth (MBA '79) and got to know him pretty well for an MBA student, so discussing him is a highlight.
I have two suggestions for you, if I may. For the CEE, it would be helpful to include a date of publication. Perhaps some articles have this, but I think not all do. Also, you've written about your teaching of numeracy to your Monterrey students. I'd like to teach more numeracy & would love to see how you go about it.
With deep appreciation for your work,
Best regards,
John
Thanks, John. I actually don't have a newsletter yet. We've just set up the architecture. Thanks for your comments on my Concise Encyclopedia of Economics and on the Fraser book on the UCLA school. After his car safety article came out in the mid-1970s, a friend and I started referring to him as "Seatbelt Sam."
Great suggestions on dating articles. I'll see if someone at Econlib is willing to do it.
I heard the same talk on a Cato podcast and had a similar reaction: this guy--who seems nice and reasonable and smart--doesn't understand what makes a market economy good.
On the upside, if someone could be bothered to talk with him for two hours, he could be persuaded.
If you view markets and supply/demand systems as feedback control systems, many of the apparent market instabilities are understandable. If an increase in demand increases the price which increases the profit margin (the control signal) to the suppliers allowing the suppliers to increase the supply which brings down the price at a new demand level. It is like the thermostat on you home heater, but with thousands of interacting feedback control system.
The mathematics that is used to analyze many interacting control system say in a rocket utilizes complex math with the √-1 = i = imaginary number part of a complex number (they are actually real) to properly consider the time dynamics. These equations show instability points where system will oscillate or fail and the location of those points depend strongly on time delays. If the supply can't respond for years, prices can go extremely high and then when the supply comes in the prices crash as we see in real estate in California. https://www.dropbox.com/s/7go8mum7wmgljsg/Realestate%20oscillation%20Ca.pdf?dl=0 (note California added a huge time delay in the late '70s with environmental and other reviews)
In the case of government planning even supply/demand relationships feedback control system doesn't work even when changes in demand and supply can be instantaneous with no time delays (replacing your thermostat with an off/on switch). With a 5 year plan there is no ability to increase or decrease supply on a relevant time scale and the system will always fail.
System engineers have found ways to get around some of these time lag induced instabilities using PID controllers (proportional, integral, differential) and even more advanced control logic to prevent instabilities and that could be used to prevent what are called market failures (assuming we are talking about real market failures, not just self-interest driven rent seeking claims of failures). For example, limiting environmental, zoning, review on permissions to a month or so would make California real estate return to stable system without unstable oscillations. It would also retire all the political "consultants", lawyers, and environmental "activists" now required. You could also tie taxes to the rate of change in price signal (price - cost/ft2 - inflation) and the integral of the price signal over time. This could also make the system stable and could be used for mining, oil wells, and other slow responding supply issues and most of the claimed market failures would go away.
Good point, government fundamentalism counter balancing market fundamentalism. Wish I had thought of that when I was accused of being a constitutional “originalist”. I was trying to respond to the assertion that libertarians are anti-government. I thought the simple response that we just prefer a streamlined government, according to the constitutional concept of enumerated powers was a winner.
Holtz-Eakin's talk was passionate and accurate- a rare combination these days.