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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.

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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.

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founding

"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.

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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.

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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.”

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founding

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!

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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.

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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.

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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.

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Holtz-Eakin's talk was passionate and accurate- a rare combination these days.

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