government largely depends on guesswork | AER

Arnold Kling with his characteristic deep insight recently described “a straw argument against libertarianism and for technocracy”. This straw argument, as Kling explains, consists of the following steps:

one. Libertarianism relies on markets.

2. Markets are optimal only under perfect competition.

3. The conditions for perfect competition are rarely met.

four. There are many cases of market failure.

5. That’s why libertarianism doesn’t work.

Kling then adds:

Step (2) is a scam. It sneaks into the assumption that markets have to be optimal to be preferable to government intervention.

Instead, I suggested a long time ago the aphorism “Markets fail. Use the markets.” That is, I readily admit that the market economy is not at some theoretical optimum. The question is what will lead to improvement. I believe that government intervention often only makes matters worse. Meanwhile, entrepreneurial innovation and creative destruction tend to solve economic problems, including market failures.

One of the commentators on Kling’s post, Matt Gelfand, then proposed the following:

Let’s turn Arnold’s line of reasoning around to examine the merits of government action.

1. The actions of the government depend on the behavior of state actors in the public interest.

2. Governments are optimal only in conditions of perfect altruism of state actors.

3. The conditions for an ideal government are rarely met.

4. There are many instances of government failure.

5. Therefore, the government does not work.

There are many examples of market failures that libertarian market processes cannot overcome, and I believe libertarians would agree with at least some of them. They are usually associated with “public goods” where competing participants will be duplicated and inefficient. Thus, the legal system, the justice system, national defense, public safety (police, firefighters), airline safety, and many other examples are more effectively regulated by the state than by the market.

Although at least one of the examples of “good” government action given by commentator Gelfand (namely, aviation safety regulation) is highly dubious, my goal here is not to dispute the listed examples of “good” government action. Instead, I argue that Mr. Gelfand, like many others, mistakenly believes that the market and the government are symmetrical to each other, when in fact they are not.

Of course, any desired outcome can in principle be achieved either by voluntary action (the market in the broadest sense) or by coercive action (government). In this simple sense, the market and the government are indeed symmetrical to each other. But that’s where the symmetry ends. The logic of the market is different categorically from the logic of the government. These differences are rooted in, but go beyond, the fact that it is only in the markets that all action is voluntary.

The single most important difference separating market action from government action is this: unlike government decision makers, market decision makers have access to detailed and reasonably reliable information about the net consequences that any of their decisions is likely to have an impact on all affected parties. In addition, decision makers in the markets are also clearly encouraged to take those actions, and only those actions, that produce the greatest possible positive net effect for the affected parties.

The fact that the information available in the markets is imperfect is undeniable. It is also undeniable that even well-informed market participants are often wrong. But equally undeniable, although not as widely recognized, is the fact that markets have (as an essential feature of their functioning) a built-in process for detecting and correcting errors and thus take into account as much relevant knowledge as possible over time. There is no such process in the government. Because of this categorical distinction, any supposed essential symmetry between the actions of the market and the actions of the government is imaginary.

A fundamental (if not the only) advantage of being dependent on the market rather than the government to supply, say, shoes, is that only the markets have a reliable source of information about what kinds of shoes to produce. and how to produce these varieties efficiently, that is, how to produce these varieties of shoes in such a way that as many resources as possible are left for the production of goods and services other than shoes..

The amount of income that consumers choose to spend on Crocs, Nike sneakers, and Gucci loafers reflects the intensity of consumer demand for each of these footwear types in relation not only to consumer demand for other types of footwear, but also in relation to their consumer demand. demand for all other goods and services available for sale.

The prices for each of the different varieties of shoes contain at least two important pieces of information. First, Crocs prices show entrepreneurs how much consumers are willing to pay for Crocs versus how much consumers are willing to pay for sneakers and loafers, and also versus how much consumers are willing to pay for hamburgers, honey, lodging, etc. books, bananas, baseballs, and any other goods or services currently on the market. Second, the prices of Crocs compared to the prices of inputs that can be used to produce Crocs tell entrepreneurs: if The desire of consumers to purchase Crocs is strong enough to justify the use of resources to produce Crocs, and if so, how many pairs of Crocs need to be produced.

If, as is usually the case, there are some unexpected changes in the market (for example, consumers suddenly lose interest in Crocs), consumers today will not be served as well as possible. The same is true if entrepreneurs as a group make some mistake (for example, they do not notice the high consumer demand for blue suede shoes). Too many resources are being spent on the production of Crocs today, and too few resources are being spent on the production of blue suede shoes. As a result, the prices of Crocs will fall relative to the prices of other goods and services, while the prices of blue suede shoes will surely soon be seen by profit-seeking entrepreneurs as high enough to justify an increase in production of this particular style of footwear. . Such price changes and a more accurate determination of existing prices turn what might be called today’s inefficiencies (or market “failures”) into today’s profit opportunities as well. Price-driven entrepreneurs will profit by diverting resources from Crocs to other products, including blue suede shoes.

Entrepreneurs who are not sufficiently aware of market realities as reflected in the prices of both inputs and products, or entrepreneurs who are too incompetent to profit from market information, suffer losses. Thus, these entrepreneurs “control” fewer resources, while more resources are “controlled” by more vigilant and competent entrepreneurs.

The personal interest of entrepreneurs is combined in the market with the personal interest of consumers and resource suppliers, as well as with the ability of consumers and resource providers to say “no!” to proposals that they consider unattractive, so that opportunities for improved allocation of resources are identified in market prices. Again, such information is never revealed perfectly. Who has ever acted with only pure experience. But the very essence of the market process is to disclose such information and encourage all market participants to act on it.

This disclosure process is not available to government action. Exactly because government intervention in the markets is aimed at ignoring or suppressing market signals, government officials, if they want to improve the well-being of citizens, must have access to information superior to that available in the markets. But in reality, government officials not only don’t have an excellent source of information, they don’t have a good source of information at all. The best they can do is guess.

This lack of information available to government officials is a particularly acute problem for those officials who imagine themselves able to improve the performance of the economy through the nationalization of industries, the use of subsidies and protective tariffs, the imposition of “corrective” taxes here and there. But this lack of information is characteristic of all public affairs. No matter what projects a government undertakes as a government, its officials cannot know exactly, as market participants know, exactly what to produce, how much to produce, and how best to produce.

Even local governments that provide tax-paid policing do not have good information on how much policing to provide and how best to provide those services. Consumers do not express their demands for government-provided policing by voluntarily spending money on it, being able to change the amount they spend in response to changes in the quality of the services provided or the desire to receive them. While the government’s grotesque incompetence on this front can lead to change for the better through the ballot box or through voting with the feet to move to another jurisdiction, per a lot of irresistible the reasons the types of information being released in elections or moving from jurisdiction to jurisdiction lack the detail, nuance, completeness, and timeliness that characterize the information conveyed in the markets. Politically transmitted information is so scarce, noisy and outdated – and therefore so unreliable – that it is categorically different from the information transmitted by the market.

As the example of policing shows, the lack of reliable information available to government agencies for various tasks does not mean that the government does not have tasks suitable to perform. Sometimes political instinct tells us that a given task, if left to private market forces, is likely to perform even worse than if it were left to the state. And sometimes this instinct can be true, although there is no way to verify this conclusion.

Whatever the arguments in support of government action, respect for honesty should cause those who make such arguments to recognize that government officials who carry out prescribed actions are not guided or abetted by the detailed information that guides and motivates market participants. . Unlike actions taken in the markets, even the best government actions, under the most appropriate circumstances, are based on guesswork.

Donald J. Boudreau

Donald J. Boudreau

Donald J. Boudreau is Senior Fellow at the American Institute for Economic Research and the F. A. Hayek Advanced Study in Philosophy, Politics, and Economics Program at the Mercatus Center at George Mason University; board member of Mercatus Center; and professor of economics and former chair of the economics department at George Mason University. He is the author of books Essential Hayek, Globalization, Hypocrites and idiotsand his articles appear in publications such as Wall Street Journal, New York Times, US News and World Report as well as numerous scientific journals. He has a blog called Cafe Hayek and a regular column on economics for Pittsburgh Tribune-Review. Boudreau received his Ph.D. in economics from Auburn University and his law degree from the University of Virginia.

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