Introduction to Government Failures
Economists often discuss market failures, which occur when market outcomes do not correspond to perfect competition. There are also government failures of a similar type, when government agencies do not create the result which would occur under perfectly competitive markets. Most people focus on market failures without even addressing government failures, despite, in my opinion, government failures being more severe and pervasive.
When markets are used to allocate resources, each person can match their purchases to their own preferences. For example, if I go to the grocery store, I can buy apples and someone else can buy oranges without either of us harming the other. Each of us gets the particular good we want and prices adjust to reflect how much resources society uses for each of the goods. If oranges are out of season and require expensive greenhouses to grow, the price of oranges will rise. Even the producers’ preferences are reflected in the market price. Government choice, on the other hand, necessarily imposes one option on everyone, hurting those whose preferences are different from the faction which controls the government. At best, you have a democracy so at least half the population is satisfied with a choice, but that’s a far cry from a market where everyone can follow their perferences.
The Median Voter Theorem
Most choices that are made by governments are not stark “A or B”; they are picking a position along a contiuum of policy options. According to the median voter theorem, the policy which is popular with the median voter will be implemented. So, suppose you have 100 possible policies, ranked from most conservative to most liberal. If one politican advocates #60 and the other advocates #45, the one advocating #45 will win, because they’ll get the 45 lower plus 7 middle voters closer to 45 than to 60 and wind up with 52% of the vote. Under the median voter model, well over half of the population could hate the policy, but it will still get passed, because compromise pushes policy toward the middle.
If people could pick policy by policy, they could get a situation where each policy was approved by around 50% of the population, but when policies are instead chosen by one representative, you could wind up at a situation far from even that low bar. All a politican has to do to win election is be better than the other candidates. In many cases, the result boils down to only a few key issues people care a lot about. If elections were perfectly competitive, the winner would be fairly close to the median voter. However, there are only a few candidates in elections and people often vote based on a candidate’s appearance or personality, not on the issues. Furthermore, voters might be rationally ignorant of the optimal policies, not having the time or the inclination to carefully evaluation which candidate is actually better.
Special interests often change policy to benefit themselves to the detriment of the rest of society. Firms may lobby the government to lower their taxes, which pushes the burden of the cost of government to others. Governments may place tariffs on specific goods, which helps particular firms by limiting competition from abroad, but at the cost of higher prices for consumers. But how do these policies come about? If they hurt the median voter, should the majority be able to block them? Beneficiaries of the policies are often well organized and highly motivated to lobby, but the costs are dispersed over many poorly-motivated victims. Special interests can ally themselves with a more sympatheic group. So the cannonical example is that both bootleggers and Baptists are in favor of prohibition. The bootleggers want it because it raises their profits and the Baptists want it for moral reasons. Whatever the tactic, special interests often get their way in politics to the detriment of the masses.
Lack of Market Institutions
The free market is an incredible institutions for solving problems which relies on incentives, information, prices, and property rights to function properly. Governments often do not use market prices to allocate resources; they allocate by fiat in an inflexible way. When a law is passed, prices and circumstances might be different than when it is implemented resulting in inefficient behavior. This problem is exacerbated by price controls, which destroy the ability of supply and demand to function. Fortunately, most governments have given up on price controls as a way to direct economic behavior. Government agencies are rarely run for profit, which means that managers are not rewarded for improving efficiency or customer satisfaction. While inefficient firms can go out of business, inefficient agencies can blunder about for decades after they have lost any ability to improve societal outcomes. Finally, it is very rare for government run institutions to have any competition whatsoever. All the problems of monopoly as a failure apply whether that monopoly is government or privately run. Monopoly is certainly not an exclusively “market” phenomenon, given that many monopolies today have explicit governmental support. Governmental organizations can often not rely on market institutions to ensure efficient functioning.
The exclusive focus on market instead of governmental failures is misleading. Government organizations are often just as “failed”, if not more, that market ones and suffer from their own set of problems. If society is to improve, both types of failures need to be understood and accounted for.
James M. Buchanan died today. He was one of the two founders of the public choice school of economics, which studied government failures. Buchanan described his field as “politics without romance”.