11 January 2011

Government Failure and Over-Government -- The Review

This book, volume 5 in the collected works of Arthur Seldon, argues that government can just as easily be part of the problem as the solution.

Seldon was one of the co-founders of the London-based Institute for Economic Affairs, where Hayek (and 11 other Nobel Laureates) was welcomed, and Margaret Thatcher learned her free-market economics.*

The book has six chapters, reprinted from works published between 1978 and 1998.
  1. "Change by Degree or Change by Convulsion" argues that [p. 3]
    "confrontations" in the market are small, and solved by higgling and haggling over price, the peace-maker. In a state economy or state industries, decisions are centralized to planning boards, committees, commissions, councils, government departments, that nominally "represent" the very much larger number of workers, managers, and consumers who will benefit or suffer. Change is therefore more likely to be opposed, repressed, inhibited, postponed. When it takes place it is contrived, jerky, discontinuous, lumpy, convulsive. Disturbance, dislocation, disruption are large-scale. Friction is inflated.
    He goes on to point out that representative government can be distorted by lobbying of special interests. This may be an unavoidable cost when the government is producing public goods, but it's inefficient and unfair when the government is providing private goods (heath care, food, housing) through overreach.

  2. "Individual Liberty, Public Goods, and Democracy" extends this point with the additional observation that the size of government (as a % of GDP) should fall, not rise, as citizens grow richer. Citizens with more money are better able to buy "necessities" (such as transport) that the government previously provided. Seldon points out that governments frequently expand with GDP, in ways that can be both inefficient (wrong products) and unfair (favors to politically-powerful lobbies such as trade unions, businesses and bureaucracies).

  3. "Avoision" describes how unhappy citizens will try to pay less taxes, in ways that are simultaneously legal (avoidance) and illegal (evasion). Examples include barter, cash payments, purchases at garage sales and flea markets, and (now) shopping on the internet.

  4. "The Dilemma of Democracy" laments the expansion of government into unsuitable and inefficient areas such as "public" utilities (water, energy, etc.), "welfare" services (education, health care, etc.), and local government functions (libraries, pools, etc.) that can be supplied by private, for-profit or non-profit organizations. Governments do this without evidence that the market has "failed" to
    provide these services, prohibiting competing services and subsidizing costs ("free!") with tax revenues. Seldon notes that we vote for politicians every few years, but vote in markets daily. That means that markets are more responsive to our needs as consumers. People in government counter that they "fairly serve the public good," but such self-serving claims do not hold when we are able to make head-to-head comparisons of private vs. public services. Seldon laments the decline of charitable societies that began in the 19th century and notes that citizens who try to work the system in protecting their interests as producers (barriers to trade or worker job security, for example) collectively do much more harm to themselves as consumers.

  5. "Public Choice in Britain" quotes Keynes: "Government should do only what people could not do at all, not what it could do better than the people." Yes, that's J.M. Keynes, the one whose name is invoked by politicians claiming that government should "stimulate" the economy (see this and this). This idea makes a lot of sense, because it means that citizens and businesses will compete to provide -- and improve -- services, leaving "impossible" services (defense, laws) to a smaller, more efficient government. In this chapter, Seldon complains about manipulative language [p. 157]:
    The insinuation is that "public" means selfless or benevolent whereas "private" means selfish or greedy... The politician who wants to sell a doubtful policy he cannot explain or justify calls it "in the public interest" -- or by the nebulous "fair."
  6. The short sixth chapter wasn't particularly interesting :)
Bottom Line: Seldon is right, in so many ways, about the root causes of poor government: Bureaucrats crowding out services that for-profit and non-profit organizations could provide; politicians taxing citizens to provide these services (and other favors) to special interests they favor. These problems often fall under the heading of the Knowledge Problem (from Hayak) and the problem of Public Choice (from Buchanan and Tullock). Russ Robert and Bruce Caldwell discussed both recently in this podcast. FOUR STARS.

* Thatcher's privatization of water and energy utilities and showdown with trade unions can be traced to IEA ideas. Privatization of British Rail, the British Airports Authority, and other programs were later extensions. The recent decision to allow university fees to triple falls in the same category (fewer subsidies, students-as-customers). Most of these programs have been successful. National Health seems to be working, but the Dutch health care system (mandatory insurance, private provision) seems to be more efficient. The US health care system (before and after Obamacare) is still a disaster of perverse incentives.

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