Saturday, April 9, 2011

Realism on market failure and government failure

One of the strange things that a lot of public choice theorists like to throw out there is that anyone who ever gets involved with market failure ideas ignores government failure. I've always thought this was odd and a little condescending. When you think about the conditions for market failure - exactly how incentives break down to make the market not work how we traditionally think it does, and open the possibility of collective action solutions, it seems to me you're uniquely in tuned to thinking about incentives and the way they shape economic behavior. In other words, you can't really do public choice theory or explore those sorts of issues unless you take market failure seriously. Incentive structures and their impact on action are very clearly and formally laid out for markets by economists. If you can't understand how incentives enable or disable efficiency and optimality in markets, you're never going to grasp how they work in governments - which is more undertheorized.

I was reminded of this when I was reading Akerlof's "Market for Lemons" paper again recently to help out with a paper on information economics that I'm reviewing. Akerlof writes this at the very beginning, after outlining the basic idea of his model:

"It should be perceived that in these markets social and private returns differ, and therefore, in some cases, government intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increase in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power - with ill consequence of their own - can develop."

A lot of the time, public choice theorist types want to tell you what you think before you start arguing with them, and they want to imply that you don't realize the problems associated with government failure, you don't realize the potential for the emergence of private collective institutions, and you think that government intervention is the response to every market failure. I am increasingly tiring of even engaging with someone that takes this approach to me. I think the origins of this approach are an underlying ideological position that doesn't want to say "OK, both of us agree on the potential for government failure and the prospect of private collective action, so let's think through when the market, private collective institutions, and public collective institutions are best suited for the job." They don't want to have that conversation because they want to be able to pin you as always opposing the first two, and they want to be able to always oppose the third option. I don't like corner solutions, I'm willing to consider some mix of all three, and I am not especially impressed with someone that tries to frame me as seeing it any other way.


  1. imagine you spending your time creating non-coercive solutions instead of what you do. it's a ridiculous idea. without your guns you wouldn't be a relevant progressive. you couldn't find work with kucinich. freedom loving people spend their time trying to solve problems with love and respect. you guys are violent and depressing. when we again say to you that you should consider the problem of the gun it's because you're always producing another reason to use it so we figure that your brain is just completely stuck. gun gun gun gun gun...

  2. Above post is weird as hell.

    Before you tell somebody that his solution is coercive, you need to explain why his solution is coercive. You are presupposing that your opponent accepts your premise, before you give your conclusion.

    Otherwise, it becomes a "When did you stop beating your wife?" question, as ancient Greeks called it.

  3. Weird as hell and condescending as hell. You might want to find somewhere else to comment, mobsrule. I don't own any guns, and I'm not a Kucinich fan.

    Don't tell me I'm coercive if you're willing to enshrine the denial of the right to self governance. I have claimed I'm coercive in the past ( The difference between you and me, mobsrule, is that I recognize the real tensions that exist whereas you don't. That strikes me as a real threat to liberty.

  4. Prateek Sanjay,

    The difference between government action and non-government action is coercion. Liberals could form a nationwide system of free hospitals which would address their obsession with health "equality." They choose coercion instead, forcing people to abide by their massive blueprints using guns. That's what characterizes progressivism. You could go help somebody using your own money, energy, and time, but you'd rather employ the biggest gang. When statists use the term "market failure" I just think about how they define the term. Their definition is broooaaaaad. It leaves almost any market condition open to endless progressive legislation and guns.

    Although I almost don't want to say this because I know it makes thugs (or should I say "pinheads") like Kuehn happy, I think the principle emotion freedom lovers feel when we come across people like him is horror. It's the sense of onrushing constriction and doom. There's no end to the machinations of violent people like him; there's no end to people like him; they produce more legislation and misery every year; they have the ear of most politicians; they have the easiest story to sell to voters. They're winning and there's no way to stop them.

  5. I agree, mobsrule, that there is an element of forcing unwilling participants into a program such as that. That is coercion, sure, and worse, done by people who are not medical doctors or who have never worked in insurance.

    However, and I remember this from classical scholar Thomas Fleming's Socialism, that the SDP in Germany in its early days was a completely unforceful undertaking. The SDP had its own community centers, hospitals, lunch rooms,.etc that members could enjoy freely and contribute to freely. Their mini-experiment extended only as far, and after various SDP failures in actual government, the day would come when SDP member and Chancellor Helmut Schmidt would actually say, "We are all Hayekians now." Indeed, even the biggest of socialist true believers would not want entirely to force people into things that they don't want.

    They were all Hayekians now, because coercion is simply too hard and unfeasible, and it was no longer a matter of what they should or should not do, but what they could or could not do.

  6. Dude - cool it. If you call me a thug again or keep this up I'm just going to delete your comments.

  7. How do you define "self-governance?"

    Why would you tell me that you don't own any guns? That's pinheaded and overly-literal. Progressive intellectuals get other people to do that icky and dangerous work while they comfortably brainstorm new ways to employ the guns. This is obvious.

  8. I expect you to delete my comments. It's not as if you will allow open expression the way libertarian blogs you comment at do.

  9. "They were all Hayekians now, because coercion is simply too hard and unfeasible, and it was no longer a matter of what they should or should not do, but what they could or could not do."

    This is actually how I view most progressives like Keuhn. They have massive playbookss for ordering strangers' lives, but they are convinced that they need some free-market elements to generate wealth that they can direct using the biggest gang.

    "the SDP in Germany in its early days was a completely unforceful undertaking."

    How did they fund this stuff?

  10. mobsrule, this website is private property of Blogger.Com, which has delegated authority to Daniel Kuehn on this corner to do whatever he wants with this blog. Like deleting comments.

    Of course, that is free expression! If CNN chose to remove a segment interviewing me, they are just conducting free speech.

    PS: Funded by donations of some members, of course. They believed it could meet the needs of the other free riders, it seems.

  11. How do you know Daniel is even a progressive? Or even a leftist? Or even close?

    I remember him criticising Dennis Kucinich himself just a few weeks ago. I don't think he had kind words for any of the most popular American progressives on the internet, and what he says about Ron Paul could be flattering by comparison.

  12. re: "I expect you to delete my comments. It's not as if you will allow open expression the way libertarian blogs you comment at do."

    No, mobsrule. The point is that there's a lot to talk about w.r.t. market failure, government failure, public choice theory, and social order. I write about this stuff on this blog because I want to talk about it with people who also want to talk about it - and a great majority of those who do want to talk about these issues with me on here end up disagreeing with me. That's not what you're doing - you're diverting from the discussion and hurling insults at me and it's no affront to free expression for me to keep that from detracting from the conversation. If I'm having a conversation with someone in my apartment and someone is yelling insults from outside, I will shut the window. Too many comment threads have been hijacked lately with complete non-sequitors. I want subsequent comments to be restricted to reactions to Akerlof.

  13. I would guess this is done a lot for a number of reasons:

    (a) one time public choice may have had to fight for a place at the table (and thus there is still some inertia in existence);

    (b) in the real world of politics, markets are viewed with more suspicion than government is (or rather, there is more idealization of the former than the latter);


    (c) public choice economists may have an inferiority complex because they are often viewed as somewhat heterodox.

    That's just me speculating.

  14. As with anything, it depends on where you are standing and from where public choice economists are standing they often apparently feel the need to make comments like this.

  15. Too many comment threads have been hijacked lately with complete non-sequitors. I want subsequent comments to be restricted to reactions to Akerlof.

    Fair enough. I was going to address some of the bizarre comments above (no names mentioned), but I'll try keeping it to script...

    Well, sort of. Seeing as you mention Akerlof, I was recently (re-)reading the original 1960 paper by Ronald Coase, in which he lays out the basic ideas associated with his eponymous theorem on bargaining rights and externalities. An apposite quote:

    "It would clearly be desirable if the only actions performed were those in which what was gained was worth more than what was lost. But in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others. Furthermore we have to take into account the costs involved in operating the various social arrangements (whether it be the working of a market or of a government department), as well as the costs involved in moving to a new system. In devising and choosing between social arrangements we should have regard for the total effect. This, above all, is the change in approach which I, am advocating."
    - The Problem of Social Cost, pg 23.

  16. Gary -
    Your (a.) is asserted a lot... I think this may be true to a certain extent - I'm not really qualified to weigh in - but that's kind of what I liked about reading this in the Akerlof paper. That was from the early 1970s, after all. Keynes, too, treats it as common knowledge in the GT that central planning cannot improve upon the efficiency of the market. Maybe some people were naive, but I think it also wasn't talked about because it was so commonly accepted it wasn't really discussed. That doesn't mean public choice theory didn't do a great service by formalizing something that was previously undertheorized. But just because it was undertheorized doesn't mean it was especially ignored.

    The other thing, I think, is that while a lot of politicians may have ignored this I doubt a lot of economists really did. Sometimes the two can be conflated. This is much like your point (b.).

    (c.) I think is true too, but I think that's unfortunate personally. Public choice theories make good sense with very mainstream stuff. A lot of economists don't talk about it because they're simply not interested in it (I'm not all that interested in public choice... although perhaps a little). Economists are generally interested in how the economy works and expect other people to figure out how politics works. Maybe that's bad, and it's probably good public choice thoery tried to answer those questions. But they ought not feel shut out just because a lot of economists are interested in different questions.

  17. So in other words, I think your a, b, and c are all right.

    But I have to add a (d.) to that list. A lot of public choice theorists simply find the accusation to be a convenient cudgel to use against economic theories that they don't agree with. It's easier to say that market failure theorists don't think about government failure and then dismiss brilliant men like Akerlof than it is to really take measure of the fact that Akerlof actually did acknowledge government failure, and that the identification of a market failure is not the same as the insistence that government ought to intervene.

  18. Hmmm... Don't think my (missing) comment on this thread was offensive enough to warrant deletion, so perhaps Blogger is playing up again.


  19. For me there really isn't enough of the insight of public choice in how we deal with the world of politics; so bring on the cudgel I say.

  20. Gary - I suppose I would just prefer that the cudgel be used against politicians and not against economists for whom public choice theorists are preaching to the choir, like Akerlof and myself.

    We're already being preached at completely unnecessarily... no need to cudgel us too.

  21. rescued - yours and Prateek's

  22. Very good point from Coase! And I think that is precisely what Akerlof is getting at when he talks about arbitrating between them.

    In a lot of ways, the point is simply that the only options available to us may be externalities. I, for one, think externalities are pervasive and just part of the human condition so this doesn't surprise me in the least and I would be the last person to deny that collective solutions also introduce externalities.

    The trick is, what is the solution where either the externality is eliminated OR in which it is minimized?

  23. Responding to the post to which you linked above: "What is the difference between private property and a gang claiming urban territory other than strength of numbers? They assert a monopoly on territory and back it up with force."

    You made something or were given it and capitalists like me say that you should be able to keep it from anyone who walks by. A gang takes a bunch of stuff away from people (not the U.S. govt in this case.) These cases are equivalent only if you believe that property is theft... which would not surprise me.

    "What is the difference between the heir and the non-heir that warrants the award of property to the heir? Sheer luck of birth, and nothing more."

    What warrants it is that the property's owner gave it to someone... in this case his heir. Only a nosy and aggressive person would consider it his right to tell someone that this private transaction is somehow illegitimate. The government doesn't have to inject itself into every single transaction, pinhead! Of course, you'll spend your whole working life thinking of excuses why it should.


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