Governments (and Markets) Fail, but They Can Succeed Too

Don Boudreaux criticizes modern economics for “simply assum[ing]” that governments are able to intervene without being subject to the same, or worse — Boudreaux invokes public choice theory —, imperfections as markets. I am deeply sympathetic to “politics without romance.” But, I find critiques like Boudreaux’s unpersuasive, because they give their intellectual opponents too little credit and they are often susceptible to similar scrutiny. That is, governments may not be perfect, but they are not necessarily entirely worthless, either.

“Free market economists,” for lack of a better term, like to impute onto the intellectual opposition the belief that governments are, for all practical purposes, perfect and that they can realize the supposedly optimal solution these economists calculate on paper. But, this view has never been accurate. In a 2012 paper, Roger Backhouse and Steven Medema correct certain economists’ view on the assumptions and beliefs of the “Cambridge School” welfare economists, such as Alfred Marshall and A.C. Pigou. As it turns out, these economists were often just as skeptical of government as anyone else! The same is true of modern economists. It’s simply not true that any economist assumes: (a) apolitical politics;1 (b) no human imperfections; (c) with more information than markets.

I do agree with, for example, Peter Boettke when he suggests something along the lines of some economists do not take public choice problems as seriously as they should. But, the idea is that the margin at which the costs of applying government-skepticism are higher than the benefits are different for different economists, which is saying something much, much different to what Boudreaux is claiming. Boudreaux’s post presents these scientists as completely unreasonable, making obvious mistakes when drawing conclusions from their beliefs, but this simply is not the case. What does exist is reasonable  disagreement on where public choice and radical ignorance problems become too relevant to choose collective action over private action, but Boudreaux has nothing to say about this, which is why his argument is unpersuasive.

Why do (some) “free market economists” characterize their relatively “pro-interventionism” peers so uncharitably? I don’t think there is any intention of wanting to mislead, or any purposeful deceit in any sense. Rather, I think that free market economists (including me) are much more skeptical of government than the mean, and that the margin at which we draw the line (delineating the proper functions of government, which many libertarians think is zero) is, in absolute terms, very far from that mean. We are so biased — and I use this term in a neutral (statistical) sense — that even the average opinion on government seems unreasonable. Given that some libertarians (not Boudreaux, of course) like to call others “sheep,” I don’t think I’m that far off.

In the introduction to The Better Angels of Our Nature,2 Steve Pinker channels his inner Tversky and Kahneman to explain the average person’s estimate of the probability of crime. He argues that because of the increasing quality of communication technology, we simply hear, watch, and/or read more crime than we used to. While crime has actually decreased over time, the average person today is likely to over-estimate the probability of crime, and even be prone to the belief that crime has increased over time. If someone were to ask us to estimate the probability of, say, murder, because examples easily come to our head — thanks to the news we read, watch, and listen to —, we will guess that probability as being higher than it actually is, maybe even by a wide margin.

The case is the same with government failure, and this is especially true of libertarians. We tend to choose our news sources based on how close their views fit our own, whether we think so explicitly or not. I am someone who thinks of themselves as being open-minded, and open to alternative views. I try to organize my blog roll, to the right, around this mantra. But, I still have more libertarian blogs than I do non-libertarian, and when it comes to actually reading what’s on my blog roll, I tend to choose libertarian over non-libertarian posts. I have been reading more non-libertarian material recently, but my views have changed during that time — in what direction does causality run? Some people rather read, the Wall Street Journal, or Forbes, rather than the New York TimesJacobin magazine, et cetera. If we think that some source of information frequently produces bad information, why would we want to read it? Selection bias has reasonable causes. But, if what we read produces 10x more articles on government failure than any other source, we are probably going to overestimate the relevance of government failure.

Pinker also argues that our standards on crime have significantly grown over time, and the same is true of politics. Our political institutions have gone through tremendous improvements. Hoppe aside, most of us rather live under developed democratic institutions than under a monarchy or dictatorship. We recognize that modern governments are more exchange-based, and less extractive. This is not left-liberal opinionating; Buchanan’s The Calculus of Consent is entirely on political exchange in a representative democracy (the other side of public choice theory that isn’t invoked as often by “free market economists”). Thus, the standards to which we hold government are much higher today than they were 100+ years ago. And, this is a good thing! It means governance has improved.

I am skeptical of government. I think public utilities should be turned over to the competitive market. I think the banking industry can be “deregulated” (or, that private regulation is superior to public regulation, in this case). I am not saying libertarians and other “free market economists” should become government-lovers. What I’m saying is that we need to map our own intellectual position in reference to that of others, and realize that we are the ones close to an extreme. We are the ones who are most likely to overestimate the probability of bad governance (granted, there are many who will underestimate that probability). Thus, when it comes to having intellectual discussions on these problems, we should be more open to what others have to say and less trigger-happy to make uncharitable interpretations of their position.

It’s not that many economists assume governments are perfect, it’s that many “free market economists” assume governments are completely broken.

Addendum: One last attempt to frame my point. A common complaint leveled against a large chunk of “mainstream” economists — I, for example, critiqued Mark Thoma on this topic — is that perfect competition should not be the assumed standard by which to judge markets. The reason markets work exist independently of perfect competition: the institutions which allow markets to overcome problems of the unknown unknown, information asymmetries, externalities, et cetera. The same criticism can be turned around, however. Maybe some libertarians judge government by the unfair standard of perfect governance. Of course governments will fail, but we also need to look at where, and how, they work.



  1. I’m actually not sure what Boudreaux means by “apolitical” politics. I don’t think “political” decision-making is necessarily discoordinating. Certainly, the process of vote trading will have some “political” aspect to it — there has to be a bargaining process between politicians, after all —, but vote trading can be Kaldor-Hicks optimal. It was none other than James Buchanan who made this argument.
  2. I temporarily abandoned Pinker’s book, in favor of Piketty’s Capital in the Twenty-First Century. I read both books’ introductions, and I thought Piketty’s was the most interesting.

18 thoughts on “Governments (and Markets) Fail, but They Can Succeed Too

  1. ckmurray

    Very honest post again.

    I certainly agree with your general point. Perhaps one thing you overlook, and this was one of Coase’s main issues, is that if bureaucracy and non-market organisation is so inefficient, why do firms exist at all? Internally, firms face the same problems of government, yet choose not to use pricing and internal markets to allocate resources. Coase and others explained that the market is like canals between the large land masses of other organisational structures, and are in fact, even in a market economy, a tiny minority of human interaction.

    There is a second issue I think you might want to consider. Private actors are very efficient at profit-making. Whether profiting and some social good are aligned is important, because for a firm they just don’t care – profits are profits no matter what. So for example, when doctors are paid per procedure, controlling for the success of a procedure, they are likely to over prescribe, over medicalise, over treat patients, and more so those who don’t need it because the risks of failure are lower. Best to operate on healthy people than sick people because they will recover better.

    This is relevant, for example, to your point about privatising public utilities. Not only is privatisation rarely financially attractive for government, but in the hands of private owners profit rather than service provision become the driving force. Profits can come from increasing prices and decreasing output, delaying investment, and so forth. I worked in a statutory body overseeing privatised utilities for many years and there was simply no way we could provide incentives for them to invest. Once they are a monopoly, they bloody well act like one!

    And even if you argue that some utilities can be opened up to competition, history suggests this is a costly way to go.

    The more obvious question in regards to privatisation, is exactly what is being gained? A government can certainly privatise a power or water utility, but then in secret buy back all the shares. Now it is government owned again. Exactly what incentives have changed for those making decisions and working at the utility?

    Anyway, I’m glad you’ve started an honest discussion here.

    1. JCatalan

      Regarding the firm, I think firms are more constrained by the pricing process than governments are. Market incentives are more relevant for firms, even if they do not use the pricing process internally. Government do not earn competitive revenue; they “expropriate” it (or, we pay a democratically determined fee, or whatever). The price firms can sell their output at, and the prices they pay for their inputs are determined, to some degree or another, by “the market” (events out of the firm’s control). I think that firm “bureaucracy” can, and often is, inefficient (I used to work for Kmart, and it was terribly inefficient); but, I think that, on average, government bureaucracy is worse. I think Gordon Tullock has a book on exactly this topic, but I haven’t read it. But, in any case, the institutional framework firms operate in are different from governments’.

      I agree that there are perverse incentives. I think market institutions overcome many of these problems. You’re right that may not cover all of them, however. But, the probability of a dentist building his career around maximizing the amount of times his clients visit him by purposefully ruining their teeth, for example, is probably exaggerated by most people (I know people who actually think that dentists do this). Regarding public utilities, I’m not convinced those are “natural monopolies” (monopolistically competitive, sure — but, there are many large companies who are willing to pay high fixed costs if profits are high). Consider all the legislative help many supposedly “natural monopolies” enjoyed in the monopolization process, as was the case with AT&T in the United States. I was careful not to use the term “privatize,” because I don’t think you can just sell an existing public firm to a private capitalist and expect the market to work things out.

      1. ckmurray

        Just so you know where I am coming from, I wrote a few of my early ideas on competition reform a while back

        Also, regarding money, I recommend Graeber’s book Debt: The first 5000 years, and any other book about the origins of money. Money is, by definition, a collective contract, and thus works only via a central authority.

        Certainly other forms of promissory notes worked from time to time, but only in limited domains, since accepting a private promissory note require extensive knowledge of the financial trust able to be had with the ultimate financier.

        As a side note (relevant to eduction) think about other was humans cooperate where simpler principles of competition and regulation are prevalent. Imagine a world where there is are no common physical metrics – for weight, length, time etc. How would private enterprise function? Well, pretty poorly really. It is an environment for scammers and con artists. In fact, part of the impetus for the development of the metric system was the hinderance to trade from non-uniform measures. Thus, with such a central system, trade was greatly facilitated, even between two strangers, because they could trust and verify the quantity being sold.

        I say this is relevant to education, because without the many common customs that filter through everyday lives, including common language, common knowledge of the law, common measures, investment and trade is greatly reduced. Thus, part of the role of central control of education is to provide these common customs.

        What I’ve never understood is whether libertarians support compulsory eduction at all? Or how support for compulsory education can be reconciled with the call to remove public education?

        Why can’t children simply work if they choose to?

        We can’t understand modern institutions like money, health and education without looking to the past to see how we got here. The same goes for other public utilities (as I not in my third link above).

        That will have to do for now.

        1. JCatalan

          I just don’t think Graeber’s story, or the state theory of money more generally, is persuasive. In fact, I think Graeber’s book has some pretty basic flaws, and these have been well documented. And, I don’t think the existence of a network externality is enough to dismiss the idea that money emerged spontaneously. There have been plenty of goods with network externalities that have been provided for privately.

          I agree with you that we need to understand the historical process by which modern institutions emerged. In the case of money, based on my own research, the historical truth is that market moneys were replaced by government moneys for reasons other than social optimality. (Controlling the mints were important 1000+ years ago, because controlling mints often meant controlling the state.)

          In part, I think the same is true for education. I know, for example, that law school was relatively inexpensive during an initial period of U.S. history. But, falling rates for lawyers created an incentive to rent-seek, limiting schooling. What I’m more skeptical about (in the context of privatization) is schooling for young children.

  2. John S

    Sure governments can succeed, and “interventionist” economists aren’t unreasonable for suggesting that govt outcomes can be better than market outcomes in some circumstances.

    What is truly odious is that in 3 *huge* markets–healthcare, education, and money–the vast majority of economists aren’t even willing to flirt with the idea of allowing free markets to do the “heavy lifting” and aprioristically assume the need for government control. These aren’t tiny, obscure areas. Staying alive and healthy is the #1 concern of nearly everyone; education is the #2 concern of parents (after health) and is the 2nd most important base (after family) upon which children will base their future material well-being, outlook, and life satisfaction; and money is of course vital to the functioning of the economy.

    Until a significant proportion of economists starts calling for a greater role for free markets in these 3 areas, the libertarian/free market voice needs to make itself heard amongst the interventionist chorus.

    1. ckmurray

      John, have you ever wondered why your three big areas are dominated by government and remain essentially unquestioned? If it is so obvious, as you suggest, that private enterprise will rise up to fill these needs, why didn’t it? Why do we instead have what we have?

        1. ckmurray

          That’s a very ahistorical answer. Are you going to contribute some examples of these nutty interventionists destroying a free market utopia with their state provision of education, health and money?

          Or to be more precise, why do governments intervene in property markets? Why do they have to enforce private property rights when people should be free to use any land they choose even if someone is residing there? That’s bloody interventionist if you ask me. I certainly didn’t consent to anyone else’s claim on land. It’s a theft far worse than any tax!

          1. Alexi

            Look, if you want to prohibit markets from handling certain activities, the onus is on you to justify it, regardless of how “ahistorical” you think my point is.

            “I certainly didn’t consent to anyone else’s claim on land. It’s a theft far worse than any tax!”

            Who consents to you owning your body? No one. I think you are unfairly depriving others of its use. Therefore your body is up for grabs, to do with what we like. Satisfied with this line of reasoning? Yes/no? Or are you conflating the possession of a right with the view that a particular institution, called the govt, must enforce it?

            Of course, I am not in favour of a positive right to have your property protected, so this will fall on deaf ears.

          2. ckmurray

            “Who consents to you owning your body? No one. I think you are unfairly depriving others of its use. Therefore your body is up for grabs, to do with what we like. Satisfied with this line of reasoning? Yes/no?”


            Depriving rights to your body is required for any punishment – prison? You’ve denied someone their rights to have their body in the location they choose etc.

          3. Alexi

            Only if they violate the rights of others to begin with as they then cannot coherently object to it. But this presupposes one isn’t ‘unfairly’ depriving everyone else of the use of their body. Clearly this is a ridiculous assertion but then I don’t see why this is so for bodies and not other resources. So it isn’t obvious why people should be able to object to unowned land, to which they have no prior connection, being appropriated , especially if they shoulder the costs of its protection, much like they would for their bodies.

      1. John S


        Yes, I have wondered about the persistence of government domination in these areas. I don’t think, in any of these cases, the answer is “because it best enhances consumer welfare.”

        [ Let me state at the outset that I’m not a conspiracy theorist or closed-minded dogmatist. I don’t think the world is secretly run by Jews/Masons/the Illuminati; I don’t care about JFK or UFOs; I believe in evolution through natural selection; and I’m not a praxeology-worshipping Rothbardian. ]

        Money: The best argument I’ve heard so far of why governments have historically dominated coinage (and previous forms of money) is David Glasner’s idea that states with monopolized mints had a survival advantage against those that didn’t since they had the option of debasing the coinage for emergency defense financing.

        The prerogative of money creation wasn’t limited to self-defense. The Great Debasement of Henry VIII’s reign was carried out in large part to finance wars of conquest in Scotland and France. The establishment of the Bank of England institutionalized the granting of special privileges to individuals who provided cheap credit for state ventures (again, including war). (p. 6)

        1. John S

          I’m least familiar with the history of government control over the provision of medical care. At least part of it can be traced to rent-seeking by practicing physicians to restrict entry into the field (via the AMA) and keep wages artificially high.

          (Commenters: Any links to books or articles on the history of government regulation of the medical industry would be highly appreciated).

          As I said, I don’t think concern over consumer welfare was the primary consideration in determining the level of government intervention in these areas. My question to you is: why shouldn’t it be?

    2. JCatalan

      To be fair, there is an important economics literature on healthcare. Arrow (1963) is the seminal paper. Many economists think there is at least some scope for government in the healthcare industry. I agree, though, with regards to education (although, I’m not entirely convinced for young children) and, especially, money. But, I think libertarians could be more persuasive if they agreed there was scope for common (that is, stopped thinking the people they disagree with are hopelessly naïve).

      1. John S

        Jonathan, thanks for the link.

        I agree that, in general, it’s not a good idea to consider one’s intellectual opponents to be hopelessly naive. But suppose you ask the average person on the street what they think about the following proposals.

        1. The public school system should be abolished in favor of a voucher system (or no vouchers; parents should pay for their children’s schooling out of their own wages or a basic guaranteed income).

        2. Doctors shouldn’t be required to get a medical license, and hospitals should operate on a for-profit basis, developing brands and specializations as in any other industry.

        3. The government should leave money creation to the private sector, and banks should be free to issue their own paper currency. The Federal Reserve system should be wound-up and shut down.

        I’m pretty sure that most people would think of you as “hopelessly naive.” I’m quite sad that most economists would too.

        1. Alexi

          The catalogue of very simple reforms that are considered ‘hopelessly naive’ is stupendous. People really do become used to high levels of government spending and then think anything less is “unthinkable”. Thus why I don’t think the usual slippery slope arguments made against government intervention are off the mark.

          For instance, I know most people would be terrified by the idea of minarchism or anarchism, so I simply say we ought to review the idea of what spending is fundamental, and limit it to some essentials, and then use a flat tax to procure income, to satisfy this basic spending. Being an anarchist, of course I think this is tepid, but of course I am aware even this is considered very “laissez faire” in the mainstream mind.

          Anyway, besides defence and the usual ‘essentials’ (e.g. roads), this can, notionally, include education or healthcare, although I think if you have a basic income guarantee, the arguments for that by welfare statists also tend to dissolve. But even granting these points, people seem to think it’s “radical” or “unworkable”, and this is when you know they’re full of shit. It’s fear of the unknown. They will try and find issues with it, insist the govt can’t possibly live with anything less than current spending, agree spending needs to be reformed but in a very ‘piecemeal’ way etc. Entepreneurs know the consumer doesn’t know what they want until it is given to them. I think politics is little different. It’s sad and I think it’s why politics tends to achieve so little. Politicians largely react to social movements already in place.


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