David R. Henderson  

Government as Deus Ex Machina

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The above title should have been the title of my previous post. The title I gave it, "Mark Thoma Doesn't Get It," was unnecessarily provocative, as one of my co-bloggers has pointed out. I know the myth of male power, and part of it is that we men are not supposed to have feelings. We do have feelings. I think, based on his reaction in a subsequent post, that I hurt Mark Thoma's feelings. I didn't mean to. It was thoughtless of me to think that with that title, I wouldn't upset him. What I really meant to do is talk about the following:

When people advocate government intervention, they rarely, maybe never, tell us how the incentives will be set up so that government will do the right thing. Think about how asymmetric the argument is. Incentives in the private sector are such that someone will do something in his interest that hurts others in society, but he doesn't take account of that hurt in his decision. Or, someone could take action that would benefit others a great deal but it isn't in his interest to take the action. Notice the use of reasoning about incentives to show why the market fails. Therefore, continues the argument, we should have government intervene.

Did you catch the non sequitur? The argument proceeds at first using standard economic tools. We show that the incentives are such that the private actors make the decision that leads to sub-optimal results. Then we (not really we, but many of us) conclude that government should step in. But there's no analysis of government incentives. Why would government do the right thing? That's the unjoined debate. The late George Stigler once said it's like a judge at a beauty contest seeing just the first contestant and then awarding the prize to the second contestant.

I wasn't naive enough, as Mark Thoma suggests in his response, to think that he has "unqualified support for regulation." Also, he has been critical of specific regulations. One of the things that makes his blog interesting is his eclectism. I was just saying that although I read his blog a fair bit, I've never seen him, when he advocates a regulation or a government program, explain why he thinks the incentives will be set up so that it works. I had hoped to get him to address this. It would still be nice if he would.

Addendum: One of the commenters on my post said the discussion shouldn't proceed without mentioning Coase and Demsetz. I'm a fan of both men, and indeed, it was Demsetz who got me into economics, as I lay out in Chapter Two of my book, The Joy of Freedom: An Economist's Odyssey. Of course, I had Demsetz's nirvana fallacy in mind when I wrote this. But I'll often use ideas without naming the person I got them from.


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CATEGORIES: Regulation



COMMENTS (13 to date)
Arthur_500 writes:

Retgretfully, you fail to understand the benefit of government and instead apply human traits such as incentives to what is a gift from God.

We have Public Servants rather than employees.
They serve the Public Good rather than mere profits.

Government, although made of humans and led by humans, is far above human fallability. There is no reason for incentive to do well and only a profit mongering conservative ogre would fail to understand this.

PS The lack of incentive is probably why credit card companies charge the highest rate possible for Government Credit Cards.

Jim Glass writes:

Coase:

"My approach is to compare the alternatives.

"People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point."

http://reason.com/archives/1997/01/01/looking-for-results/

david writes:

It should be noted that rational-choice theory has been very poor at explaining government action in the past, and as such is probably a poor guide to designing government institutions in the future.

One major problem is identifying what (if anything) civil servants maximize. Without that, the entire Samuelson framework of constrained maximization makes no sense. Kling has mentioned power and status in the past, but translating this to empirical evidence has not, as far as I know, had much success.

While we wait for Thoma's likely reply, I humbly request that Mr. Henderson cite some empirical research underlying his own analytical framework. My own suspicion is that we don't know as much about non-monetary incentives as we would like to think.

Charley Hooper writes:

I have never seen anyone explain how incentives cause government employees to strive for and succeed in doing a good job, primarily because I've never seen anyone even try. It's like that Gary Larson Far Side comic with a board full of equations and at the bottom it says, "And then a miracle occurs." People who love government solutions are usually planning on just that miracle. Logical thought won't get them to their desired solution, so miracles are all that is left.

And yet they don't see it this way. And that's the entire problem. They are so much in favor of the idea of some planned organization with a stated purpose for solving a particular problem that they fail to see that such an organization is ill-designed to actually succeed. But the love carries on even in the face of continual disappointment.

dorf writes:

Mr Henderson probably didn't hurt Mr Thoma's feelings. Thoma was probably angered by Henderson's lack of tact and inability to read and represent the statements of others. I think there's a big difference. To say that Henderson hurt Thoma's feelings seems condescending, hardly an attempt to mend bridges, more an attempt to further mock.

David R. Henderson writes:

@Charley Hooper,
Well said.
@david,
It is a tough problem. I see government working badly and I see lot of bad incentives. They are not all monetary. Cops often like to beat people, petty bureaucrats often like to throw their weight around, some of them are nice, etc. I don't see how this gets to it. What I want to know is how people who advocate government solutions think the incentives will guide the government to do the right thing.
@dorf,
You don't know me but virtually everyone who does knows that this is not an attempt to mock.

david writes:

@David R. Henderson

Well, the people vote for the principal legislative representatives and executives and let the responsibility flow downwards.

I note that Supreme Court Justices are deliberately non-incentivized, which perhaps tells us something.

Since this is the status quo I presume the onus is on you to explain why the market-failure outcome is better than the government-failure one.

Tracy W writes:

David - which failure are we talking about? Isn't it entirely plausible that for some situations the market failure outcome is better than the government-failure outcome, and other situations vice-versa?

Brad P. writes:

I get the point of this: the problems of an externality, inappropriate cost accounting, a transaction imposing costs on individuals who aren't a party to the transaction, suboptimal results, are all problems of government intervention as well.

Proponents of government intervention seek to address externalities with the mother of all externalities, and they are loathe to actually acknowledge that.

I was going to say that you should have started this with an apology to Mark Thoma for blatantly misrepresenting him, but as I think about it, there is a very subtle difference between what you are saying and what he is responding to.

Thoma takes you to be making the typical libertarian argument that government technocrats simply don't have the tools to be effective, where as you are saying that, even if they possessed the tools and information necessary to produce optimal results, there just isn't motivation to produce optimal results.

This is fairly similar to monarchy vs. democracy argument that Hoppe advanced.

fundamentalist writes:

Arthur_500, I agree completely! Somehow, people who are irrational and stupid in private life become brilliant and selfless just by becoming a bureaucrat. I only wish Christians has as much faith in God as most people have in bureaucrats.

Chris Koresko writes:

david: It should be noted that rational-choice theory has been very poor at explaining government action in the past, and as such is probably a poor guide to designing government institutions in the future.

One major problem is identifying what (if anything) civil servants maximize. Without that, the entire Samuelson framework of constrained maximization makes no sense.

Wait, isn't this an argument that we don't know how to design a government that works? Or are there other theories that do a better job of predicting government behavior, and which predict that government can be made to behave better than a free market?

I'm genuinely curious.

Joel West writes:

David: The ideas have face validity, but you really should articulate the linkages to show that this is based on longstanding theory. The Nirvana fallacy seems crucial to understanding while this mindset is inherently flawed, but you leave it as an exercise to the reader to make the connection.

The other part missing is this seems like the theoretical underpinnings for your arguments about government fundamentalists. In other words, there are a class of people out there who are government fundamentalists, because they don't think about whether the government has the incentives to do the right thing. Instead, they succumb to the Nirvana fallacy and assume a priori that the government intervention case will be superior to the non-intervention case — but never come back later to validate that assumption once the interventionist policy is implemented.

Andrew writes:

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