Government Is Efficient.

Economics Economics Questions
1

In Saving Government Failure from Itself, Boettke, Coyne, and Leeson present the following dilemma.

The problem as we see it is as follows:

(1) Economic theory informs us that $20 bills (unexploited opportunities) cannot persistently lay on sidewalks without being picked up;

(2) The very same economic theory that informs us about the non-persistence of inefficiencies is also what we use to identify inefficiencies (gains from trade that are currently unexploited);

(3) When we examine policy reality in light of that economic theory we see inefficient policies all the time, e.g., protectionist legislation.

How do we square propositions (1)–(3) without abandoning economic theory? We see the choice as pushing in one of two directions. On the one hand we could argue that (2) and (3) are illusions that economists must pierce through. The $20 bill is not there because it would actually cost $25 to reach down and pick it up. In other words, if a lower cost alternative were available it would be employed; and since it is not, the policy reality must reflect the political economy reality efficiently. No unexploited opportunity for mutually beneficial action remains in the political process.

That is, if unexploited opportunities cannot remain indefinitely, then allegedly “inefficient” government policies might simply be a delusion, a myopic distortion of an efficient process.

Quoting George Stigler, “Consider the following example. The United States wastes (in ordinary language) perhaps $3 billion per year producing sugar and sugar substitutes at a price two to three times the cost of importing the sugar. Yet that is the tested way in which the domestic sugar-beet, cane, and highfructose-corn producers can increase their incomes by perhaps a quarter of the $3 billion-the other three quarters being deadweight loss. The deadweight loss is the margin by which the domestic costs of sugar production exceed import prices. Lacking a cheaper way of achieving this domestic subsidy, our sugar program is efficient. This program is more than fifty years old-it has met the test of time.”

Tyler Cowen adds, “Governments often do terrible things, but the reason we observe them so frequently is because they are the predominant form that a stable equilibrium takes.”

There is a challenge presented to anti-statists of all sorts: if we presume individuals are rationally maximizing their benefits (and hence reducing their costs), then why would supposedly inefficient government policies persist over long stretches of time?

That is, if there’s a $20 bill lying on the ground, why would people continue to walk past it? If it actually takes $21 to pick up that $20, then it would inefficient to lift it up; likewise, if transition to nongovernmental social arrangements has a cost that exceeds its benefit, then our democratic government is efficient. As Cowen states, governments are ubiquitous and perhaps persist as a stable equilibrium, one whose efficiency might escape the limits of our reason.

Or so the argument goes. What do you think?

2

Yeah but they forget the fact that the government at the same time doesn’t care so much about the money it is given. The government always has less incentives for efficiency because it doesn’t have the risk a regular business would have. So it doesn’t strive to be efficient. That’s why the government is more likely to invest in fruitless projects, throw money around, and waste.

The problem is incentive.

3

The reply to that criticism would be that, as a rational population, if the government was truly being inefficient, then the practices would have been replaced by lower-cost alternatives.

4

And the government has the powers of monopoly and aggression. How can lower cost alternatives replace the government when they have all the guns and a monopoly on law?

5

*double post

6

If we do not act to replace the political system, then the cost of replacement must exceed the benefit; otherwise, the libertarian utopia should already exist.

7

How’s that a necessity? From that point of view, we should already have the best technology, and live in a utopia for the last thousand years, because only the most advanced way of living exists. We have plenty of evidence that people act irrationally or don’t understand the government. How can people know that lower cost systems actually exist? Progress is not immediate.

8

Wel; this assumes a ‘one person actor’; however: prisoner dillemmas, collective action problems and free rider problems are big. Also: rational ignorance and rational irrationality. Also: ‘objective’ costs aren’t necessary costs according to which ideology you believe.

I do agree with the statement that if the costs of abolishing government are higher than keeping it, we shouldn’t just yell ‘abolish it’. But… how much does morality cost? Costs are subjective so this is something everyone has to decide for himself.

9

There are a couple problems I see right away. First, let’s be clear that the problem with governments is not that they are “inefficient” but, rather, that they are a detriment to human welfare. Governments are not market actors, that is, they do not engage in voluntary transactions only with willing participants. This is important because the whole reason we say that markets increase human welfare is that we can know (via revealed preference) that nearly every transaction in the market resulted in a net benefit to the parties to the transaction (externalities are another subject).

Market efficiency is the result of the many transactions in the marketplace and entrepreneurial activity. By constantly seeking profit opportunities, entrepreneurs (really, all of us are entrepreneurs in at least some sense) are “picking up the $20 bills” lying around. The existence of rent-seeking doesn’t change market efficiency a bit, it only reinforces it. Government policies that result in destruction of entrepreneurial opportunity do not contradict the rationality of individuals nor the efficiency of the market because government policies suffer from the public choice problem (externalities in decision-making). Since the government does not bear the costs of its own decisions (except in the most extreme cases of revolution or foreign conquest), it cannot be rational and there is no reason to believe that its actions will lead to market efficiency (unlike the actions of rational entrepreneurs which do lead to market efficiency). The possibility of profit or loss is a necessary condition for rationality.

Clayton -

10

Efficient in achieving what? Is Stigler saying that the sugar tariff is an efficient way to create a 3/4 deadweight loss?

How can people know of alternatives, particularly without simple measures like profit and loss? The whole point is that we cannot determine the efficacy of a political program, as we don’t have a good way of measuring benefits and, even if we did, costs tend to be separated from benefits.

11

I agree with Michael Green, efficient for whom? For the population, the government is tremendously inefficient. For the sugar lobby, it achieves their ends. Doesn’t change the fact that we are getting screwed.

And even if people are inclined to abolish the State, it’s more complex than that. Just because we prefer not spending the time and energy to abandon something does not mean that we a) have to like it or b) prefer its existence to its non-existence. We prefer its existence in relation to the amount of time and energy it would take to remove it combined with the perceived probability of our action actually accomplishing the goal. If a libertarian population that encompassed 90% of a nation thought that the State was a necessary evil and could not be abolished (even though it is maintained by passive ideology), they would not bother. If they realized that 90% would take over the government, you’re still dealing with that Nash Equilibrium as you assume everybody else isn’t going to spend the time to change things so you don’t even bother, even with the 100% probability of absolute overthrow if everybody pitched in.

The other commenters hit the nail on the head pretty much. The Mises Institute is hear to educate what the State really represents. Of course people like the State as they perceive it, but the problem is, we think they’re wrong and that there is a much better alternative. They don’t know about the alternative. We’re not all Laplace’s Demon, there are certainly gaps in what we know and misconceptions about reality.

12

The reply to that criticism would be that, as a rational population, if the government was truly being inefficient, then the practices would have been replaced by lower-cost alternatives.

Mass delusion due to years of government inculcation is no substitute for economics, sorry.

13

But therein lies the strangeness of what Stigler is proposing: if you are truly “getting screwed,” then why hasn’t the subsidy been repealed? If the cost is exceeding the benefit of acting, then that explains why the subsidy is peristent and efficient.

If you are claiming that there is a benefit we can attain greater than the cost, then the subsidy would already have been repealed. Essentially, you and others are claiming that there are $20 bills lying on the ground that people are refusing to pick up.

14

I believe interest trumps ideology.

15

Ever read Caplan’s Myth of the Rational Voter?

You’re assuming a government is an economic service provider in competition with others on the market. Why make such a blatantly ignorant assumption? So “surely” nothing. It only exists to serve the interests of its well connected patrons. God, how can so-called neoclassicals be so utterly blinkered?

That’s a quaint belief. What makes you think voters have the incentive to research the impact of government policies? What makes you think, after years of non-education, they’ve the means of analysing them? Do you live in some fairy tale world? Even assuming they were cognizant of it, like others pointed out, who is to say the costs of removing it are currently exceeded by the benefits of it? That it is not removed does not imply it provides any benefits whatsoever… it’s like saying some people refuse to fumigate their house because it’s too cost prohibitive, therefore the bugs infesting it are providing value…

16

Efficiency does not mean that there is an atemporal utopia we should all now live in, with unchanging futuristic technology or other such features. Efficiency, is this case, merely means we are achieving the ends we want while minimizing costs to the best of our current abilities.

To claim we have “plenty of evidence that people act irrationally or don’t understand the government” is inconsequential; understand the government by what standard? Perhaps they understand it enough (cf. Posner’s neologism of “Concept 2 democracy” from his book Law, Pragmatism, and Democracy). I don’t understand how cars work, but I believe I use them successfully.

17

You’re basically just saying the costs of removing government aren’t perceived as low enough yet to make it worthwhile. That’s all.

18

I am not saying voters should be fully-informed according to your normative criteria (e.g., being able to name their congressmen on a pop quiz). What information is efficient to know might be substantially less than democratic idealists might believe.

P.S. I have read Caplan’s book.

P.S.S. I am not necessarily endorsing this belief; I am arguing it for the sake of discussion.

19

Well, the sugar lobby’s protections aren’t “$20 bills” to me. More like pennies

I would rather see them non-existent and I am getting hosed. The cost still outweighs the perceived benefits on my part. If I could wave a magic wand, I would get them removed. If I wanted to do a Ron Paul (thankfully only hypothetically ), work on a political career, get elected, try to vote legislation only to see it shot down, etc. or just became a public advocate against the sugar lobby, it would be a complete waste of time (probably) because I assume most people don’t care that they have to pay an extra 10 cents or whatever it is per 2 liter of coke. The fact remains, it would be cheaper on a total market. Kind of like how you may hypothetically be willing to pay $10 more on a sofa or something you like, but the competition between businesses brings that number down. They’re only asking for $10 fewer, even though you’d be willing to give them $10 more if they asked for it.

The problem is that I would rather pay the 10 cents per coke than spend my time lobbying against the sugar industry. But if you apply this to the whole economy (which pretty much everything is interfered with by the government), that dollar number and amount of “hosage” keeps climbing and climbing. You’re not going to convince anybody to care about an individual sector of the economy, but if you explain to them the damage that the government does, hopefully they will see the numerous examples of how they are getting hosed and demand the abollition of the government. But that’s also difficult to do with the amount of propaganda and misconceptions about government floating out there in the public sphere.

20

That’s a good summation; all the allegedly inefficient government policies still generate more benefits than the costs to repeal.