At 12:35 AM +0000 8/3/09, Stefano Mori wrote:
>I invite everyone to the premise of this thread that some things are
>best handled by government and some things are best handled by
>individuals and corporations.
>
>And I wonder if we can make a list of which is which.
My take on it is
- take as a starting point that the governments role is to facilitate
the common good.
- then take the idea that the question of how resources are
allocated, as the only actor in which all citizens have a stake, is
one the government is in a unique position to address.
- if a given area of production approximately resembles a perfect
market, then resources will be allocated in a reasonably efficient
way, and the government is best leaving it alone.
- the right wing/ free marketeer generally imagines that a perfect
market is the natural state of things, and that then a market with
minimal interference from the government normally approximats a
perfect market, so if the government stays out of things, it will be
efficient.
- this free marketeer argument is pretty much clearly bullshit. For
example, a perfect market assumes no transaction costs, that you have
a large enough number of major players that no single player can
affect the market price, that everyone has perfect knowledge, that
there are minimal barriers to entry. In almost all real world
markets, many of these assumptions are not even close to true. In
many cases, there is absolutely nothing that can be done about the
ways in which markets are imperfect - making microchips requires
multi-billion dollar investments for example, so there are large
barriers to entry, so the market will almost always be an oligopoly
or monopoly, which is far from a perfect market.
If these conditions are not true, then we don't get any
guarantee of sensible, efficient resource allocation, and if we don't
get that, then the only major economic, objective, argument for
having a market system as opposed to any other method of allocation
of resources disappears.
Also, there are public goods. Goods that are not excludable
(you can't stop other people from enjoying them), for example. And
there are externalities - when the transaction between parties A and
B has notable effects on anyone other than the two parties. Both of
these situations occur all the time in the real world -- and in both
these situations there is no guarantee that markets will efficiently
allocate resources.
- perfect markets also assume everyone is rational. Everyone
isn't. And that everyone has perfect knowledge. Everyone doesn't.
Sometimes a small number of actors are able to clearly understand a
situation that the majority are unable to - sometimes this is
virtually guaranteed, if some of the information needed is highly
technical.
- given this situation, there is no obvious, objective, right choice
for governments attitude to economic activity that applies to all
situations. Markets differ, and some markets will drastically fail to
do the 'right' thing if left to themselves.
- If it encounters an industry that seems to work like a
perfect market, maybe they should leave it alone, or regulate it
lightly to ensure it remains that way.
- It if encounters an industry that is close to perfect
market, but differs in some substantial ways, maybe they should
regulate it so it more closely resembles a perfect market (at a basic
level, we have insider trading regulation to attempt to make stock
markets work as all players have the same basic level of knowledge,
we have anti-cartel legislation to attempt to restrict the ability of
groups to affect the market price).
- if it encounters are industry that seems very far from a
perfect market, or which has notable externalities, then the
government should be aiming to regulate that industry in such a way
that the common good is served.
- there is a very strong argument that some markets should
thus be heavily regulated or should otherwise have a great deal of
government interference to ensure that the common good is best
served, if those markets involve a lot of externalities. For example,
trying to make externalities into private costs, such as fines that
approximate the cost to others of pollution.
- sometimes that regulation may even be to the extent of
restructuring a market so that it no longer deals directly with the
consumers of its services. There is a pretty solid case for doing
this when externalities are greater than the service provided.
Sometimes this means simply having the government take over provision
of services directly. Roads are a good example.
- in markets in which large externalities are involved in
many decisions, even down to the point where there are large
differences in the flow on externalities from various specific
management policy, is one in which the necessary level of government
regulation is going to be so high that it probably makes sense for
the government to stop indirect regulation through legislation etc,
and jump in as a direct provider of services. Health and education,
both of which have huge levels of externalities for many specific
decisions of service provision, are examples of areas that fall into
this category.
- in many cases, citizens are likely to want the government
to interfere in situations were there is no direct economic reason to
do so. The reasons may be ideological, for example -- such as
believing that people have rights that the government should enforce.
Economics isn't everything.
All of which is a very long winded way of saying
- there is no obvious economic reason for a government to interfere
in an industry that resembles a perfect market beyond the level
needed to ensure it continues to do so.
- if a government thinks it can, by regulation, make a market behave
more or less like a perfect one, it probably should do so.
- If a market can't do so, then it should regulate or otherwise act
to ensure the common good anyway. When positive externalities are
very large, but it may not otherwise happen, this often means taking
on that function itself (eg roads) . If negative externalities are
large, and it is otherwise likely to happen, this means the
government should forbid is (serious pollution, for example).
- some areas are so complicated that ensuring the common good is
almost always going to involve the government being a major part of
the system. Often, the best way to deal with this is for the
government to become a provider. Health and education generally fall
into this category.
Cheers
David
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