Government failure: an underestimated phenomenon

_ Antony P. Mueller, economist, University of Erlangen-Nuremberg, professor of economics and macroeconomics, Brazilian Federal University UFS, member, Ludwig von Mises Institute, senior fellow, American Institute of Economic Research (AIER). 17 February 2022.*

Time and again reference is made to a supposed failure of the markets in order to justify corrective political intervention. This ignores the fact that government failures carry much greater weight and are more problematic. In this analytical note, twelve different government failures that are neglected by social engineers are presented by way of illustration.

For example, the representatives of the state presume knowledge that they cannot have. In order to be able to carry out an intervention successfully, the state would have to fall back on information that the free market first produces. Market knowledge is not central, systematically organized and general, but distributed, heterogeneous, specific and individual.

Politics also suffers from long delays between diagnosis and effect. Politics is a power game. The politician’s antenna is trained on the signals relevant to this struggle for power. Only when an issue is sufficiently politicized will it attract the attention of politicians.

The value of a single vote in a mass democracy is so small that the rational voter will not spend much time and effort examining whether the grand promises made by the politicians standing for election are realistic and do not conflict with their other desires. Therefore, the political campaigns are not aimed at information and education, but rather disinformation and confusion. It is not the soundness of the program that is important, but the enthusiasm a candidate can generate among his supporters and how well he can put down, denounce, and humiliate his opponents. As a result, election campaigns breed hatred, polarization and retaliation.

Statists loudly trumpet the tale of market failure across the country, while everyone can see with open eyes that state failure is the real evil.

The interventionists have developed a theory that deals with “market failure”. Concrete market situations are compared with the ideal of the perfect market. The theoretician then identifies deviations and develops intervention mechanisms on the part of the state that are intended to eliminate the problem.

This theory of market failure is flawed from the start. The proponents of capitalism do not claim that the market is perfect. On the contrary: For the supporters of capitalism, there are always market imbalances. Without these, there would be no need for entrepreneurs.

The market failure theorists first construct a model of the perfect market in which there are no entrepreneurs. Then they examine a concrete market and find that there are imbalances compared to the perfect market. On this basis, the theorists of market failure now justify the

State intervention

The aim of the theory is to establish market equilibrium through state intervention. Since entrepreneurial activity was excluded from the outset in these models, the state should now intervene and bring about equilibrium through market interventions.

Interventionist theorists ignore the problem of state failure. Public choice theory has been developing models and theories since the 1970s and has proven with numerous empirical studies that government failure by no means eliminates the imbalances, but usually increases them.

When politicians and bureaucrats don’t deliver on their promises – which often happens – it is said that the problem can be solved if only we can fill these bodies with better people. We are told that the old guard of government officials didn’t try hard enough or didn’t have the right intentions. While it is true that there are many incompetent people with bad plans and decisions in government offices, we cannot always blame the people involved. Often the likelihood of failure is a consequence of government as an institution itself. In other words, politicians and bureaucrats are unsuccessful because the nature of the state apparatus prevents them from operating efficiently.

Lack of knowledge

Politics suffers from the arrogance of knowledge. In order to successfully carry out state intervention in the market, politicians would have to know more than they can. Market knowledge is not central, systematically organized, and general, but distributed, heterogeneous, specific and individual. Even with the greatest effort, the knowledge needed to intervene can never be obtained.

Mistakes are corrected less often

Unlike in a market economy, where there are many actors and a constant process of trial and error, the correction of government errors is limited because the government is a monopolist. It is often worse for the politician to admit a mistake than to stick to a wrong decision – even against one’s own judgment. In the case of state monopolies (in contrast to natural monopolies that can arise on the free market and are so “desired” by consumers), there is simply no alternative for those negatively affected, because equal competition is not permitted within the political local authority.

information asymmetries

While so-called information asymmetries also exist in the market (e.g., between the insurer and the insured or between the seller of a used car and his buyer), the information asymmetry is more pronounced in the public sector than in the private sector. For example, while several insurance companies and many car dealers compete with each other, there is only one government. The members of the government don’t have much to lose if something goes wrong. On the contrary, bad politics often pays off for politicians. The politician will therefore not make a lot of effort to avoid missing knowledge. As partisans, they strive not to tackle the most pressing problems, but to provide resources to those groups that matter most in the political power game.

Displacement of the private sector

Apparent market deficits are not eliminated by state intervention but created by crowding out private supply. If there were no public dominance in the fields of schooling and social welfare, non-governmental services and community charities would fill the gap, as was the case before the state usurped activities. The displacement of the private sector by state measures is constantly at work because politicians can obtain votes by providing additional public services, although public administration does not solve the problems but only worsens them.

Administrative time delays

Politics suffers from long delays between diagnosis and effect. Politics is a power game and the politician’s antenna is trained on the signals relevant to this struggle for power. Only when an issue is sufficiently politicized will it attract the attention of politicians. After the delay for an issue to receive political vigilance and be diagnosed as a problem case, another delay occurs until state authorities and party bodies have reached consensus on how to address the issue. After that, it will take another time for the appropriate political means to gain the necessary political support. After the measures have been implemented, a further period of time elapses before the use of funds shows its effects. The time between the articulation of a problem and the impact is often so long that the nature of the problem and its context have changed fundamentally in the meantime. Not surprisingly, the results of government interventions, including monetary policy, not only deviate from the original goal, but can produce the opposite of the intentions.

Sinecures

Government intervention makes the pursuit of privilege attractive, attracting those who seek sinecures through politics. In a democracy, there is constant pressure on politicians to increase perks in order to garner support and votes. The creation of privileges in favour of one special group increases the zeal of other groups to seek privileges as well. Over time, the distinction between corruption and decent and legal conduct is blurred. The more the state devotes itself to creating sinecures, the more the country becomes a victim of clientelism, corruption and the misallocation of resources.

Coalition clique leads to law inflation

Logrolling, the subject of public choice theory, is the exchange of favours among political factions to achieve a preferred project by supporting the interests of another group. This behaviour leads to a steady expansion of state activities. Through this process of mutual quid pro quo, parliamentarians support bills from other factions in return for political support for their own projects. This behaviour leads to the phenomenon of “law inflation”, the avalanche of useless, contradictory and harmful laws.

Common good illusion

The so-called “common good” is not a clearly defined concept. Similar notions such as that of “public good” defined by non-excludability and non-rivalry also miss the point because it is not the good that is “common” but its provision. A good becomes a public good when its collective production is considered more efficient than the private or individual production of that good. But this is the case with all economic goods, for the market itself is a system for the provision of private goods through cooperative efforts. The market economy is a collective supplier of goods because it combines competition with cooperation. Any of the so-called “public goods” provided by the state can also be produced by the private sector, cheaper and better. In contrast to the public sector, cooperation in a market economy also includes competition and thus not only economic efficiency, but also incentives for innovations.

Regulatory seizure of power

The term “regulatory capture” refers to a state failure in which the regulatory authority no longer pursues the original intention of promoting the “public interest”, but falls victim to the group interest to be regulated, which the agency was set up to regulate . By enlisting administration from private interests, the agency becomes a vehicle to advance the particular interests of the group targeted for regulation. To this end, the interest groups will demand special regulations according to their particular concerns in order to use the state apparatus as an instrument to promote their own interests.

Myopia

The political time horizon is the next election. In an effort to ensure that the benefits of political action quickly accrue to their specific stakeholders, the politician will favor short-term projects, even if they bring only temporary benefits and cost more in the long run than an alternative project in which the costs come first and the benefits come later . Since the provision of public goods by the state cuts the link between the payer and the direct beneficiary, the temporal preference for the state’s apparently free demand for goods is necessarily higher than in the market system.

Rational ignorance

It is rational for the individual voter in a mass democracy not to inform himself thoroughly about the political issues, because the value of the individual vote is so small that it does not make a difference in the outcome. The rational voter will vote for those candidates who promise the most benefits. Given the small weight of a single vote in a mass democracy, the rational voter will not spend much time or effort examining whether these promises are realistic and do not conflict with their other desires.

Generation of hate, polarization, and retaliation

Because rational voter ignorance is a fact, the political campaigns aim not at information and education, but at disinformation and confusion. What matters is getting more votes in the end. It is not the soundness of the program that is important, but the enthusiasm a candidate can generate among his supporters and how well he can put down, denounce, and humiliate his opponents. As a result, election campaigns breed hatred, polarization, and retaliation.

* Translated and republished with kind permission of the author from the original publication at the Liberal Institute.

This article is an excerpt from: «Capitalism, Socialism and Anarchy. Opportunities for a social order beyond state and politics» by Antony P. Mueller, which will soon also be published in English.

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