Markets are from Earth, Governments are from Mars
Market failures exist. A lot. And we do need intervention many a times to return us to a more optimal/efficient outcome. Here's the thing. I think a lot of people make the mistake of - essentially - comparing apples to oranges. They tend to say "in the real world, x and y are indicative of market failures and thus the government should intervene in z". What they neglect to account for is the fact that, in their analysis, they also make use of a theoretical structure - a government that cleanly executes what it sets out to do.
I think this is an unfair comparison, because sure - a theoretical government can cleanly wipe up the mess of a real world market failure. But what of real world governments, with their own beauracratic, political incentive schemes?
So I think the real comparison is real world governments versus real world market failures.
What do real world governments do a lot of the time?
1. Autarky, i.e. closing the economy. This used to be a fad back in the day. Thank god people stopped now. Import substitution sucks for the reasons I explained in my previous post, and by and large empirical and theoretical analysis suggest that this is generally bad.
2. Huge budget deficits. I'm not convinced by the Ricardian Equivalence Hypothesis. It seems to presuppose non-distortionary taxes.
3. Encouraging black markets. Things like fixing exchange rates can lead to people buying and selling foreign currency on the street.
4. Hyperinflation. No explanation necessary. =)
5. Repressing banks. No explanation necessary, I'm sure.
6. Corruption. Hernando de Soto, a brilliant Latin American economist, tried to set up a shoe factory in Lima. He wanted to see how long it would take him to set up shop without paying bribes. Turns out, he was forced to bribe anyway, and what would have taken 4 hours in NYC took him 10 months.
7. Overspending on wasteful services.
Does all of this mean I'm a libertarian? Far from it. In a post a long-long ago I argued that even under the most conservative of assumptions we can drive a welfare state justification in economic terms. What it means, however, is the following:
We - as liberals, conservatives, mums, and dogs - have to try to paint an accurate picture when discussing things. Liberals ought not compare real world markets to fictional governments. Conservatives ought not compare real world governments to fictional markets. Debate would be a lot more productive, I feel, if people talked about comparable ideas.
I think this is an unfair comparison, because sure - a theoretical government can cleanly wipe up the mess of a real world market failure. But what of real world governments, with their own beauracratic, political incentive schemes?
So I think the real comparison is real world governments versus real world market failures.
What do real world governments do a lot of the time?
1. Autarky, i.e. closing the economy. This used to be a fad back in the day. Thank god people stopped now. Import substitution sucks for the reasons I explained in my previous post, and by and large empirical and theoretical analysis suggest that this is generally bad.
2. Huge budget deficits. I'm not convinced by the Ricardian Equivalence Hypothesis. It seems to presuppose non-distortionary taxes.
3. Encouraging black markets. Things like fixing exchange rates can lead to people buying and selling foreign currency on the street.
4. Hyperinflation. No explanation necessary. =)
5. Repressing banks. No explanation necessary, I'm sure.
6. Corruption. Hernando de Soto, a brilliant Latin American economist, tried to set up a shoe factory in Lima. He wanted to see how long it would take him to set up shop without paying bribes. Turns out, he was forced to bribe anyway, and what would have taken 4 hours in NYC took him 10 months.
7. Overspending on wasteful services.
Does all of this mean I'm a libertarian? Far from it. In a post a long-long ago I argued that even under the most conservative of assumptions we can drive a welfare state justification in economic terms. What it means, however, is the following:
We - as liberals, conservatives, mums, and dogs - have to try to paint an accurate picture when discussing things. Liberals ought not compare real world markets to fictional governments. Conservatives ought not compare real world governments to fictional markets. Debate would be a lot more productive, I feel, if people talked about comparable ideas.
posted by arun at 3:42 PM
3 Comments:
I agree wholeheartedly :-)
I agree. One case you could have mention would be historical banking crises and the creation of the Federal Deposit Insurance corporation, widespread failure of the Banking Industry is when things get nasssty. There are regulations as to how much banks must actually keep in cash (or readily available funds) and the marketing of FDIC to bring some public confidence and prevent bank runs.
i read your blog for the first time in a while (the basketball stuff doesn't do much for me, you know?), and you've got good posts on there. i just finished reading bhagwati (in defense of globalization) for my global political economy class. i agree with your assessment, but i'm not convinced that the free market is good for all nations, particularly when the united states is dictating which industries are open and which aren't. thus, while protectionism doesn't tend to work, i can understand that some see it as theoretically justified.
and i'm writing a paper on what your last post was on. governmental policies' impact on a nation's economy. it's really interesting stuff, particularly the corruption you cited in latin america. governments can be a lot more fucked up than ours is.
anyway, i have to go. i just wanted to say hi :-) hope your'e good.
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