Tim Worstall

The Difference Between Markets and Government

Shall we be serious for a moment? No froth at the mouth denunciations of either the slime moulds that masquerade as politicians and bureaucrats, nor peans of praise for the self-organizing capabilities of free people in free markets?

Let’s actually look at a simple yet serious difference between markets and governments.

What is needed is for legislators to heed the opinions of those likely
to be most affected by their output and to be ready to amend or repeal
laws that do not work, not simply carry on regardless.

If you cock up in a market you soon get to hear about it. There is a feedback mechanism. If you cock up in Government, it’s vastly harder to undo the mistake.  There is no such simple feedback mechanism.

As we’re being serious here, no, I’ll not go on to deal with what this means we should do about it, rather, just leave that point where it is. Either system will make mistakes, as even a cursory readin of history will show. But which undoes those mistakes at the least cost?

In

9 responses

  1. Esben Avatar
    Esben

    I think it’s very simplistic to claim that markets do a better job at correcting their mistakes than governments. There are plenty of areas where markets NEVER correct their mistakes, without government intervention – pollution being the classic example. There is no obvious feedback mechanism for people who are badly affected by pollution – or rather there is ONE obvious feedback mechanism: democratic government.
    In fact this way of comparing government and markets are completely meaningless, since it ignores the fact that the two serve different purposes and should not be seen in competition with each other, but rather complementary. Markets do certain things best (such as delivering material goods), whereas Government does things which markets will never be capable of, including regulating and correcting the market.
    The truly interesting debate is not market vs. government, but rather good governance vs. bad governance. To have this debate would be infinitely more productive than the anti-government agenda that dominates so many places (including on this blog). But when your ideology requires you to be against government in virtually all its forms then obviously it is had to look constructively and nuanced at how we improve the quality of government services.
    Tim adds: There’s an extensive literature focusing on why we don’t get good governance and are fated to only have the bad: the incentives that politicians and bureaucrats face.
    There’s also an extensive one on things like pollution: try Coase for a way in which markets can indeed handle this (dependent, of course, upon transaction costs).

    Reply
  2. dearieme Avatar
    dearieme

    Two generations have been indoctrinated to believe that the Clean Air Act of the 50s saved us all from coal smoke pollution. But Lomborg, The Skeptical Environmentalist, claims that the rate of decline in smoke pollution was well-established before the Act and did not accelerate when the Act was passed. If Government action is so routinely good, why do the bastards feel constrained to lie about it so often?

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  3. Roger Thornhill Avatar
    Roger Thornhill

    Maybe the point is that Governments should not act like commercial entities and commercial entities should not act like Governments.
    Governments can be good at enforcing regulations and claims – “weights and measures” I call it. They do not necessarily have to be the ones to come up with standards, however, and especially should be very loath to stepping in if two parties divert from it by open, mutual consent (not having a HIP is an example).

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  4. Esben Avatar
    Esben

    Are we truly fated to have bad governance or are there in fact examples in the world of good governance? Could it be that the narrow incentives that economists focus on, don’t always tell the full story? Could there be public servants that are motivated not solely by economic/material incentives but by self-respect, idealism, social dedication, altruism or what have you? I would say that there are real world examples of very well functioning societies with unusually large governments.
    As for your literature I am well aware that it exists. Needless to say there is also endless amounts of literature stating the exact opposite (in fact I’m pretty certain that a clear majority of economists DO consider pollution to be a serious negative externality, which does need to be addressed by government), all depending on axioms, assumptions and so on. So isn’t it what this kind of blog is here for: debating the issues?

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  5. Alan DouglasAlan Douglas Avatar
    Alan DouglasAlan Douglas

    SUNSET CLAUSE
    Much legislation would benefit from a sunset clause – “THe law will expire in 3 years time unless specifically renewed”.
    Alan Douglas

    Reply
  6. johnnybonk Avatar
    johnnybonk

    “The Difference Between Markets and Government” – I am surprised to have to point out the obvious, that the difference is that governments act by threat of violence whereas markets work by entreatment.

    Reply
  7. gene berman Avatar
    gene berman

    Mr.Esben:
    I don’t know whether or not you intentionally worked the old rhetorical “switcheroo” but it was a good ‘un.
    “Pollution” (and it hardly matters what type you contemplate) is not a market phenomenon, a product of the market, nor a consequence of market activity. And the fact that pollution of many sorts poses a problem, in general, is by no stretch of the imagination, a “market failure” but most defintitely one of government. It’s simply the case that science, custom, and the law have simply been behindhand in dealing with the problems arising from some externalities. (The very fact that they’re called “externalities” is in recognition that their consequences are not part of the calculus of the economic actors concerned.)
    Market and governance are two entirely different things. The first is the system by which private individuals interact peaceably to exchange privately-produced goods and services with each other with benefits and satisfaction to all concerned. Governance is a system for minimizing those acts which, if permitted, would bring general disorder and violence
    into interhuman relationships.
    I would not dispute that there are honest, dedicated, intelligent public servants of many sorts. What I will dispute is whether they can (or, more accurately, are likely to be able) to deliver much of anything of value in the wise expected (and routinely received) from private initiative. By nature, such people are not entrepreneurs, investors, designers, artists, or marketing experts. Their forte is law and its forceful application; if those were qualifications actually in competition with the private sector in furnishing goods and services, no power on earth could have suppressed the institution of slavery–it would be a coexistent system of production to this very day.
    There is a name for the ability that those in the government sector lack: it’s called the ability to calculate economically and refers to the considerations of an owner (and potential expender) of resources faced with the various decisions involved in “turning a profit.” It’s a process occupying a significant amount of the attention of every entrepreneur, whether a captain of industry or a pretzel-vendor on the street but utterly foreign and unfathomable to the public servant, no matter how otherwise bright, able, or educated. It is the same inability which doomed the Soviet Union before it was started and has meant the progressive diminution and retardation of progress wherever the socialist model has been employed.

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  8. Tim Almond Avatar
    Tim Almond

    “Could there be public servants that are motivated not solely by economic/material incentives but by self-respect, idealism, social dedication, altruism or what have you?”
    Yes. There are able people working in all sorts of areas of the government who choose to do it despite being able to be paid more than outside for altruistic reasons.
    But that’s missing the point. It doesn’t matter how bright, hard-working and public-spirited you are, no-one is a genius at judging what is the best solution for the public.
    Of course, there are things where the government has to be present, where decisions have to be made for the group rather than the individual. Law and order, planning, pollution.
    But that’s also an argument for more localised government. Not only that councils can learn from each other, but that individuals can gravitate towards more successful economic ideas.

    Reply
  9. Esben Avatar
    Esben

    gene berman. I am intrigued at your claim that an externality is not a market failure. Firstly because of your reasoning that “The very fact that they’re called “externalities” is in recognition that their consequences are not part of the calculus of the economic actors concerned”. This is exactly WHY the market fails. Because it doesn’t include externalities into it’s calculus. However the externalities are still a direct result of the economic activities in the private market.
    Secondly I find it interesting that you would call it a government failure because “It’s simply the case that science, custom, and the law have simply been behindhand in dealing with the problems arising from some externalities”. So now it is government’s responsibility to make sure that science is adapted to handle for instance problems of pollution. Well I agree actually, but it is a strange claim coming from someone who is seemingly advocating MORE market and LESS government. A big push to seriously develop renewable energy sources to the point of sufficient cost-efficiency would be a great thing, but also very expensive and tax financed. But hey, I’m for it.
    As for law I assume, that you subscribe to the universal solution of strengthening private property rights to let individual actors deal with externalities (correct me if I’m wrong). But c’mon, I could easily mention the first 50 types of externalities where even highly improved private property rights won’t do a damn thing about it, either because benefits or costs or the source of externalities are too diffuse to identify, or because there are too great transaction costs involved.
    As for pointing out the (obvious) differences between market and government, fine. Of course there are differences. Of course different kind of people are working there. In the private sector most individuals tend to be motivated by profit. They don’t care so much about the big picture, but care about their own bottomline. That is fine, that is good and as Adam Smith pointed out this self interest if often neatly aligned with the genereal interest (the baker produces bread for everyone to buy and enjoy etc.). However it isn’t always so. For those cases where private interest and public interest diverge greatly we need people who are NOT motivated by profit, but motivated by a desire to further the overall good and are inclined to look at the big picture. It might not work perfectly but it sure beats the alternative of not doing anything. This is why the mixed economy is such a good thing and works so much better than any other system tried.
    Gene you said: “What I will dispute is whether they can (or, more accurately, are likely to be able) to deliver much of anything of value in the wise expected (and routinely received) from private initiative.” Well, dispute it all you like. Curious that the Scandinavian countries all have very large public sectors, are very prosperous and consistently end up at the top when surveys try to uncover where people are happiest. Clearly that enormous government is doing something right. Why not undertake to figure out WHEN government works well, rather than try to stick to the antiquated belief that it never does?
    Tim, I don’t see anything in your argument which really contradicts anything I have said.
    Tim adds: “Why not undertake to figure out WHEN government works well, rather than try to stick to the antiquated belief that it never does?”
    Sure. What do you think we’re doing around here? My answer being that it works well a great deal less often than everyone seems to think.
    The Scandanavian countries: you know that the vast majority of their “government” activities are income transfers? That there’s almost no intervention in the productive side of the economy? The labour protections, just as an example, are very low? That they are both small and until recently, culturally homogenous societies? That in many ways they are more free market than the UK or US? (Sweden has a pure voucher system for the education system, for example)?
    Yes, let’s look at places and work out when government works and when it doesn’t.

    Reply

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