So a long side discussion I had with Scott after class wound up being interesting enough to merit posting. Only tangentially related to econ so you can stop reading if that your only concern.

The question posed was how I could possibly believe that governments could be efficient economic actors. The assumptions went like this. There are outcomes in the world that are inefficient from a perspective of maximizing utility. There is also theoretical government action that could make those markets more efficient. From there we have two problems with government actually implementing a more efficient policy, (I’m also assuming that government action is legitimate, ie it can tax and spend for public welfare w/o causing moral harms) first, that government agents have a knowledge problems and secondly that they have an incentive problem.

The issue of knowledge problems is divided into two parts. First is the concept that government agents aren’t able to frame legislation because they lack the capacity to conceptualize the complex workings of the economy and that the only agents that have a vested interest in displaying potential legislation are special interests, ex only a tobacco company has (enough) interest in helping craft tobacco legislation. I find this reasoning inconclusive. On a wide variety of issues, not the least of which would be monetary policy, you find numerous interest groups pushing a variety of policy prescriptions more or less for (their own perception of) the public good. Assuming that any of these agents are right, it does not seem too farfetched for me to assume that government is capable of picking between policy alternatives.  The second and thornier knowledge problem is that government and indeed any actor can only guess at the utility curves of other individuals and thus any action by government is not maximally efficient compared to people seeking their own remedies. My first response to this is dogma. I think that most goals government pursues, ex. increased education, health care, support for the elderly, infirm, or disabled are inherently good goals and that most people believe these are good goals. My second response is that, given that dogma, government reduces transaction/coordination costs among actors. Keep in mind that for things that I think government should be involved in there’s an inherent difference between alot and a little. For instance giving 50% of my income to know that there are no children starving in America is me buying a totally different good then if I were to spend the half of my income supporting some number of starving children. In short the first knowledge problem is in practice surmounted and the second is an article of faith that certain goals are inherently worthwhile.

The second issue is that of incentives. The argument goes that politicians first and foremost goal is to win reelection, secondary to ideology because if they allow themselves to act as an ideologue in scenarios where it is toxic to their political career they find themselves unable to implement their ideology. Related to their goal of winning elections they have the goals of fund raising and mobilizing the base. Thus come the pernicious scenario that advocates of smaller government fear. There is a bill on the table. The bill started as an attempt to provide free lunch to all school age children. Lunch for all kids is commonly believe by society at large to be socially efficient. But there’s a problem. Me and you and other individual constituents gain a little bit if the bill passes. But if the bill were to include language that says, for example, that each lunch must have 2 servings of dairy, then a certain group might benefit disproportionally from writing the bill in such a way. And in order to insure it was so written they might be willing to make a large donation to a certain politicians campaign coffers. Now the extra dairy probably won’t be very helpful to the children but it probably won’t do anything to harm them. So the politician writing/voting on the bill goes ahead with it and gets the campaign contribution.

The above scenario is bad. Its not what I want. But I don’t think of it as a crippling indictment of government. Say there are  types of legislation:Perfect, Imperfect and None. Perfect legislation is that maximally efficient solution that we assumed exists, that government enacts and everyone is happy. I don’t think this actually occurs but its nice to think about. Imperfect legislation is the legislation that we actually get. Its warped by the differing incentives politicians face as individuals versus the preference their constituents feel as a whole as well as knowledge issues in properly accounting how people want things to be. Finally we have no legislation which is the status quo. Most people believe that perfect legislation is better then the status quo, the question is whether the imperfect legislation we actually get is better then none.

One fact that I think is important to remember about imperfect legislation is that the options available to the politician are filtered through what the people want. The politician (or rather the lobbyist) can only exploit the delta between how much people care about an issue and how much the lobby cares about the issue, filling the gap in public perception with money.  If I’m providing meals to children, which the public wants, I can write in a boon to the milk industry because the public doesn’t care about it and the fraction that does the politician can replace with those they sway with increased campaign advertising due to the donation. On the other hand the tobacco lobby can’t convince me to write a rider including a cigarette with every meal because they can’t  pay me enough to bribe the public to better my goal of being reelected. I would also like to add that I don’t think, by and large, that political agents are solely moved by Machiavellian self interest. They, to a greater or lesser degree, internalize the values and wants of their constituents and society at large.

So given these 2 problems in crafting public policy, in order to believe that public policy can in fact be good, I have to believe a number of things. To solve the knowledge problem I have to believe that there are sufficient relevant institutions, organizations or individuals that are willing to propose policy solutions, in additions to the governments own bureaucrats. Once I assume the knowledge or solution exists I have to justify for why a politician would pick the “ideal” or societal beneficial solution, solving the principal agent problem. To do this I have to believe that the public cares about benefiting society, for its own sake, and the politician does likewise. This is obviously not perfectly true but the closer it is to absolute truth, the closer the proposed policy will come towards being ideal.

I don’t have any problem believing those claims. It might be that I’m wrong and as I became older and bitter about the human condition I’ll drift towards libertarianism because it minimizes harms. But I think its important to note that the question of government interaction in markets and the degree to which its efficient is an entirely empirical one.  If we’re operating from a utilitarian standpoint then I can see reasonable people disagreeing about the level government intervention, mishaps the level of corruption and indifference to politics is higher then I want to think it is. But if that’s the sphere from which we’re starting then it seems ludicrous to hold it as an inherent tenant that government intervention is always and everywhere evil. At some level of public involvement, at some level of people trying to better the world, there has to be a point at which the benefits from government intervention outweigh the costs. Libertarians might think that point is never reached in real world situations. If they happen to be right, I still refuse to believe them.