A casual glance at the morning newspaper shows how much government does. “U.S. War in Iraq Declared Officially Over.” Down a bit we read “Lawmakers Offer Bipartisan Plan to Overhaul Medicare.” Meanwhile a huge spending bill involves political struggles over “travel to Cuba. Abortions in the nation’s capital. Energy efficiency standards for light bulbs.” All that and no mention of Social Security, the largest federal program!
Why does government do so much? Here’s one common answer. Problems develop in society and come to public attention. Many Americans think “that’s a problem, government should do something about that.” Former President George W. Bush put this folk wisdom succinctly: “We have a responsibility that when somebody hurts, government has got to move.” Government spending (and taxing) are desired responses to public problems, responses that most all Americans endorse.
Economists provided a more rigorous account of why government should act through the theory of “market failure.” Markets are judged by the standard of efficiency which means satisfying as many preferences as possible at a given time. But, it is said, markets fail to be efficient. Sometimes they do not offer goods or services — national defense, lighthouses — that everyone wants. Government should then provide such “public goods.” At other times, market exchanges between two parties have effects on third parties (and more). Sometimes these “externalities” are negative: think of pollution. It is also argued that free exchanges sometimes do not produce as much of a good as society could produce. Free exchange, for example, is said to foster too little spending on education. Government spending on education could lead to a better outcome, a “positive externality.” Economists have come up with other examples of “market failure,” but you get the idea: markets fail, government succeeds.
Until the 1960s, the theory of market failure dominated economics and policymaking. Since then, a subfield of economics “public choice” has raised questions about the claim “government succeeds.” Public choice economists have explored the idea of “government failure.” In other words, they focus on testing the unexamined premise of the theory of market failure: the idea that government can do better than markets at serving the general welfare.
Public choice extends the assumptions of economics to government action. Market failure theorists assumed government officials (or voters, for that matter) were beneficent and acted for the common good. In contrast, public choice economists offered “politics without romance.” Public choice began by assuming that all individuals, including everyone in politics and government, were self‐interested and acted accordingly. Why would the butcher, baker, and candle maker change when they became a bureaucrat, lobbyist, or voter? Other questions seemed implicit in this starting point for public choice. What did the rational pursuit of private interest lead to in the public realm? Was it really true that if markets fail, government succeeds by the standard of efficiency?
Over the next few weeks I plan to write some brief explanations of the central concepts of public choice. These ideas are important to libertarianism. Why? The economist William A. Niskanen explains:
In evaluating proposed changes in government institutions and policies, we now have the opportunity to compare imperfect markets with imperfect government and thus avoid the biases inherent in assuming perfection in either institution.