Market Failure vs. Government Failure 07:08

Brennan discusses the intersection of political philosophy and political economy in this conclusion to our Guide.

Further Reading
Jason Brennan, Political Philosophy: An Introduction (free download)

Jason Brennan, Libertarianism: What Everyone Needs to Know

Jason Brennan, Why Not Capitalism?

Brennan: Throughout this course, we’ve been discussing institutions and what makes them good or bad, just or unjust.  And as we’ve gotten into more and more applied topics, better referenced more findings from the social sciences, I think that’s not accidental.  I think when you want to think about institutions, you can’t do that just from armchair philosophy alone in a way that’s very productive.  But a lot of people do and they make kind of mistakes when they think about these issues, and so I want to sort of talk briefly about how to do political economy in a sort of fair and open-minded way, in a sort of reasonable way.  

And to start with, I want to talk about pretty pig contest.  So the economist Mike Munger has a sort of joke about this.  He says, “Down in North Carolina, they often have what you might call a big pretty pig contest.”  In the state fair, they’ll have contests to sort of evaluate what is the biggest and prettiest pig, sort of a beauty pageant for pigs.  So imagine this is going down and there are only two entrants this year because there are lots of pigs that are pretty and lots of pigs that are big, there are very few that are both pretty and big.  And the judge comes in and he just looks at the first pig and says, “That’s an ugly pig.  Let’s give the award to the second pig.”  What’s the judge’s mistake?  It’s kind of obvious.  Well, sure that pig is ugly but the other pig might be even uglier.  You might as well look at the second pig first.  

Well when it comes to political thinking, a lot of us do that.  We make the same mistake that judge has made.  So in example, this might be something where a person says, “Here’s the market.  It’s suffering from a market failure.  Let’s have the government fix it.”  Well the problem is maybe the government can’t fix it.  Maybe the government will mess it up.  Maybe the government will be even worse.  Similarly, others do the same thing.  “Here’s the problem with the government.  It’s seems to be pretty bad.  We should just leave this to the market; maybe that will take care of it.”  It’s the same problem.  In both cases, you want to look to see “Well which one is actually less ugly?  Which one’s actually prettier?”  You want to kind of weigh both.  

So a lot of times when sort of standard economics textbook, Microeconomics textbook, it’ll say introduce you the concept of a market failure which is just technically is a case where the market fails to reach full efficiency.  And markets routinely fail to do that.  They often fail in very small ways and sometimes they fail in very big ways.  In principle, a government could fix it but it’s often like saying something like in principle, a fully motivated set of omniscient creatures who really want to do the right thing and who are very competent could fix it so it’s basically saying a justice fair, it could fix it if it wanted to.  It’s very different from saying an actual government will in fact fix it.  So when you want to be responsible in the way that you think about politics, you want to do the following:  Compare market successes to government successes, and market failures to government failures, and balance those out.  Now I’m not making or taking a stance on how that’s going to balance.  Maybe it’ll turn out that you want government to do a lot and markets do very little.  Maybe you want markets to do a lot and governments to do very little, maybe, something in between.  But you need to be aware of all of those things.  

Further, another mistake that people make when they think about institutions is to often think about what they call ideal theory versus non-ideal theory in a kind of haphazard way.  So think of the following question:  What institutions would be best if only people were perfect and incorruptible?  If people were morally perfect, morally flawless, had all the right motives, never did the wrong thing, and were incorruptible, what institutions would you want?  Well there’s an answer to that question.  I think that’s an interesting question.  I’m willing to write about that myself but it’s going to be a very different answer perhaps than the question of what institutions do we want given that people are the way they are, or they are flawed where they can be incentivized to do the wrong thing, where they might try to take advantage of power, and so on.  It might be very different.  

So maybe a metaphor for that would be if we were designing cars for perfect drivers who never get drunk, who never slip, who never encountered bad pavement, who never encountered bad weather, we probably wouldn’t put in seatbelts.  We probably wouldn’t put in airbags.  We might not bother with ABS brakes and so on.  But here and now with the kinds of people we actually have driving, we have all sorts of reasons not to design cars like that, in fact put in those kinds of safety devices.  So similarly, when talking about what institutions do we want in the real world, we have to keep in mind we’re dealing with actual people with their actual flaws and motives, and we can’t just stipulate that their motives will be good.  

When I was a graduate student, I took a class with some law students, and the law students said the following:  This goal of social justice is so important that if we need a K.G.B. to make it happen, so be it.  We’ll just have to make sure that the right people run the K.G.B.  But in the real world, there’s no such thing as making sure the right people run the K.G.B.  People who are attracted to those kinds of jobs will have motives of their own, not motives that you can stipulate from the armchair as a philosopher.  Along those lines, you don’t want to make the following kind of argument.  Sort of imagine a political system with morally perfect people and then compare that to a real life system.  That’s not very interesting.  What you want to know is given how people are, what institutions are going to be best?  

One mistake is that if we can like understand what ideal institutions would be, then we should try to approach those institutions as much as possible.  But again, that doesn’t follow.  That’s kind of like saying, “Well, ideally cars wouldn’t need airbags so we should get rid of ours right now.”  That’s not so.

Another mistake people make is when they think about government behavior and government promoting certain goods, they often conflate legal guarantees with real guarantees: So, legal guarantees are sort of a document stipulating that government strongly intends to accomplish some end.  But the difference between that is when say George W. Bush guarantees that no child will be left behind versus a real guarantee, a guarantee in a sense of like if an economist says that if we quadruple the minimum wage, that’s going to guaranteed to lead to rising unemployment.  Clearly a legal guarantee is not necessarily a real guarantee.  A legal guarantee could even backfire.  If you imagine the government saying, “We’re going to provide everyone in the United States 150,000 minimum income.  Well, it wouldn’t actually be able to do that because probably no one would work so they wouldn’t have an actual tax base of which to offer that.   

So when you’re thinking about economics, when you’re thinking about justice, when you’re thinking about institutions, it’s worth noting that you have to do this balancing act.  What institutions are going to work with real people given how they are, given that they can respond to incentives in ways that we often don’t like, how are we going to weigh market failure versus government failure, market success versus government success?  If we’re not doing that, you’re in a sense not being ideologically responsible and regardless of what way you come down in politics, you want to be responsible in the way that you think about it.

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