Public choice economists have long argued that conventional economists hold markets to far higher standards than they hold government. Markets “fail” unless they’re optimal. Governments “succeed” unless they’re on fire. If this seems unfair, compare the standard definitions of “market failure” and “failed state.” Market failure exists whenever markets fall short of perfect efficiency. To be a failed state, in contrast, requires habitual disaster.
Is this a Straw Man? I think not. Even the most sophisticated conventional economists hold markets to unreasonably high standards – and hold governments to unreasonably low standards. Paul Krugman, arguably the world’s most sophisticated conventional economist, provides a fine case study in his recent Conversation with Tyler.
Tyler asks Paul, “To start with a very basic question: The major tech companies have become increasingly controversial. Do you think there’s a significant market failure there? And if so, what would it be?” Paul’s response:
Everything about tech, certainly everything about networks, is a violation of the principles that say that a market should be efficient. The trouble is, it’s hard to sort out. It’s not that there’s any one thing.
It’s got increasing returns, it’s got imperfect competition, it’s got spillovers. So I’m not sure what I know is the particular market failure. There’s no reason at all to think that Facebook or Twitter or Google are doing the optimal thing from a social point of view. The trouble is, trying to figure out what to do as an alternative is not trivial.
When Tyler prods him about all the great stuff consumers get, Paul pushes back:
What’s problematic is that they’re still — although they’re not charging us anything — they’re not in business for our health, they’re in business for their health. They’re in business to sell something else. What Google is selling, really — it’s still ads. It’s selling advertiser access. At some level, that’s what Facebook is doing as well.
Since it’s indirect, in some ways, the reasons to think that it’s going to be non-optimal are even greater.
Paul’s right, no doubt, that tech markets are “non-optimal.” But that’s an absurd way to frame the situation. A reasonable frame is more like: Mankind has received a cornucopia of wonderful stuff for free, so thanks a million! If you described the modern Internet to people in 1988, almost everyone would have laughed at your naive optimism. Sure, things could have been even better. But if your main reaction to the Internet is to complain that it’s “non-optimal,” there simply is no pleasing you.
Does Krugman really hold government to lower standards? He definitely has many negative things to say about current U.S. politics.
Exhibit A:
[O]ur political system is set up on the basis that we elect representatives who will not exactly reflect their voters but will, in fact, deliberate and exercise independent judgment. But we are in an extreme partisan environment in which, for all practical purposes, only the party matters.
All that matters on most things is whether there’s an R or a D, which means that all of the . . . Not that long ago, people used to refer to the Senate as the world’s greatest deliberative body in a non-ironic fashion. [laughs]
These days, it’s ridiculous. There is no deliberation that goes on. It’s a completely partisan institution.
Exhibit B:
I think that the role of money in politics has created . . . a lot of people in political life now have spent their entire lives within a partisan ecosystem, never really having to step outside. Any independence in judgment, any demonstration of an independent conscience is actually career destroying.
So the kind of people you get are people who are basically bad people, at the very least very cynical people. I still find it hard to understand how people can be quite as cynical as they have become.
Exhibit C:
Ordinary people, people with real lives, real jobs, people who aren’t paid to think about abstract policy issues are, understandably really, more poorly informed that those of us who push around words and symbols for a living can easily appreciate.
If you ask people, do they actually know what the policies are being propounded, if you ask them do they know what Republican healthcare policies actually are — maybe more so now than a year or two ago — but still mostly not. People are poorly informed.
Of course, sometimes they’re actively misinformed by Fox News or something. It’s instructive, being out there in public, writing for a newspaper, even writing for the New York Times, and then looking at the mail you get.
Leaving aside the crazy and hate stuff, but just the sort of ordinary citizens — they’ve heard from somebody that there’s a plan to replace the US dollar with some global currency.
You know and I know that’s ridiculous. But these aren’t necessarily stupid people. They’re not devoting a lot of time to public affairs. Of course, the news environment is — leave aside, again, the partisan media — tends to be very information scarce.
Strangely, though, none of this negativity leads Paul to question his support for government intervention – or support stricter limits on government. Common sense tells us that great power comes with great responsibility. Common sense tells us that “very cynical people” and “basically bad people” with power will do very bad things. Common sense tells us that ignorant people who don’t “devote a lot of time to public affairs” will be easy for cynical and bad politicians to manipulate. But as far as I can tell, Paul’s only proposed remedy for democracy’s deep structural flaws is to elect more Democrats. No matter how poorly our government performs, we must grin and bear it.
When does our political system’s performance get bad enough for Paul to muse, “Democracy in chains is a lot better than it sounds”? The answer, strangely, seems to be “never.”
Aside from the fact that the world is going to hell otherwise, I’m just basically having a good time.
A joke? Perhaps. Yet it still exposes a deep truth. When markets fall short of perfection, Paul cries for government to fix them. When government is an ongoing disaster, Paul prays for government to fix itself.
What’s the alternative? Recognize that due to pervasive government failure, economists should often oppose government intervention even when a thoughtful, well-intentioned government could readily make the world a better place. Why? Because actually-existing governments are rarely thoughtful or well-intentioned. Public choice problems hardly provide an iron-clad case for laissez-faire, but they plainly tip the scales in that direction. And due to the ubiquity and severity of these problems, we should never forget to put them on the scales.
READER COMMENTS
nobody.really
Oct 23 2018 at 3:19pm
Yeah, markets do good stuff. Yeah, government isn’t perfect. But phrased this way is like asking people to choose between fruit and meat: They are rarely substitutes, so it rarely makes sense to compare them.
Often, the substitute for poor government is not the market; it’s worse government. Arguably many people in the developed world are grumpy about frustrated expectations. They see peers growing rich, and they see non-peers–that is, immigrants–becoming peers. They feel left behind. They’re so disgusted, they’ve abandoned any hope of gaining redress from government and instead all become libertarians. NOT. Instead, they’ve thrown out moderate-ish politicians and demanded populist measures: Closed borders! Tariffs! Nationalism!
Thus, in evaluating government, I tend to compare it not to some hypothetical “market” standard of efficiency, but to the standard of the likely substitute.
Sure, let’s compare government vs. private where there is a real prospect for substituting one for the other: Education. Health care. Roads. Prisons, maybe. But those are exceptions, not rules.
Garrett
Oct 23 2018 at 3:38pm
And often the substitute for a poor market is a worse market, post-intervention.
Market Failure Dork
Oct 23 2018 at 3:42pm
Hi Bryan,
I think there’s a couple of aspects to Paul’s analysis that you’re neglecting. One is that market failure implies—not suggests, but implies in the logical sense—the existing feasibility of a Pareto improvement. If a market is suboptimal, then you can, right now, achieve a Pareto improvement. This doesn’t imply that the government can do this. But the math says that the market definitely can’t! And what other institutions are there? Will churches solve information asymmetry in health care? Are private clubs the solution to national defense? If governments can’t achieve the Pareto improvement in question, then you are really disputing Paul’s assertion that the market is non-optimal. So either it’s quite likely that the solution lies in government policy, or you’re mischaracterizing (probably unintentionally) your disagreement with Paul.
The other thing you’re failing to note is that the only thing government failure has in common with market failure is the name. Market failure refers to the mathematical demonstration of the Pareto inefficiency of a market. Government failure refers to an informal judgment that the government is doing a bad job of things—there is no claim of Pareto inefficiency. Conversely, in market failure, there is no claim that the market is doing a bad job of things. It’s an old and pointless mistake the public choice theorists have made to confuse government failure and market failure. The two things are not symmetrical at all, and you should not be surprised to see economists using the terms asymmetrically. Paul is being completely consistent, he just isn’t showing his work—assuming, probably mistakenly, that his audience is familiar with the technical underpinnings. Or at least that Tyler is—they are having the conversation that they want to have, not we!
David Henderson
Oct 23 2018 at 4:41pm
Bryan,
This is one of your best posts ever. And that’s a high bar.
Viking
Oct 25 2018 at 2:58pm
I need to second that notion, while I strongly disagree with Caplan on immigration, Caplan is on fire, especially with the immortality vs death coin flip post.
Weir
Oct 23 2018 at 6:10pm
It’s not just that government will fix itself. It’s that a one-party state will fix itself.
So a single party needs to control everything, without opposition. Paul’s convinced himself that by eliminating competition from politics and making every city Detroit, and every state California, the ruling party will be perfect and have solved forever all the problems caused by the existence of wreckers and saboteurs.
In real life, the law of group polarization means that Paul has it backwards. Competition is actually good. Dissent is patriotic. An alternative point of view is worth listening to. He who knows only his own side of the case knows little of that.
AMW
Oct 23 2018 at 6:56pm
Wikipedia disagrees with you:
“Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. It can be viewed in contrast to a market failure, which is an economic inefficiency that results from the free market itself, and can potentially be corrected through government regulation. … As with a market failure, a government failure is not a failure to bring a particular or favored solution into existence but is rather a problem which prevents an efficient outcome. The problem to be solved need not be a market failure; governments may act to create inefficiencies even when an efficient market solution is possible. “
Don Boudreaux
Oct 23 2018 at 10:34pm
Bryan: What David said. I’m proud to be your colleague.
BC
Oct 24 2018 at 12:35am
To be fair, Krugman did say, “The trouble is, trying to figure out what to do as an alternative is not trivial.” I took that as Krugman’s concession that there may not be a compelling case for government intervention.
Brian is correct that “market failure” should not be defined as “less than perfectly efficient” unless there is an obvious way to achieve perfect efficiency. A better definition of “market failure” might be “obviously easy to achieve better efficiency, even considering public choice factors”. A “proof” of market failure would require more than just demonstrating inefficiency. Instead, one would need to prove by construction: construct the market-beating solution demonstrating that such solution can overcome public choice factors.
James
Oct 24 2018 at 12:37am
nobody.really,
You wrote “They [government and market] are rarely substitutes, so it rarely makes sense to compare them.”
Rarely? With zero exceptions, government regulation means that decisions made by people in the public sector are substituted for decisions made by people in the private sector.
Mark Z
Oct 24 2018 at 3:51am
I think it may be beneficial for us Americans to resuscitate the distinction between ‘state’ and ‘government’ (which merely means the politicians who currently stand at the helm of the state).
I would describe his position as pro-state, but opposed to the current government, in large part because he would say the current government is preventing or not making the apparati of the state – the professional bureaucrats and regulators who do the actual ‘footwork’ of the state – intervene more in society, particularly the economy.
There’s nothing self-contradictory about this position. Krugman is essentially making a partisan claim couched in non-partisan language. He wants the state to be more active in the economy, to direct more economic decision-making, and it is precisely for that reason why he is so frustrated with the current government (that is, the politicians and party that run it at the moment) and wants to exchange it for one that will direct the actual state apparatus to intervene more in the economy.
nobody.really
Oct 24 2018 at 4:59am
Fair enough. In the absence of law, we’d live with the law of the jungle, and private might would prevail. Instead, government displaces that. I concede the point.
But Caplan’s point was that we should evaluate government actions for efficiency relative to private actions. So, let’s compare environments with the rule of law to environments without it, and evaluate their relative efficiencies. There are plenty of regions around the globe without functioning governments. Would anyone care to nominate one as a model of efficiency, and nominate some measure by which to evaluate its efficiency?
Thaomas
Oct 24 2018 at 11:34am
Probably the difference in attitude is that it is comparatively easy to fix a market failure — a little pigovian tax or a little cost benefit vetted regulation. Fixing a failed state is a lot tougher.
Meets
Oct 24 2018 at 11:57am
Bryan,
It’s actually worse than you say.
Paul wants to give the government more power to do what is necessary. Even if it involves restricting some speech or overturning old institutions.
Other interesting points in the podcast: Paul admits NYC is badly run and cant even fix the subway. He also admits northeastern Republican governors govern better, but writes it off as a fluke.
Rob Wiblin
Oct 25 2018 at 12:10pm
I think my view is the following:
Tech companies are economically suboptimal in material ways.
There are policies that could be adopted that would improve things (my guess is mostly preventing the largest companies from stifling competition).
The government is not that smart, so it probably won’t do these good things.
If the government acts, it will more likely than not make things worse, so I won’t advocate government action without being pretty specific about what I mean by that.
But if a good policy intervention somehow ended up on the table, I’d publicly support it.
I think that set of views is consistent. I wonder how close to them Krugman is.
Dallas
Oct 25 2018 at 12:40pm
Imagine having our congress and government bureaucrats in control of Google and all its information. Would searches be less biased or more? Would we know less or more about the screwups of our government?
We have a world test case going on in China. They are fixing the “market failures” by limiting things like “fake news” about re-education camps, etc. from search results. They are fixing peoples “obviously” false perceptions of reality.
With all their technological education (producing 25 times more STEM-educated people than the US) and research, China should dominate the future of science and technology in the next two decades. If the US is still in the scientific and technological leadership position, we will know the opportunity costs fixing little “market failures” is to destroy the innovation in a society that benefit the society. However, they will have innovated in controlling the society and preventing “market failures”.
KevinH
Oct 25 2018 at 1:18pm
I agree that this double-standard does exist, but I think it exists because of another double-standard that you don’t acknowledge: We expect the people in markets to do the simple thing in capturing about half the personal benefits they create, and we expect the people in government to do the impossible in capturing none.
Mark Z
Oct 25 2018 at 11:06pm
But this illustrates precisely why the state isn’t in a position to adequately correct market failures: it’s employees lack the incentive to. How do you give them the incentive to? You can’t just pay them more; you have to make the compensation correspond to the benefits produced by resolving the market failure. But how do we assess the value of the benefits, unless we have a market for them?
David Khoo
Oct 26 2018 at 8:19am
I think it reveals something about your biases that you apparently think there is a single big thing called “government” that is the enemy. We see the enemy in caricature while being mindful of the richness and detail of our own side. You conflate a whole bunch of different things into a single term “government”. The cure to a sclerotic Congress (“government”) may be a more professional and proactive civil service (“government”) or a more activist Fed (“government”) or more devolved state powers (“government”).
“When government is an ongoing disaster, Paul prays for government to fix itself.” is not a contradiction of any sort once you properly unbundle the term “government”.
Butler T. Reynolds
Oct 26 2018 at 10:27am
When people think about tech, they always talk about Google, Facebook, Twitter, and maybe Amazon. Talk about those companies if you like, but I think it’s a bit of a mistake when thinking about tech in general.
There are countless advancements that people take for granted.
One trivial example: the ability to log in to your 401k account and change the beneficiary in a matter of minutes. Not that many years ago you had to find the company phone number, call it and wait on hold a bit, request a beneficiary change form, wait several days for the form to arrive in the mail, fill out the form with a pen, stick it in the mail with a stamp, then a couple of weeks later receive notification that your beneficiary had changed.
Instead of appreciating how much better things are, we contemplate Facebook and Google.
Rucas_1972
Oct 26 2018 at 10:30am
Bryan’s point if, I’m not mistaken, is that since government and people in power are not reliable then the citizens should fight for less government intervention in their affairs (namely their economic and financial affairs).
The thing is that good government is not about more or less intervention but is, instead, about the timing of said intervention.
In the through of the economic cycle, intervention is welcome, during the boom it’s not. That’s good government. No intervention (Ayn Rand style) is as bad a complete government intervention (Stalin style.) And both are bad government.
Prostagma
Nov 20 2018 at 1:38pm
There are aspects of societal function that, when implemented as a free market, converge to providing maximal social benefit. If we notice that stops happening exactly, we should worry because we don’t know exactly what it’s optimizing for. “Government” is a fallback that tries to align these adversarial optimizers with the electorate. It’s a much harder job.
Zifyduha
Nov 21 2018 at 10:01pm
I think you’re inventing a position for Krugman that he wouldn’t agree with, and indeed that he rejected when the topic of government intervention for a market failure was actually broached.
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