Thursday, November 11, 2004

Public Choice Theory

In my last post I mentioned my dislike for the public choice approach to analyzing government programs. The argument is that because people are self-interested, they will continue to be self-interested when they are in government and so government bureaucracies and programs will be run for the benefit of the people who work there, and not for the public. Thus, all government programs will either by incredibly lazily run, or else will be very corrupt -- employees will take bribes and such to maximize their rents.

This has a certain logical consistency to it -- and a compelling logic which anyone slightly competent in economics could follow, and perhaps make. The problem with the theory is that it implies that the principal-agent problem is insoluble. That is, it is impossible to put in mechanisms such that directives from the owners (or voters) get carried out. Now, all nice libertarians recognize that businesses seem to function so seem to have solved this problem. It has always troubled me that they find it impossible for the state to also solve this problem. I'm not claiming that all states in every situation always solve the principal-agent problem, but a certain number do in many situations. This is also true of businesses and for the same reason: some corporate governance structures work better than others and so some businesses are incredibly inefficient, but most work pretty well.

The intelligent way to approach the question of the efficacy of government is not to make blanket statements -- as the good folks at Marginal Revolution tend to -- but rather to realize that states function in a range from the predatory state of public choice theory to the far more successful developmental states (see East Asian tigers). States, also, will always have a presence in the economy. The question, then, as Peter Evans puts it, is not whether the state intervenes, but how. And it is important to realize that the how has a range, depending on how the state is structured -- as the work on corporate governance would seem to suggest. And so a blanket condemnation of state intervention reveals ones ideological blinders, not ones suave adherence to economic theory.


Anonymous Anonymous said...

It always amazes me that I can send a letter anywhere for 37 cents. And rarely, if ever, has that system failed me. And, it's government. I wonder if private business could fight that war in Iraq, could they do it at less dollar cost? And with less loss of life? Perhaps, private business would never have initiated the war in the first place after making an eco-analyses, as they did in France and Germany.
There are so many variables in such an endeavor. I am rambling and not dealing with my original intention, which was hazy at best. Enjoyed your post.

9:08 PM  

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