For all those who have taken an economics course, you’ve no doubt heard plenty about market failure. I suspect you’ve heard relatively less about government failure. Part of the allure of the public choice tradition for me has always been its very clear explication of the latter. But in this episode, leave it to perennial favorite Mike Munger to put a wrinkle in my contemplative ease.
For starters, Munger places the earliest public choice insights well before the typical story (it even includes Pigou!). Munger describes the history of the concept of market failure as resulting from the quest to explain large fluctuations in aggregate economic activity. While economists of the time believed letting markets and the price system work would alleviate such “failures,” they wondered if there were interventions that might shorten this time period. As host Russ Roberts puts it well, “Can the government outperform the private sector, either by taking on some of its tasks or by improving, by intervening, by regulating, subsidizing, taxing, the choices that would emerge from a market private choice, a set of private activities?”
We hope you’ll join us in digging into this tangled history, and we hope you’ll share your thoughts with us today.
1- For starters, why do YOU think laissez-faire is so difficult for politicians- and citizens!- to accept?
2- Why does Munger believe that Arthur C. Pigou should be considered the first public choice theorist? To what extent did he convince you? How should we really interpret what Pigou has to say about externalities, according to Munger? As Munger says, “He [Pigou] wants to get prices right. He has an economist’s intuition about this. He thinks democracy can’t do it.” As evidence, Munger points to the Pigou quote below:
Why does Munger say that most of our apparent misunderstanding of Pigou comes from Ronald Coase? And most importantly, what does all this mean as far as how we should think about market failure?
3- At ~28 minutes in, Munger explains the four kinds of market failure. What are they? Which are more or less subject to the vicissitudes of democracy? Which are more likely to be solved be allowing the market to work, absent interventions? Which would benefit most from government action?
4- Munger suggests we need to devise a new set of government institutions based on expertise that will guide markets correctly by getting prices right. As Roberts says, “Markets fail, governments fail, and therefore we need a third thing.” Munger agrees, but says we don’t even know what the third thing is yet. How satisfactory is this answer for you? To what extent can government be sufficiently insulated from political pressures sufficient to innovate and experiment? Should we be directing attention toward making bureaucracies more effective, as Roberts suggests? What alternatives might you suggest? Explain.
5- If we are to rethink government action in the way Munger suggests, how does this change our approach to industrial policy? Munger references his article, “A Good Industrial Policy is Impossible” (in a democracy), in which he writes,
…the usual separation between markets and politics, where markets are probably going to perform better than democracy in deciding how to allocate resources, was not only conceded by the Cambridge Welfare Economists: they anticipated Public Choice arguments by 60 or 70 years. They just had a different solution. Their solution was to have commissions of experts whose job will be in each sector to get prices right. An empirical question?
Is this an empirical question? If so, how might we begin to answer it? Can we find the “third way” mentioned above by disaggregating government failure unto institutional versus procedural failures?
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