Economists Should Consider Government Imperfections, Not Just Market Imperfections

See Witch-Doctory by Don Boudreaux of "Cafe Hayek." I think Milton Friedman said that we often replace market failure with government failure.

"Here’s a passage from pages 16-17 of the third edition of Paul Krugman’s and Robin Wells’s Economics (2013):

When markets don’t achieve efficiency, government intervention can improve society’s welfare. That is, when markets go wrong, an appropriately designed government policy can sometimes move society closer to an efficient outcome by changeing how society’s resources are used…  An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.

This passage is featured in the PowerPoint presentation for Jim Gwartney’s plenary-session talk today at the 2014 meeting of the Public Choice Society (in Charleston, SC – one of my favorite towns on the planet).  Jim noted about this passage: “Apparently, according to Krugman and Wells, it’s not an important part of your education in economics to learn to identify just when governments work but also when they don’t work.”

The theme of Jim’s talk (based on research that he’s doing with Rosemarie Fike) was that it is not only intellectually sloppy or lazy but, in fact, deeply unscholarly and unscientific for economists today to ignore public-choice analyses of political decision-making.  Jim presented evidence – of which this quotation from Krugman’s and Wells’s book is just one example – of the still-widespread failure of economists to take public choice seriously.

Stated differently, Jim presented powerful evidence from several current economics textbooks that an embarrassingly large number of such texts – many written by the world’s most acclaimed economists, such as Paul Krugman – are surprisingly naive and unscientific.  The authors of these texts pretend to write about reality, but they instead write about a fantasy world.  Far too many economists, such as Krugman – because they either ignore or are ignorant of  public choice – simply assume that government somehow is not affected by the many imperfections that these economists readily find in markets.  As Jim said, this continuing ignorance of public choice is embarrassing to those economists who do think seriously and realistically about their discipline and about the reality that that discipline aims to illuminate.

I’ll likely write more in a follow-up post about Jim Gwartney’s excellent presentation, but I conclude this post by asking you to suppose that the above passage from Krugman and Wells had ended not with

An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.

but, instead, ended with

An important part of your education in economics is learning to identify not just when governments work but also when they don’t work, and to judge what market policies are appropriate in each situation.

That is, if someone suggested that you assume that markets always work perfectly (or always work better than markets), what sort of scientific credibility would you accord to that person?  I hope none.  It’s profoundly misguided simply to assume that, if government fails to achieve some attainable and desirable outcome, that outcome can be achieved instead by markets that are assumed to operate perfectly.  Such an assumption about market perfection (or superiority) would be unscientific.  But such an assumption – as is made by too many economists today – about government perfection is equally unscientific.  To assume or to suggest (as do many economists) that governments operate more ‘perfectly’ than do market is no more scientific than to assume or to suggest that, if your child is seriously ill with a terrible disease and medical doctors cannot guarantee that they will cure him or her, a local witch doctor can be trusted to bring about the desired cure.

You can assume witch-doctory to be an effective cure for whatever ails your child, but that assumption doesn’t make witch-doctory so.  Yet your assumption about the wonders of witch-doctory does speak volumes about your understanding of reality.  Jim Gwartney rightly laments that far too many economists today simply assume that the witch doctor – the state – has both the miraculous powers and the benevolent interest necessary to cure all social ailments, or at least to deal with these ailments better than can admittedly ‘imperfect’ markets."