As a formal theory of how government works outside the confine of ethics and the normative role oftentimes assigned to the bureaucracy, public choice theory contributes enormously to the study of public policy. Concepts such as rent-seeking, logrolling, lobbying, to mention just three, become ubiquitous when alluding to the role of the state in the allocation of resources. A distinctive feature of public choice theory is its ability to address the existing gap between the theoretical role and the actual contribution of the state in a society, or so we are told. While the market in many instances fails to achieve pareto-improvement, the government, on the other hand, is no exception.
Joseph Stiglitz, a neo-Keynesian and staunch proponent of government involvement, seems to concur to a large extent with the existence of the gap above-mentioned. His experience in Washington, as explained in The Private Uses of Public Interests: Incentives and Institutions (1998), helped him to come to grips with some blatant characteristics of government failure to implement pareto or near-pareto improvements. Four main factors, Stiglitz (1998) observes, undermine such an implementation. These are 1) the inability of government to make commitments, 2) coalition formation and bargaining, 3) destructive competition, and 4) uncertainty about the consequences of change. Underlying these factors is the pervasive informational problem witnessed in the daily functioning of government. Why is government rife with secrecy? Stiglitz’s answer is that “secrecy is neither justified by national security interests, nor as a prerequisite for rational and thoughtful debate, nor even as a tactical necessity in a broader strategy”, but rather, he continues, “ secrecy serves as a cloak behind which special interests can most effectively advance their interests, outside of public scrutiny” (p. 16).
In this particular instance, Stiglitz’s stance seems not to be too different from Mancur Olson and Milton Friedman who are known for their pessimistic view regarding the role of government. The reason why government is inefficient, they contend, is not only because the bureaucrats are self-interested individuals who promote their selfish interests, but also because special interests are able to do their utmost to control the government apparatus. These groups, Olson (1982) argues, “ are overwhelmingly oriented to struggles over the distribution of income and wealth rather than to the production of additional output” (p. 44). “One common explanation of why government is the problem”, Friedman (1993) reasons, “is the influence of special interests. Government actions often provide substantial benefits to a few while imposing small costs on many” (p. 7). Stiglitz, however, is less pessimistic. He believes “while special interests do often dominate over the general interests, and while seeming near-pareto improvements are often resisted, these failures do not undo the great achievements of the public sector, from mass education to cleaner environment” (p. 21).
What Stiglitz eye-witnessed in Washington has been somewhat echoed in Zerbe and McCurdy’s (1999) article The Failure of Market Failure. These authors believe that market failure analysis leads to conclusions about the efficiency of government involvement that do not withstand empirical scrutiny. To demonstrate the limitations of the market failure approach, they set forth the concept of transaction costs that provides, according to them, “a more well-grounded conceptual framework for understanding issues of government intervention.” Unfortunately, Zerbe and McCurdy fail to reach their goals for two principal reasons. First, they ignore that the transaction costs, which North (1990) defines as “the costs of defining, protecting and enforcing the property rights to goods” are the exact reasons why government intervenes by establishing the proper institutional framework to facilitate exchange between parties. Without such institutional framework that is the monopoly of government in complex societies, economic exchanges that could have increased a nation’s output would not occur because of what Akerlof (1970) demonstrates in The Market for Lemons: Quality Uncertainty and the Market Mechanism.
Equating all forms of market failures with externalities is the second reason why Zerbe and McCurdy’s argument fails. To them the failure of the market to produce public goods along with many known classic failures are all forms of externalities. As it happens, externality is an actual act committed by two or more parties that has an incidence on a third party with no compensation. The failure of the market to produce public goods does not actually happen. The market fails to produce public goods because rational producers anticipate that they don’t have the necessary means to constrain citizens from enjoying these (non-rival and non-excludable) goods. They just refrain from producing them and leave the task to the state. Since the action of producing them does not actually occur, there is no externality.
However, although Zerbe and McCurdy’s transaction cost approach fails to explain the issues of government intervention, I believe that a meticulous analysis is needed when deciding upon whether the government or the market should provide/produce a particular good or service. In which sector the transaction cost is higher is an important issue to address. But even in this case, a transaction cost analysis might be insufficient to understand some issue of social justice. The private sector might be able to do a better job in providing a better quality of education, but will this education take into account Amartya Sen’s capability approach or Rawls’ distributive justice framework? Thus, for social justice concerns, the government ought to intervene regardless the transaction cost of providing a good/service.
Ostrom’s piece is likewise an important framework to look at government intervention. While many scholars, such as Max Weber, view government as an authoritative force capable of constraining its citizens from free-riding, Ostrom believes that not all interventions are welcomed because “external rules and monitoring can crowd out cooperative behavior.” In his attempt to propose a revised theory of collective action based on field studies of collective action problems and the zero contribution thesis, Ostrom shows that the existence of two types of norm-using players – “conditional cooperators” and “willing cooperators” – make external rules in certain settings unwarranted. If the reason why government intervenes sometimes is to constrain free-rider to participate in collective action, Ostrom shows that the presence of these two norms-using players can overcome this problem, thus making government intervention unnecessary.
While Ostrom’s approach may be valid for some communities composed of small numbers of individuals, in complex societies characterized by impersonal relationship (as North argues), institutions really matter. Not just because individuals are rational egoists who are prone to free-ride, or, in contrast, because they are norms-using players (or what Gauthier calls constraint maximizers), but because institutions are, to quote Patel (2006), “information-enhancing” devices who help us knowing for sure who is who in our daily exchange.
Claude Joseph
Joseph Stiglitz, a neo-Keynesian and staunch proponent of government involvement, seems to concur to a large extent with the existence of the gap above-mentioned. His experience in Washington, as explained in The Private Uses of Public Interests: Incentives and Institutions (1998), helped him to come to grips with some blatant characteristics of government failure to implement pareto or near-pareto improvements. Four main factors, Stiglitz (1998) observes, undermine such an implementation. These are 1) the inability of government to make commitments, 2) coalition formation and bargaining, 3) destructive competition, and 4) uncertainty about the consequences of change. Underlying these factors is the pervasive informational problem witnessed in the daily functioning of government. Why is government rife with secrecy? Stiglitz’s answer is that “secrecy is neither justified by national security interests, nor as a prerequisite for rational and thoughtful debate, nor even as a tactical necessity in a broader strategy”, but rather, he continues, “ secrecy serves as a cloak behind which special interests can most effectively advance their interests, outside of public scrutiny” (p. 16).
In this particular instance, Stiglitz’s stance seems not to be too different from Mancur Olson and Milton Friedman who are known for their pessimistic view regarding the role of government. The reason why government is inefficient, they contend, is not only because the bureaucrats are self-interested individuals who promote their selfish interests, but also because special interests are able to do their utmost to control the government apparatus. These groups, Olson (1982) argues, “ are overwhelmingly oriented to struggles over the distribution of income and wealth rather than to the production of additional output” (p. 44). “One common explanation of why government is the problem”, Friedman (1993) reasons, “is the influence of special interests. Government actions often provide substantial benefits to a few while imposing small costs on many” (p. 7). Stiglitz, however, is less pessimistic. He believes “while special interests do often dominate over the general interests, and while seeming near-pareto improvements are often resisted, these failures do not undo the great achievements of the public sector, from mass education to cleaner environment” (p. 21).
What Stiglitz eye-witnessed in Washington has been somewhat echoed in Zerbe and McCurdy’s (1999) article The Failure of Market Failure. These authors believe that market failure analysis leads to conclusions about the efficiency of government involvement that do not withstand empirical scrutiny. To demonstrate the limitations of the market failure approach, they set forth the concept of transaction costs that provides, according to them, “a more well-grounded conceptual framework for understanding issues of government intervention.” Unfortunately, Zerbe and McCurdy fail to reach their goals for two principal reasons. First, they ignore that the transaction costs, which North (1990) defines as “the costs of defining, protecting and enforcing the property rights to goods” are the exact reasons why government intervenes by establishing the proper institutional framework to facilitate exchange between parties. Without such institutional framework that is the monopoly of government in complex societies, economic exchanges that could have increased a nation’s output would not occur because of what Akerlof (1970) demonstrates in The Market for Lemons: Quality Uncertainty and the Market Mechanism.
Equating all forms of market failures with externalities is the second reason why Zerbe and McCurdy’s argument fails. To them the failure of the market to produce public goods along with many known classic failures are all forms of externalities. As it happens, externality is an actual act committed by two or more parties that has an incidence on a third party with no compensation. The failure of the market to produce public goods does not actually happen. The market fails to produce public goods because rational producers anticipate that they don’t have the necessary means to constrain citizens from enjoying these (non-rival and non-excludable) goods. They just refrain from producing them and leave the task to the state. Since the action of producing them does not actually occur, there is no externality.
However, although Zerbe and McCurdy’s transaction cost approach fails to explain the issues of government intervention, I believe that a meticulous analysis is needed when deciding upon whether the government or the market should provide/produce a particular good or service. In which sector the transaction cost is higher is an important issue to address. But even in this case, a transaction cost analysis might be insufficient to understand some issue of social justice. The private sector might be able to do a better job in providing a better quality of education, but will this education take into account Amartya Sen’s capability approach or Rawls’ distributive justice framework? Thus, for social justice concerns, the government ought to intervene regardless the transaction cost of providing a good/service.
Ostrom’s piece is likewise an important framework to look at government intervention. While many scholars, such as Max Weber, view government as an authoritative force capable of constraining its citizens from free-riding, Ostrom believes that not all interventions are welcomed because “external rules and monitoring can crowd out cooperative behavior.” In his attempt to propose a revised theory of collective action based on field studies of collective action problems and the zero contribution thesis, Ostrom shows that the existence of two types of norm-using players – “conditional cooperators” and “willing cooperators” – make external rules in certain settings unwarranted. If the reason why government intervenes sometimes is to constrain free-rider to participate in collective action, Ostrom shows that the presence of these two norms-using players can overcome this problem, thus making government intervention unnecessary.
While Ostrom’s approach may be valid for some communities composed of small numbers of individuals, in complex societies characterized by impersonal relationship (as North argues), institutions really matter. Not just because individuals are rational egoists who are prone to free-ride, or, in contrast, because they are norms-using players (or what Gauthier calls constraint maximizers), but because institutions are, to quote Patel (2006), “information-enhancing” devices who help us knowing for sure who is who in our daily exchange.
Claude Joseph
RSS Feed