The third lesson?

Another review of Economics in Two Lessons has come out. It’s by David Henderson and appears in Regulation, published by the Cato Institute (link to PDF). There’s a blog post with extracts here.

Unsurprisingly, given the source, it’s mainly critical of the analysis, but still has some kind words about the book. This para gives the flavour

Quiggin is a good writer who lays out much of the economics well. His analysis of rent control and price controls in general is a thing of beauty. Along the way, though, he makes small and big mistakes. He also shows by omission that the book, to be complete, badly needs a third lesson, on why government works so badly even when it intervenes in cases where markets work badly.

Tyler Cowen made the same point about a “third lesson” on “government failure” in his brief notice of the book. Of course, I discuss specific failures of government policy, such as rent control and the use of military power to generate economic benefits, both of which are noted by Henderson

The idea of “government failure” isn’t just that governments sometimes get things wrong – that’s true of all kinds of decision. Rather, it’s the claim, central to public choice theory, that government actions are driven by concentrated interest groups, rather than by ideas or broad social classes.

There’s some truth to this idea, as I note when I talk about regulatory capture in the book. But overall, I don’t accept it. In our current situation, we need more government action, not less.

10 thoughts on “The third lesson?

  1. Is there some body evidence somewhere that you can point to that shows absurdity, or at least exaggeration, of “why government works so badly, even when it intervenes in cases where markets work badly”?

    The statement begs the question “why have governments at all” because it implies that governments cannot do anything other than work badly, by implication, anywhere.

    And it ignores that governments while working badly (ie less than as well as we might wish), might work better than any alternative.

    Or is responding to anything from that source a waste of time?


  2. In that case you also need a “fourth lesson” on the failures of deregulatory policy in response to government failure in response to market failure*, and then a “fifth lesson” etc. etc.

    *That said, the fourth lesson could simply consist of a link to the IPA

  3. I see a lot more government action needed. But surely we could get this extra action with less public servants. I suspect a lot of these bureaucracies are doing next to nothing useful.

  4. It seems to me worth making a distinction between claims about ‘why government works so badly’ and those about ‘why governments /have/ worked so badly’. The latter is about seeking explanations for the historical evidence, and possible conclusions that might be drawn about how best to ‘fix’ governments; the former is a much broader claim about all governments all the time, and aimed at justifying ‘nix’ing them.

  5. I think the financing of socialist projects needs to be vastly different than what we have now. And the way the bureaucracies are set up … it should be on the basis of task orientation. Not subject orientation. If we get this side of things right we can have a socialist and sole trader economy working side by side. If we can make both wings work effectively it might be a pretty pleasant place to live.

  6. Surely if you were genuinely concerned about the ability of capital to induce government to do its bidding you would first aim to eliminate its primary mechanism for doing so, political donations, and develop a powerful and independent organ to enforce such rules but the IPA and so on hysterically oppose doing this so perhaps not.

  7. In some respects capital is attempting to fill the void left by govts (their risk assessment of fossil fuel industries is sending the message to markets).

    That’s not by design though, more likely an accident of nature. Capital is being threatened by the lack of governance and finally, taking some action. Govt seems to be paralysed by ideology.

  8. The”trente glorieuses” years of successful Keynesian postwar economic policy in OECD countries were clearly a historic aberration, as government can’t possibly solve difficult social problems like mass unemployment.

  9. In case anybody hasn’t noticed, the people accusing government of failure are the ones financing the politicians who are bringing about government failure. Starting with the Kochs.

    There has to be some government failure: perfection is a ridiculous idea. But the overall magnitude is never quantified or compared to the benefits of government successes. We all have to wonder at how (despite the endless libertarian litany of problems with government) somehow the US has prospered.

  10. John

    The centenary of the Economic Calculation in the Socialist Commonwealth is coming up – it might provide a useful springboard for your explanation of how the basic information problem solved by markets (however imperfectly) is overcome by government.

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