Government as Deus Ex Machina
By David Henderson
The above title should have been the title of my previous post. The title I gave it, “Mark Thoma Doesn’t Get It,” was unnecessarily provocative, as one of my co-bloggers has pointed out. I know the myth of male power, and part of it is that we men are not supposed to have feelings. We do have feelings. I think, based on his reaction in a subsequent post, that I hurt Mark Thoma’s feelings. I didn’t mean to. It was thoughtless of me to think that with that title, I wouldn’t upset him. What I really meant to do is talk about the following:
When people advocate government intervention, they rarely, maybe never, tell us how the incentives will be set up so that government will do the right thing. Think about how asymmetric the argument is. Incentives in the private sector are such that someone will do something in his interest that hurts others in society, but he doesn’t take account of that hurt in his decision. Or, someone could take action that would benefit others a great deal but it isn’t in his interest to take the action. Notice the use of reasoning about incentives to show why the market fails. Therefore, continues the argument, we should have government intervene.
Did you catch the non sequitur? The argument proceeds at first using standard economic tools. We show that the incentives are such that the private actors make the decision that leads to sub-optimal results. Then we (not really we, but many of us) conclude that government should step in. But there’s no analysis of government incentives. Why would government do the right thing? That’s the unjoined debate. The late George Stigler once said it’s like a judge at a beauty contest seeing just the first contestant and then awarding the prize to the second contestant.
I wasn’t naive enough, as Mark Thoma suggests in his response, to think that he has “unqualified support for regulation.” Also, he has been critical of specific regulations. One of the things that makes his blog interesting is his eclectism. I was just saying that although I read his blog a fair bit, I’ve never seen him, when he advocates a regulation or a government program, explain why he thinks the incentives will be set up so that it works. I had hoped to get him to address this. It would still be nice if he would.
Addendum: One of the commenters on my post said the discussion shouldn’t proceed without mentioning Coase and Demsetz. I’m a fan of both men, and indeed, it was Demsetz who got me into economics, as I lay out in Chapter Two of my book, The Joy of Freedom: An Economist’s Odyssey. Of course, I had Demsetz’s nirvana fallacy in mind when I wrote this. But I’ll often use ideas without naming the person I got them from.