Robert Murphy on Why Government Can't Run Like a Business
By David Henderson
We often hear people, including businessmen, lament the fact that the government doesn’t seem to be run like a business. Many of them want it to.
In one of the two December Feature Articles, “Why Government Doesn’t–and Can’t–Manage Resources Like a Private Business,” Robert P. Murphy explains why that can’t work.
However, more-practical economists recognize the limits of their textbook diagrams with elegant marginal revenue and marginal cost curves. In reality, we operate in a world of uncertainty. The “least cost” method of producing a good or service is never obvious, nor is what consumers will be willing to pay for various items. In a famous lecture, “Competition as a Discovery Procedure,” Friedrich Hayek explained how markets in the real world stumble upon this hidden knowledge. Various people with access to different information make piecemeal discoveries and constantly modify their operations accordingly; they receive feedback from market prices in the form of profit or loss. Firms mimic particularly profitable innovations, and if a firm does not adapt quickly enough, it will go out of business. Hayek thus viewed competition as a process rather than a condition or end-state. The state of “perfect competition” described in the textbooks–which includes the property that all firms in an industry use the identical “least-cost” method of production–is actually something that would emerge over time only because of the competitive rivalry between the firms, and only if the conditions in the real world remained static long enough for all firms to fully adapt.
From this Hayekian perspective, we have little reason to expect government provision of a good or service to reduce costs, if only because such an institutional arrangement limits the number of minds brainstorming on how to cut costs. Under competitive free entry into an industry, and even into a “natural monopoly,” an outsider always has the freedom to supplant the established firms if he or she comes up with a new, cost-saving idea. Thus, in principle, the entire society contributes to solving the problem of minimizing costs in the particular industry.
In contrast, with government provision (or government anointment of one firm as a regulated monopolist), there may be only a few people who can contribute to cost-saving innovations. This insight provides a strong reason to expect government-managed enterprises to have higher costs of operation than a private-sector firm would have–out of sheer ignorance. In this view, government officials waste money and offer shoddy output relative to private managers, simply because they don’t know any better.