by James A. Bacon
Jon Wight, a business school professor at the University of Richmond, is a huge fan of Adam Smith, best known for his classic economic treatise, “The Wealth of Nations.” Wight thinks Smith is one of the greatest economists who ever lived, not as much on the grounds that he championed “free markets,” as many conservatives might think, as on the way he built his economic theories upon a platform of morals and ethics, as articulated in his earlier, lesser known work, “The Theory of Moral Sentiments.” Not surprisingly, Wight makes frequent references to Smith in his own, recently published book, “Ethics in Economics: an Introduction to Moral Frameworks,” in which he outlines a moral framework for understanding markets.
Wight, a friend of mine, argues that is impossible to disassociate markets from the cultural and moral context in which they are embedded. In one chapter, “Moral Limits to Markets,” he argues that not all human relationships can, nor should be, market relationships. Relationships between husband, wife and children, for instance, are not, and should not be, conducted in accordance with market rules. Similarly, he argues against price gouging in times of crisis, discrimination on the basis of race and the commercial transaction of human body parts (made all the more timely by the recent revelation of Planned Parenthood’s commerce in fetal tissue). At bottom, his book is an argument for social justice and a retort to the “modern welfare theory” school of economics that argues that voluntary transactions between willing buyers and sellers maximizes consumer preferences and economic welfare.
The book is an easy read, spiced with lots of contemporary allusions, of an incredibly abstract subject, and I urge Bacon’s Rebellion readers of a philosophical bent to buy it. The book advanced my thinking about the moral context of economics immeasurably. If you’re too cheap to buy the book, at least check out Wight’s “Economics and Ethics” blog here. He doesn’t always reach the same conclusions I do… well, let’s say he often reaches entirely different conclusions… but I like the way he thinks. He acknowledges the complexity and nuances of issues. He takes the trouble to understand the arguments of others even if, in the final analysis, he doesn’t agree with them.
To my mind, if there was one philosophical flaw to Wight’s book, it is this: While Wight does a masterful job of dissecting “market failures” — they are many, and they are real — and while he does acknowledge parenthetically that many government fixes to market failures do themselves have flaws, he doesn’t give the same level of attention to the “government failure” as he does to “market failure.”
That is a very lengthy and roundabout way to get to the subject of today’s post. A new Cato Institute paper by Chris Edwards, “Why the Federal Government Fails,” struck a chord precisely because Wight’s book had sensitized me to the issue of market failure and I had begun thinking that someone needs to categorize government failure in the systematic way. Just as Wight provides a taxonomy of market failure, Edwards provides a taxonomy of government failure.
I cannot say it better than Edwards himself in his executive summary:
Most Americans think that the federal government is incompetent and wasteful. Their negative view is not surprising given the steady stream of scandals emanating from Washington. Scholarly studies support the idea that many federal activities are misguided and harmful. A recent book on federal performance by Yale University law professor Peter Schuck concluded that failure is “endemic.”
What causes all the failures?
First, federal policies rely on top-down planning and coercion. That tends to create winners and losers, which is unlike the mutually beneficial relationships of markets. It also means that federal policies are based on guesswork because there is no price system to guide decisionmaking. A further problem is that failed policies are not weeded out because they are funded by taxes, which are compulsory and not contingent on performance.
Second, the government lacks knowledge about our complex society. That ignorance is behind many unintended and harmful side effects of federal policies. While markets gather knowledge from the bottom up and are rooted in individual preferences, the government’s actions destroy knowledge and squelch diversity.
Third, legislators often act counter to the general public interest. They use debt, an opaque tax system, and other techniques to hide the full costs of programs. Furthermore, they use logrolling to pass harmful policies that do not have broad public support.
Fourth, civil servants act within a bureaucratic system that rewards inertia, not the creation of value. Various reforms over the decades have tried to fix the bureaucracy, but the incentives that generate poor performance are deeply entrenched in the executive branch.
Fifth, the federal government has grown enormous in size and scope. Each increment of spending has produced less value but rising taxpayer costs. Failure has increased as legislators have become overloaded by the vast array of programs they have created. Today’s federal budget is 100 times larger than the average state budget, and it is far too large to adequately oversee.
Management reforms and changes to budget rules might reduce some types of failure. But the only way to create a major improvement in performance is to cut the overall size of the federal government.
Bacon’s bottom line: All human institutions are flawed because humans are flawed. If you’re looking for utopia, you picked the wrong planet, the wrong species. Some institutions perform better in certain contexts, and others perform better in other contexts. In balance, though, we need to expand the scope of markets and shrink the scope of government.
