A Classic Question: Does Government Empower or Stifle?

If you look at the high-income countries of the world--the US and Canada, much of Europe, Japan, Australia--all of them have government which spend amounts equal to one-third or more of GDP (combining both central and regional or local government). Apparently, high-income countries have relatively large government. Conversely, when you look at some of the world's most discouraging and dismal economic situations--say, Zimbabwe, North Korea, or Venezuela--it seems clear that the decisions of the government have played a large role in their travails. So arises a classic question: In what situations and with what rules does government empower its people and economy, and under what situations and with what rules does the government stifle them?

Like all classic questions, only those who haven't thought about it much will offer you an easy answer. Peter Boettke instead offers a  thoughtful exploration of many of the complexities and tradeoffs in his Presidential Address to the Southern Economic Association, "Economics and Public Administration," available in the April 2018 issue of the Southern Economic Journal (84:4, pp. 938-959).

Boettke offers a reminder that a number of prominent economists have pondered the issue of how states can empower or become predatory. For example, here are reminders from a couple of Nobel laureates:

Douglass North [Nobel '93] in Structure and Change in Economic History (1981) ... said that the state, with its ability to define and enforce property rights, can provide the greatest impetus for economic development and human betterment, but can also be the biggest threat to development and betterment through its predatory capacity. James Buchanan [Nobel '86] in Limits of Liberty (1975) stated the dilemma that must be confronted as follows—the constitutional contract must be designed in such a way that empowers the protective state (law and order) and the productive state (public goods) while constraining the predatory state (redistribution and rent-seeking). If the constitutional contract cannot be so constructed, then economic development and human betterment will not follow.

Although Boettke doesn't make the point here, the authors of the US Constitution struggled as well with the idea that government was an absolute necessity, but finding a way for government to be controlled was also a necessity. As James Madison wrote in Federalist #51:

"If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."

This challenge of building a government that is strong, but not too strong, and strong only in certain ways while remaining weak in others, is not just a matter of writing up a constitution or design of a government. Plenty of governments act oppressively at times, or even a majority of the time, while having the form of elections and constitutional rights. The heart of the issue, Boettke argues, runs deeper than the formal structures of government, and down to the bedrock of the social institutions on which these forms of government are based. He writes:

"The observational genius of the 20th century Yogi Berra once captured the essence of this argument while watching a rookie ball player attempting to imitate the batting stance of Frank Robinson, the recent triple crown winner, when he advised, “if you can t imitate him, don t copy him.” ... The countries plagued by poverty cannot simply copy the governmental institutions of those that are not so plagued by poverty. They are constrained at any point in time by the existing institutional possibilities frontier, and thus must shift the institutional possibilities frontier as technology and human capital adjust to find the constitutional contract that can effectively empower the protective and productive state, while effectively constraining the predatory state."

Economists have often ducked or assumed this question of institution building. For example, most of the arguments that economists make about how markets function, or about how self-interested sellers and buyers may act as if ruled by an "invisible hand" to promote social welfare, are based on the assumption that a decently functioning government is hovering in the background. Boettke refers to an essay by Lionel Robbins and writes:

"Adam Smith and his contemporaries never argued that the individual pursuit of self-interest will always and everywhere result in the public interest, but  rather that the individual pursuit of self-interest within a specific set of institutional arrangements— namely well-defined and enforced private property rights—would produce such a result. Though as Robbins (ibid, p. 12) writes, “You cannot understand their attitude to any important concrete measure of policy unless you understand their belief with regard to the nature and effects of the system of spontaneous-cooperation.” The system of spontaneous-cooperation, or economic freedom, does not come about absent a “firm framework of law and order.” The “invisible  hand,” according to the classical economists, “is not the hand of some god or some natural agency independent of human effort; it is the hand of the lawgiver, the hand which withdraws from the sphere of the pursuit of self-interest those possibilities which do not harmonize with the public good” (Robbins 1965, p. 56).

"In other words, the market mechanism works as described in the theory of the “invisible hand” because an institutional configuration was provided for by a prior Non-Market Decision Making process. The correct institutions of governance must be in place for economic life to take place (within those institutions)."

When we move outside the realm of market transactions set against a backdrop of decently functioning government, social scientists find it harder to draw conclusions. "But what happens when we move outside the realm of the market economy? Public administration begins where the realm of rational economic calculation ends."

On one side, decisions made by public administration areunlikely to involve competitive producers, choices made by consumers between these producers, and a price mechanism. Nonetheless, public decisions still have tradeoffs, and still face questions of whether the marginal benefits of a certain action (or a change in spending) will outweigh the marginal costs. 

Moreover, we know from sad experience that public administration is subject to special interest pressures and being captured by those who are supposedly the subjects of the regulation. We know that a number of politicians and government workers (no need to quibble over the exact proportion) put a high priority on pursuing their own personal career self-interest. We know that when a private sector firm fails to provide what customers want, it goes broke and is replaced by other firms, but that when a part of government fails badly in providing what citizens want, the part of government does not disappear and instead typically claims that failure is a reason for giving it more resources to do the job. 

One approach to all these issues is to take what Boettke calls "the God s-eye-view assumption," in which the all-seeing, all-wise, and all-beneficent economist can see the path that must be taken. But if you instead are skeptical of economists (and others involved in politics), then Boettke points out that some questions about public administration must be faced.

"Those who favor public administration over the market mechanism must at least acknowledge the question raised earlier—how is government going to accomplish the task of economic management?What alternative mechanisms in public administration will serve the role that property, prices and profit and loss serve within the market setting?

"Let us consider the following example—a vacant piece of land in a down-town area of a growing city. The plot of land could be used as a garage, which would complement efforts to develop commercial life downtown. Or, it could be used to build a park, encouraging city residents to enjoy green space and outdoor activities. Alternatively, it could be used to locate a school which would help stimulate investment in human capital. All three potential uses are worthy endeavors. If this was to be determined by the market, then the problem would be solved via the price mechanism and the willingness and the ability to pay. But if led by government, the use of this land will need to be determined by public deliberation and voting. We cannot just assume that the “right”
decision on the use of this public space will bemade in the public arena. In fact, due to a variety of problems associated with preference aggregation mechanisms, we might have serious doubts as to any claim of “efficiency” in such deliberations. ...

"More recently, Richard Wagner, in Politics as a Peculiar Business (2016, p. 146ff), uses the example of a marina surrounded by shops, hotels, and restaurants—think of Tampa, Florida. The marina, shops, hotels, and restaurants operate on market principles, but the maintenance of the roads and waterways are objects of collective decision making. Road maintenance and waterway dredging, for example, will be provided by government bureaus, but how well those decisions are made will have an impact on the operation of the commercial enterprises, and the viability of the commercial enterprises will no doubt have influence on the urgency and care of these bureaucratic efforts."

Boettke argues that "the idea of a unitary state populated by omniscient and benevolent expert bureaucrats" should be rejected. He also argues that economists (and other social scientists) can be prone to casting themselves in the role of these omniscient and benevolent experts. He quotes from near the beginning of James Buchanan's  1986 Nobel lecture:  “Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made.” 

We live in a complex world, and there absolutely is a need for expert advice in many areas. But there is also crying need for experts to go beyond arguing with each other, or insulting the opposition, or attempting to get a grip on the levers of political power. There is a need for economists and other experts to participate in and to respect a broader process of institution-building and participating in the social consensus. (In a small way, this "Conversable Economist" blog is an attempt to broaden the social conversation in a way that includes expert insight without overly deferring to it. )

Boettke cites some comments from yet another Nobel laureate along these lines: 

"Elinor Ostrom concludes her 2009 Nobel lecture by summarizing the main lessons learned in her intellectual journey, and they are that we must “move away from the presumption that the government must” solve our problems, that “humans have a more complex motivational structure and more capability to solve social dilemmas” than traditional theory suggests, and that “a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans ... ”  .  Self-governing democratic societies are fragile entities that require continual reaffirmation by fallible but capable human beings. “We need to ask,” Elinor Ostrom continued, “how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of a more effective, equitable and sustainable outcomes at multiple scales."