Why government?

It’s a bit of an odd question. Government has existed forever. There are a lot of common sense reasons, but more and more people are questioning exactly what role the government should fill, and if we’d be better off if we limited it to the absolute minimum.

I’m going to mostly ignore the safety/policing issues and focus on the economics of government.

Proponents of minimal government generally say that the government is slow and unwieldy, doing its job very poorly.

Markets are great at optimizing a process. Basically, they want to apply survival of fittest to the roles being filled by government agencies. At the crudest level that means taking bids on road work instead of running your own road team. They’d like to expand on that, getting contractors to compete for who gets to run the DMV for example.

They hypothesize that a lot of government regulation gets in the way of the core “survival of the fittest” tenet. A lot of regulation makes it more difficult for new people to get involved in the industry. Raises the barriers to entry into a given market sector. Less people mean the existing players have more market power. The FDA certainly makes it more difficult to start producing medicine, and patents make it harder to make all kinds of stuff.

A firm with total market power can raise prices without losing any customers to competitors. At the core, a monopoly or oligarchy are examples of what happens when a firm gets too much market power. On the other hand, if a firm has too little market power they can’t take any risks at all, or support any inefficiencies. That’s why we have patents. They’re a (broken) system to try and make the risk of new research less risky.

There are also a lot of cases where a government handles a situation that would quickly turn into a natural monopoly. A natural monopoly is a when it’s most efficient for production to be concentrated in a single firm. Once you have all the market power that comes with being in a natural monopoly, you can abuse the hell out of it.

Governments also regulate against backroom deals and other forms of collusion. A lot of that comes from the Interstate Commerce Act of 1887, which was very sensibly done. It’s where we get a lot of our ideas about common carriers, and a model I thoroughly endorse for the internet. Network neutrality is a big issue.

Finally, governments help in situations where there’s a lot of value created across an entire society, but where it’s very hard to capture that value. University is the prime example. A university creates a lot of value across society, but it doesn’t really have any way of accessing that value. Right now we use government backed student loans. It gives the universities a way to capture some of the value they create, albeit in a sort of strange backwards way that doesn’t really connect success to profit properly.

I’ve heard employment contracts suggested as an alternative that doesn’t involve the government. Essentially having a firm pay your way through university if you agree to work for them afterwards. This seems pretty rife for abuse to me.

There’s a lot of stuff we need a government for, but there’s no doubt the current system is completely broken. In my next post I’ll be talking about what a government should be doing, and how to do it efficiently.

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