How government?

If you haven’t already, take a look at “why government?“, where I take a look what a government actually does, as far as the economy is concerned anyway. It introduces some of the terms I’ll be using today and talk about why we need a government for a healthy economy.

Once again, we’re largely going to be focusing on the economics. With that it mind, here’s my recipe for a healthy economy.

Most importantly.

  • Monopolies/oligarchies are bad.
  • Experimentation/risk taking is good.

In other words, too much market power is bad. However too little can be bad as well, if you don’t have a more intelligent way of handling risk. If my suggestions run counter to those goals, then they’re not good suggestions.


A lot of innovation comes from the hobbyist market, or from research done on the government dime. Pure research is risky, you’re not likely to get a good return on investment. It’s almost always better to spend your money on advertising, or other ways of capturing more of the existing market.

Making small incremental improvements to your existing products/revenue streams is a common tactic, and is often mistaken for innovation. I’d call that optimization.

Optimization is an important part of the process. But you don’t see multinational corporations creating any sort of disruptive innovations. It’s just not a good return on investment when you could be putting that money into advertising or optimization.

There are a number of ways we could make innovation happen more.

We could make it easier for companies to take risks. If we just give them more money it will probably still be better for them spend on advertising and optimization, so we have to figure out some way to reward innovation itself. Kickstarter works pretty well for that.

Personally, I like the idea strong social safety nets. It empowers individuals to take more risks in general. A strong social safety net makes it easier to quit your job and start your own business. A lot of those business will fail, but they’re all trying new stuff. When we absorb that cost across all of society, the return on investment looks a lot better.


This isn’t so much related to the economics, but I figure I’ll throw it in here any way.

The American people’s views are not being represented by their representatives.

Right now if a politician makes a bad decision, they don’t feel the effect for a while. Four years at worst. By then, many of their constituents will have forgotten about it. If a politician goes back on campaign promises, you have no recourse.

There’s also the problem inherent in the two party system. People don’t actually get their view represented, they have to pick whatever party most closely matches their views. Hopefully that party continues to most-closely-match their views during their entire term.

The pirate parties’ LiquidFeedback system solves both of those problems. It’s a “direct representation democracy”. You can select a representative, or you can vote on any given issue yourself. You can change who represents you at any time. It’s the best democratic system I’ve seen so far, and it exists today. I’d love to see a liquidfeedback based political party show up in the US.

Bounded Markets instead of government fiat

The government is slow and unwieldy. I hope some of that can be fixed by having it more accurately represent the will of the people, but that will take a long time.

When handling a natural monopoly, the government tends to reach for the bluntest tools available. They set prices themselves, say “you have to charge this much money for this much service”. That’s a band-aid over a larger problem. You need to set conditions on a market that make them more competitive. For example, you could set up grants for people trying to enter a market, negating some of the barriers to entry.

I like how they handled common carriers in the Interstate Commerce Act of 1887. A few firms were using the concepts behind limit pricing/dumping to have the railways only carry their stuff, driving their smaller competitors out of business. The government stepped in and said that all freight had to be charged at the same rate. This meant that the various railways were still in direct competition with each other, but stopped all the predatory pricing and made a lot of Anti-competitive practices tenable.

This is where I’d put a specific call to action, if I had one. It’s complicated and we need to do a lot of research to figure out what to do. But I think we’ll be okay if we just keep working hard and trying new strategies.

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