Tyler Cowen writes,
John Quiggin, Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly. The third lesson, however, is government failure, and you won’t find much about that here. Still, I found this to be a well-done book rather than a polemic.
I also received a review copy of the book. No, the term “Public Choice” is nowhere to be found in the index.
It is straight neoclassical economics, which, as you know, I find frustrating.
Suppose that in baseball, every time a batter makes an out we call it “batter failure.” By that definition, Mike Trout is guilty of “batter failure” more than half the time. A really naive manager would replace Mike Trout with a pinch-hitter. But if you know anything about baseball, you know that pinch-hitting for Mike Trout is pretty unwise.
Neoclassical economics takes the naive approach. It suggests pinch-hitting for markets without making any estimate of the pinch-hitter’s propensity to fail.
I think that what “markets” do so very very well, is to improve plans.
1) every business owner, every entrepreneur (bad word for PR), makes plans. What to buy, what to make, what to sell, and how much.
Some say business only plans for the short term, but the gov’t plans for the long term, therefore we need more gov’t long-term planning. This is mostly false, tho there is enough truth for this myth to keep being repeated. Most businesses make short term and long term plans.
Lots of plans.
2) With markets, there are lots of measurements of how the plan is doing. This is key – for any long term plan, what are the “milestones” or other ways to know whether it’s a good plan or not?
Profit is the measure of sustainability, “doing a good job”, for a business.
Re-election is the measure for politicians. The 80-90% re-election rate in the US means most folk think their elected officials are doing a good job.
3) Market actors, both buyers, sellers, and makers, all are constantly monitoring and adjusting their plans, usually with some ability to make small changes rapidly, and large changes if really necessary.
The buy-sell feedback from customers allow markets to adjust more rapidly and more often in ways the buying customers want.
Markets get lots monetary feedback and respond quickly to that feedback, in quarters and months. Gov’t elected officials get shallow advice and multiple requests for free money, without knowing how much desired results are really worth it.
4) Market plans fail. Often. Gov’t plans fail. Often. Failed market plans are usually replaced quickly with alternative plans — if too many plans fail, the company goes out of business. Failed gov’t plans occasionally result in voters getting new elected leaders, but most often the agency which failed to achieve its plans is not ended, and quite often mission failure leads to organization increase.
5) Markets have an incentive to improve their planning and execution based on profit. Gov’t officials have much less incentive to improve, and even have above style incentives to fail, so as to become a bigger org.
There are lots and lots of examples of big gov’t failures, as well as big gov’t-private “partnerships” which fail — usually because of bad gov’t policy.