Do Market Failures Justify Government Intervention? (with Michael Munger)

Michael Munger: Well, let me say something about how we got to this point. As you said, Bill Keech was a friend of ours. Actually, the three of us, we met once, I think, at the Southern meetings and had a very good scotch during the conference. I’m so sorry I didn’t get a picture of you and Bill together. It wouldn’t quite be Friedman and Stigler, but it would be close. Bill was six feet eight—just shockingly tall. In fact, Bill and I used to go to Duke. And, surprisingly, the car Bill had was a Mini Cooper. Now, the reason he had a Mini Cooper was because the front seat went back over the back seat, and that meant that—specially, that car meant that his big six-foot-eight legs would fit.

So, one day Bill and I pulled into the parking lot, and a woman was walking right in front of us, heading toward the office. And, quite by accident, Bill and I suddenly went out at the same time. I’m not a small person, and Bill is six foot eight. He actually stopped and looked and said, ‘They are there More?’ He thought it was a clown car because the Mini Cooper is so small.

So Bill, I wanted to give the impression that—Bill had an Eeyore-like way of speaking, where,'[low Eeyore-like voice] Everything is bad’; but when you talk to him, he actually had a good sense of humor. He died recently.

And, part of the reason I bring this up to talk about, Russ, is that 10 years ago, on this day, Bill and I were in a coffee shop on the beach in North Carolina working on this paper. Also, what we were struggling with was the idea of ​​how to present the problem of government failure in a way that was consistent with what you were talking about when you said market failure.

Therefore, market failure has a long history in economics. In some ways, the concept of market failure was inspired by the events of the late 1920s and 1930s that we now call the Depression. But, the question is: why is there so much volatility in aggregate economic activity?

So, the classical definition doesn’t describe those cycles well–the classical economic model. But, the claim was that you should let the prices work themselves out.

And so, the question in the early 1930s was: are there ways for the government to do it intervene would that reduce the time it takes for prices to correct things or reduce the magnitude of the initial decline? So, can we make the recession shorter and shallower? And, the old answer was, ‘No, no. If you do that, you will distort the values; you will make things worse.’

Therefore, this laissez-faire, this kind of hands-off approach, was difficult for politicians and citizens to accept.

So, people were looking for ways: How can we explain this great change in the combined economic activity? Also: Do ​​we have a way of thinking about them that will allow us to find places for the government to intervene?

So, the Austrian answer to that – as you know – and Ludwig von Mises, since 1920, had written this book Socialism, saying the government does not have enough information. Apart from the numbers, there are various reasons why the government cannot intervene effectively. The Public Choice response of the late 1950s and early 1960s took the Austrian objection as correct, but added the problem of motivation.

Therefore, I wrote recently that in order to understand the economic system, you have to look with two eyes: Motivation and information. Again, the question is: Can you be productive with two eyes–motivation and information–a better result than what you would get in the market?

Because, markets create a set of information, and markets generate information about prices. Can you do better than that?

Therefore, a Public-Choice response would mean that the government does not know enough and government officials will have unfair advantages. And so, we probably can’t do better.

Now, there was an answer that I think the Public-Choice people don’t take seriously enough, and that came from the Cambridge Welfare School. Also, let me take a moment and describe Cambridge Welfare School.

Therefore, Oskar Lange famously said, ‘Surely the Socialists have good reason to be grateful to Professor Mises, the great devil’s advocate of their cause. It was his powerful challenge that forced socialists to recognize the importance of an adequate system of economic knowledge. Thus, as a reminder of the central importance of economic accounting, the portrait of Professor Mises should take a place of honor in the Great Hall of the Social Welfare Department of the socialist state.’

So, what he said – what Lange said – was Mises right. We it is possible I don’t have enough information. We need to work harder on knowledge than we thought.

However, what information do we need? Well, in retrospect, there is another one school of market failure, and that equal people. So, the Cambridge School was social economics: Can we have better results? Also, the equilibrium school was concerned with: Will markets produce consistent results or will they be chaotic?

So, Leon Walras in the late 1890s said, ‘What do we have to do to prove that the theoretical solution to the problem of price determination is the same as the solution made by the market?’ That is, we can come up with the right idea. Will the market measure that? ‘Our job is very simple. We only need to show fluctuations in prices to solve the mathematical system of supply and demand through the process of fumbling.’

Now, in French, to fumble balancing. So, tatonnement the process by which markets will find the right prices.

What’s interesting is that Oskar Lange has taken exactly that by tatonnement–that grope–and he said, ‘That’s what the government is supposed to do: inspect. So, what we need to do is try different policies.’

That’s really where President Roosevelt, when he made his speech about testing, and when people who are in favor of government regulation, government intervention in the market, are promoting testing.

Therefore, the Austrian criticism that the government does not have enough information is probably true. But, Public Choice in the 1950s, when I look back, said, ‘Well, the government won’t have enough information. And, they don’t have the right motives either.’ Because, if you look at Ronald Coase or Gordon Tullock, they say, ‘Well, government officials – the people who represent the government – don’t see a political problem.

What I found was that the Cambridge economists, and AC Pigou in particular, were very aware of the political problem, both motivational. again information problem.

And, I actually found in many places that AC Pigou in the 1920s, in the 1920s, should be recognized as the first author of Public Choice. Also, I can read the excerpts if you want, but I wrote a few things about this.

What is interesting is that the Cambridge economists – the people of the Social School – recognize the problem of information to a degree that I think most people have not given them credit for. But their answer is simple. They want the government to have enough power to carry out continuous research.

And, here’s the important thing: It must be protected from political influence. Therefore, it should be completely outside of any democratic pressure.

That is why, during the 1930s, the Roosevelt Administration – many scholars of the Roosevelt Administration – and the people of the United Kingdom were such supporters of Mussolini: not because they wanted to be Fascists but because they realized that the problems of political motivation. they were very difficult.

So, one more thing and I’ll be done with my presentation – because I think this intellectual history is interesting for people who grew up in the culture of Social Choice.

In the Public Choice tradition, we are taught that people who favor government intervention don’t understand the problem of information, and they don’t understand the problem of incentives. And, if you include politics, then the scales will fall from their eyes.

That is not true. They actually saw those problems before; they just have a different solution.

However, there is a 1938 paper by Abram Bergson that is not read often but should be. Thus, in 1938, Bergson said, ‘If the functions of production and the functions of indifference of each individual are known, it provides sufficient information about the social function of the economy to determine the highest position, if any.’ All details–everything they are just matters of implementation. So, all we need–