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Political Lemons

Mises Daily: Thursday, November 15, 2001 by

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If assymmetry of information can cause market failure, how about the market for government intervention? Supposedly, at least in a "democratic" regime, there is such a market. Citizens, we are told, demand assistance, which the State supplies on the payment of taxes. 

It doesn't really work quite that way, but let's say it does. Certainly political functionaries are in a better position than their customers to gauge the inefficiency of political programs, and they have every reason to obscure such inefficiency. Ordinary citizens are more astonished at $500 toilet seats and the immortality of the Rural Electrification Administration than those who must daily witness such marvels.  Therefore, just as a used-car salesman might take advantage of his customer by saddling him with a "gas guzzler" even though the poor sucker suspects something, so a politician might swindle his vaguely suspicious customer with a "tax guzzler" in the form of regulation allegedly designed to shield him from the used-car salesman.

The simple expedient of taking a mechanic to the used-car lot, or the more elaborate resort to a private consumer protection organization, might well make State regulation unnecessary or worse. But if you work for a regulatory agency, you have as little incentive to make these alternatives known as the used-car salesman has to advertise his more efficient competitor across town. This last point applies more dramatically to police and defense services. 

Paul Samuelson states the common view:

Could market laissez faire, with no political voting and no coercion, give the group the national defense desired by the majority? Evidently not--not in the same way that the market can handle our private bread needs. If I knew that I was going to benefit anyway for the defense you had paid for, why should I come into the market place and exercise a dollar demand for it? Patriotism would of course motivate me, but it would show itself in the way that my neighbors and I vote on election day and in the way that we acquiesce to the coercive fiats legislated by our responsive government rather than in our day-to-day private purchasing. (Economics, 11th ed. [McGraw Hill, 1979], p. 151)

The majority's desire for a certain sort of national defense might itself show that citizens are on the short end of an informational assymmetry. That aside, presumably Samuelson knows of the work of people like Gustave de Molinari and Hans-Hermann Hoppe on the private provision of defense services through insurance firms, but he does not mention it. So, those who "buy" his argument may do so in consequence of something they don't know, but he does.

On the other hand, how can even Samuelson know that the presumed urgency of national defense might not induce those who feel the urgency to pay high enough premiums to make up for those who don't? Voluntary support of apathy is no worse than extortion for the sake of paranoia.  Those who hawk government intervention might have privileged awareness not only of its inefficiencies per se, but also of deformities that such initiatives impose on markets. Compliance costs drive smaller firms out of the market, therefore restricting competition. Money and effort must be spent unproductively lobbying for or against proposed regulations, thus raising costs to the consumer, and again putting smaller firms unable to afford this at a disadvantage.  This is not the worst of it. 

Used-car companies rarely drum up business by sabotaging automobiles. The government routinely does something very like this, and not always innocently. Could those directing "the war on drugs" be unaware that their efforts raise the street price of dangerous drugs, thus adding to the incentives to sell them? Crime and disorder thus increase, excusing further State activity with its patronage and appropriations.

The proponents of affirmative action can hardly be ignorant of the acrimony their programs inspire and of the delicious opportunities for further profitable meddling that this affords. Thus, the buyer of State intervention may not know that, aside from working badly, restricting choice, and demoralizing markets, the lemon he is stuck with might explode in his face. (For more on this, see my "Zimbabwe: The Snake Eats Its Tail," Liberty, March 1999.)

Unlike the used-car agency, the dealer in government services has little reason to stock anything but lemons. In the case of the car company that too often cheats its customers, word gets around and business declines. But when government programs shortchange the citizen, a problem is created "that only the government can resolve," and if it can't , we have another problem "that only the government can solve," and so on.  

As an example, here in Zimbabwe, many were persuaded that farmland needed to be redistributed and that the State alone was competent to do so. Among the many dire results was an increase in food prices, which the government answered with price controls. This is causing producers to go out of business, and the State now promises to nationalize such producers. Whatever the next blunder, you can be sure "only the government" will be up to it.

The basic difficulty is that no government can live up to its billing as a semi-divine problem solver. It consists of mere mortals who, when parceling out benefits seldom forget themselves, and who cannot have sufficient information to do better even had they the will. Just as Mises showed that in a socialist commonwealth a rational price structure cannot be calculated, so for similar reasons any State action must result in unforeseen consequences that will probably defeat the stated objective--but then, so much the better.

Government intervention is not, as Samuelson believes, an alternative to the market; it merely creates a different kind of market full of con men selling very sour lemons.

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Leonard Brewster, Ph.D. teaches philosophy at the University of Zimbabwe and Arrupe College.  He has a piece forthcoming in the Journal of Libertarian Studies on the limits of the State.  Send him MAIL.