Today's musing minute: It's not rocket science, actually its simple economics.

 THE FUNDAMENTAL ASSYMETRY BETWEEN PRIVATE AND GOVERNMENT INSTITUTIONS

Competition in the private property market economy tends to harmonize private and public interests. People acting in pursuit of their own private economic interest are led as if by an "invisible hand" to serve other people's needs and desires. The result is a spontaneous order - the result of human action but not human design.

The same cannot be said about the public sector. Where people work for the government and various levels they are not led automatically to serve the needs of others (the public) by any kind of market signals. Public sector services do not have prices. There is no bottom line except for the ability to pay for the those services with taxes. There are, in short, serious knowledge and incentive problems. There is an assymetry in this between the private and the public sector. Workers in the public sector are not automatically accountable to the public like private sector workers are to consumers.

THE FUNDAMENTAL DILEMMA OF GOVERNANCE

For that reason government tends to produce waste and corruption. This is more likely the larger government is and the more centralized it is. The Founders of America understood this and provided for the separation of powers at each level of government and for decentralization of powers between the federal and state governments. James Madison, the scribe for the Constitutional Convention, and the third president of the United States famously described the problem as follows:

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”

PAYING FOR GOVERNMENT

In order to finance the functions of government taxes must be raised. These taxes are used to produce public services and also for anti-poverty subsidies. All taxes and subsidies create inefficiencies. Some argue that they can be used to counter cases of 'market failure'. Logically speaking maybe. But, as a practical matter for this to work, the extent of the market failure must be known, the extent of the 'government failure' produced by the tax or subsidy must be known, and the two must be weighed. In reality, it is probably more efficient in terms of value created and destroyed to deal with 'market failures' in other ways.

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