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Source link: http://archive.mises.org/9975/the-neoclassical-fallacy-of-government-as-deus-ex-machina/

The Neoclassical Fallacy of Government as Deus ex Machina

May 19, 2009 by

The question of where the government fits into the neoclassical framework demands an answer. It cannot just be assumed that any market “inefficiencies” (in the neoclassical sense) could be limited or eliminated by government, when government itself is arguably the most inefficient of all institutions. FULL ARTICLE

{ 6 comments }

Jeremy May 19, 2009 at 9:06 am

Wow – great article. It brought me back a few to my days studying Economics at BYU. We constantly discussed those 4 neo-classical models – I took an entire class on anti-trust in which the entire class was about this subject. However, I’ve never seen these models applied to government – great idea.

One thing really got me thinking from you article. In a pure monopoly model, the monopolist under-produces. However, when it comes to government, the biggest complaint is that it over-produces. I want significantly less government! I was trying to think how to reconcile these two. Here’s my thought: the stated purpose of government is to protect rights. So, in this sense, government clearly is under-producing since our rights are being violated to a much greater extent than if we had a government based more upon the free market.

Under the original Constitution we had a more monopolistic competition form of government. The firms (state and national governments) competed to provide the best “service”. However, after the War Between the States, our government was consolidated into it’s current monopoly form.

Joshua Park May 19, 2009 at 11:44 am

It may be a waste of time, but an interesting real-world exercise would be to try to break up the government using its own antitrust laws. I can imagine a few examples:

A private security company would sue a city police force saying that they have an monopoly over arresting lawbreakers. Arguments might include the fact that a citizen’s arrest is just as binding as one performed by the police, and that all citizens are forced to pay for this service with no competing options. Favorable outcome: Judge rules that citizens can opt-out of police services, keeping their own money which would free them to take their money elsewhere if they find that the police are offering inadequate services.

A road paving and construction company could sue a state (like California) that has one state-funded and mandated road construction department. (Here in CA, it’s called “CalTrans.”) I would think that arguments are obvious, but there are other states in the union that bid out any roadwork, and private companies actually perform the work. It could also be argued that the placement of roadways is a monopolized industry, preventing competition for safer, faster, and better-maintained roads.

An insurance company could sue the government because it has a stranglehold on unemployment insurance. We have private auto insurance in case something bad happens to our car, so why not private insurance in case something happens to our job? That competitive market does not exist because of government monopoly.

…Come to think of it, auto insurance rates go up if you have a blemished driving record or previous accidents… so why not with employment insurance? Picture a world where employment insurance benefits are linked to likelihood of dismissal. Metrics for the insurance companies might include performance reviews, employee of the month records, education, any work-related demerits, etc. Those that are secure in their jobs would likely pay less overall, just as safe drivers pay less. That’s only fair, right? Currently, no matter how recklessly you invite unemployment, you see the same portion of your income go to state unemployment programs. Wouldn’t this new system encourage everyone to be more productive? Logically, if someone’s employment insurance premiums would decrease if they can get a good review from their bosses, they’d try harder to get a good review. And, let’s say for the sake of argument that the entire employment insurance industry falters and fails. Perhaps it’s because workers everywhere realize that they could do just as well sitting on a six-month reserve of cash to keep them afloat until they find a new job. What’s wrong with that?

But I digress. I’m sure there are many more examples of how individual government programs might be broken up using the state’s own antitrust laws. Or, at least someone could try.

Nate May 19, 2009 at 11:58 am

Joshua,

It would be nice if we could use anti-trust laws to break up the government, but unfortunately the anti-trust acts limit the law to only individual persons or companies. The government and unions are exempt.

billwald May 19, 2009 at 7:22 pm

Which private national defense supplier should have an inventory of H-bombs? All of them?

Maciej Piechotka May 23, 2009 at 11:39 am

Very good article – although not surprising for austrolibertarian (not metioning austoanarchists) as you wrote.

However as you mentioned monopoly. As far as I remember there are two kinds of efficiency in neoclassic economy. So in neoclassic economy if a firm is charging monopolistic prices the consumers may be better of as the drop in prices due to economy of scale is bigger then the increase due to monopolistic prices.

gene May 25, 2009 at 2:12 pm

I don’t believe consumers can ever be “better off” due to monopolies.

Even lower prices on one product, which is debateable, do not take into account the “forced direction” of capital that occurs whenever there is a monopoly. Whenever capital is diverted from its natural path, it is taken out of the hands of producers and concentrated, fostering further potential monopoly.

Economy of scale could be argued as simply a indicator of monopoly rather than free trade. There would be no advantage to “scale” under the ideal system, as competition in all aspects of the market would “overrule” any advantage of size. Economy of scale signifies “privleged pricing” rather than free exchange.

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