by Jurgen Brauer, June 2004
Copyright: J. Brauer. No reproduction without permission.

Private markets are not perfect, but neither is government.

The most commonly given justification for government intervention in the market place is that free, private, competitive markets can fail to deliver needed or desired goods and services. If the private labor market results in an income distribution deemed lacking in social equity, government can tax the better off to supplement the income of the not so well off. If the private media market is deemed to produce too little edifying material, government can subsidize a public radio and TV network. If private markets under-serve small businesses, government can create a small-business administration and provide subsidized loans.

Just as private markets can fail to provide commonly desired goods and services, so can government.

Another reason given for government intervention is that unfettered markets can create havoc, exploitation, and unjust conditions in need of correction. But just as the private market can fail, so can government. Indeed, the very reason why private markets sometimes fail to deliver is because government fails to properly regulate and monitor private markets.

For example, until government mandated standardized dissemination of information, the financial industry remained a world onto itself. The cost for small-time investors to acquire risk-reward information was too great or, alternatively, the risk of investing in spite of the lack of information was too great. Thus, the financial markets did not reach ordinary households. Households' primary investment option came from investing in government bonds, save but low in return. Here the government failure lay in inaction. Correcting this by mandating disclosure requirements opened up the financial market to millions of households. Better informed to weigh risk against potential reward, millions of households began to participate in and to benefit from access to financial markets.

More often, government failure is associated with its actions, not its inactions. The annual budgetary dance is a spectacular example. Thousands of actions are being funded at federal, state, and local levels for which there is no particular reason of why they need to be carried out by government. In the United States, the newly formed Transportation Security Administration (TSA) – airport screeners, in short – is an example. The proper role of government is not to run the service but to let private companies take on the screening and security functions and to insist that performance targets be met. A bevy of competing private companies will figure out better than government how to meet and beat any performance target.

Another form of government failure is neither action, nor inaction, but inertia – the inability to let moribund programs die. Agricultural subsidies never die, even as these markets have become astonishingly sophisticated, from seed technology to planting, from tending to harvesting, from processing to distribution to the final consumer. There is no reason why private financial and insurance markets could not take on risk-hedging services to replace current government-provided risk-avoidance (such as price guarantees and similar methods).

Yet another form of government failure is neither action, nor inaction, nor inertia, but the failure to supply the underlying conditions necessary for the conduct of business such as a reliable legal framework, a stable currency, property rights, contract enforcement, personal safety and security, and long-term political stability. This may be viewed as another form of inaction, but if so it is inaction of a more fundamental nature. Lack of stable money by allowing price-inflation to grow out of hand affects not merely a particular market, but all markets. Lack of law and order affects all people in the country, not merely those that would participate in a specific market. Failure to supply the very conditions upon which free enterprise can prosper is a failure of monumental scale.

In sum, those who bemoan the hick-ups and failures of private markets need to beware that government intervention can lead to failures as well, indeed failures greater than those to be corrected. The best government is one that carefully harnesses the competitive nature of private business and lets the private market do the work. It is a conceptual failure, at any rate, to conceive of government as distinct from people and business. Without people, no government. Without people, no business either. The task of those people delegated by other people to regulate the commons is not to supplant failures with worse failures.