The 2010 Sir John M. Templeton Fellowships Essay Contest

Second Prize, Student Division

“Everyone wants to live at the expense of the state.They forget that the state wants to live at the expense of everyone.”
—Frédéric Bastiat

I—Introduction

This essay argues that argumentation to promote policies which reduce government waste is futile as a conduit for actual change. Politicians will do what makes them survive in their profession, and if they do not they will be replaced by those who do. Advances in economic science have made it clear that well-functioning markets enhance welfare, yet many industries are protected by tariffs if not directly by money from the government, labour markets remain distorted in various ways, and rent control is still not uncommon. If improvements could come about through public debates, they would have done so by now.

This essay will discuss the failure of advocacy, but also how waste might yet be minimized by competition between governments, achieved by decentralization. Since such a process also depends on citizen preferences, it seems a distant prospect. However, advances in technology may enable man to reach new frontiers whose governments can compete with extant ones. Such competition leads to differences in well-being, which, when big enough, cause migration towards the better-managed places. If tax havens now restrict taxation in developed countries, more intense competition ought to force waste down even further.

One might think of this venue as a “technological” one. In a world suitably described as in equilibrium, such venues are far more likely to bring about improvements in how states are managed than is advocacy, which cannot change the incentives underlying the equilibrium. The most promising ideas to reduce government inefficiency are therefore technological rather than academic. This issue is discussed further in Section III of this essay. Before then, the shortcomings of advocacy will be further explored in Section II. Section IV summarizes and concludes.

II—Advocacy and Government Failure

Given everything we know about the ways in which state action can worsen outcomes for society and the continued attempts to convey this knowledge by skilled and opinionated academics in the public eye, one should ask oneself whether advocacy is the answer to our persistent welfare losses due to government failure. Indeed, those who advocate may not even think it is. By partaking in public discourse, advocates can promote their books and their image, become acquainted with interesting people, and achieve fame. Many undoubtedly also do it for the fun of debating and to be intellectually challenged. That advocacy is useless for other purposes is not evidence that advocates are irrational.

While this may sound depressing for those who deeply care about efficiency in government and a world more pleasant to live in, it should be remembered that the present state is not all bad. Large shares of the economy remain quite well-run; World GDP has never been as high, in spite of the recent recession; and technology has enabled almost everyone to keep in touch with friends and family through mobile phones, the Internet, and travel by aeroplane. That advocacy is sterile also comes with the benefit that the business environment will be stable, since radical changes in government policy, in any direction, are very unlikely.

The French 19th century economist Frédéric Bastiat’s lucid wit has been a great inspiration for pundits in the public sphere in the 160 years that have passed since his untimely death. From the satirical ‘Candle Makers’ Petition,’ urging the blocking of sunlight for the preservation of domestic manufacturers of light sources, to the clever ‘Broken Window Fallacy,’ providing a classical argument for the superiority of productive trade, rather than trade for its own sake (Bastiat, 1996 [1845] and 1995 [1848]), he established himself as a fountain of commonsense. The quotation introducing this essay may be interpreted as an anticipation of public choice theory. Unfortunately, as this essay argues, the quote is best seen as a positive description of democracy rather than a normative one, urging voters to come to their senses. To achieve better government, even lambent advocacy of Bastiat’s calibre is futile. Instead, advocates should promote efficiency-enhancing “technology,” such as favouring power at a local rather than national level (see Section III on the feasibility of this).

While many people may wish for less waste overall, they usually have some special interest about which they feel immensely strongly. It may be possible to convince a postal worker of the benefits of free trade, but it is unlikely that one will succeed in convincing her that competition works also in her sector. Candidates who are consistently against waste must somehow still manage to get the votes of everyone who receives special government privileges.

Apart from the protection of uneconomical industries and maintenance of trade barriers, most social policies are quite probably wasteful even in creating greater equality of opportunity. Indeed, there is neither theoretical nor empirical evidence to suggest that politics can alleviate the lot of the most indigent. Why would individual members of the relatively well-off majority take the time to design working political relief schemes for the very poor? Proper schooling can lift children out of poverty, but usually, there are only low-quality schools in impoverished neighbourhoods. Likewise, inexpensive higher education is sought mostly by relatively well-off adolescents. Minimum wage laws, by forcing up the price of labour, reduces the quantity that is traded and thus puts the relatively articulate, and usually white workers (who are more likely to advance eventually anyway) at an advantage to those who do not possess these characteristics (see, e.g., Burkhauser et al, 2000, p. 658). This is part of a phenomenon called Director’s Law (Stigler 1970), which says that the ones most likely to benefit from government programmes are the middle classes.

That bad policy can come about by people’s optimizing behaviour is something that Bastiat also realized, in pointing out that it takes less effort to legislate against foreign competitors than it does to kill them (Baugus, 2008, p. 579). Special-interest groups with a high valuation of such policy will support the politicians who help bring it about. If said policy can be made suitably complex, to increase the information costs and thereby reduce the risk of public outrage, then it will likely not pay an individual voter to ascertain the true function of the policy (Tullock, 1967, and Posner, 1977 (chapter 19)). Voters are rationally ignorant. Having only an infinitesimal probability of actually affecting an outcome in a democracy of thousands, if not millions of voters, it does not pay an individual voter to analyse proposed policy in any great detail. Informed voting is a public good and public goods are underprovided.

This type of information dissemination may be expected to be found in the domain of journalism, since media consumers should be interested in knowing how poorly their taxes are spent and how badly regulation can fail to increase welfare. However, even excellent investigations of the true impacts of political decisions will not improve outcomes when poor policies can still ostensibly claim to benefit a group which currently enjoys public sympathy. In the face of perceptions of immediate plight, harder-to-see, more distant, and diluted benefits will lose out in terms of newsworthiness. Moreover, media consumers may well have prior beliefs which they like their sources of information to confirm (Tullock, 1967).

Voters may also cherish certain political positions which are downright irrational. Bryan Caplan has identified several biases which are likely quite comforting for many people to hold. They compare well to Bastiat’s ‘seen-and-unseen’ dichotomy. If workers are laid off because a factory can be more profitably run abroad, voters do not see how these freed-up resources can create future prosperity by productive employment in sectors which will last longer. Caplan finds some evidence to suggest that these beliefs are widespread and do not average out. They survive and, sadly, strongly influence policy because the price of holding these beliefs is related to the actual consequences they might have, which are virtually none for voters (Caplan, 2007).

It is in the institutions of every advanced country that the sources of poor policy are found. Within these systems, everybody does as well as they can, given the actions of everybody else. The fact that even the simplest ideas such as bailouts for futureless industries or free trade fail so miserably on the political scene suggests that advocacy cannot reduce government inefficiencies. For those devoted to argumentation, the realization this essay attempts to provoke is an unpleasant one, but those who come to agree with this thesis can at least spend their time more fruitfully.

III—New Frontiers and Experimentation with Governments

Consider two cities where services are provided in equal measure and all other characteristics are also the same, but one of them has a Council slightly more wasteful than the other. If moving between these communities were costless, the relatively less efficient one would have to improve or perish. Voter shortcomings will matter less the more scope there is for institutional choice, as good policy is now a private good, rather than a public one.

This is one part of the idea suggested by economist and geographer Charles Tiebout (1956) on how people sort themselves into communities where public goods are provided in a way such that it is the best fit with the preferences of the people the community attracts. This is also one of many reasons why decentralization is a good thing. The presence of alternative institutions disciplines the egregiousness of government waste everywhere provided mobility is sufficiently easy.

However, it would be strange indeed to suggest advocacy of decentralization having just eschewed advocacy in general. And indubitably, advocacy is just as fruitless here as everywhere else in politics. But there is one important difference: areas unclaimed by any government provide fertile ground for experimentation with institutions. The “out-there” suggestion that we set up self-governed colonies in space is surely infeasible for very many years, but unclaimed areas exist also at sea. Patri Friedman, executive director at the Seasteading Institute, favourably compares expensive ocean platforms to much more expensive radical change (Friedman, 2009). Concrete ideas like this one, while not being easy to implement, are more deserving than is debating of the attention of those longing for efficiency in government.

Apart from sheer costliness, the Jules Verne-esque project will be sensitive to natural disasters. Disasters with oil rigs do, infrequently, occur, although they are necessarily located where there is oil rather than where waters are calm. However, seasteads are meant to be mobile and so could simply use a weather forecast to avoid stormy weather. Migration is not for everyone, but the potential loss of citizens may already reduce waste just like the presence of tax havens help keep capital taxation from rising. Besides, even when countries reform very little or not at all, those citizens who remain will be precisely those who least mind the inefficiencies, much like a logistical version of Robert Nozick’s vision of sub-societies providing benefits to their paying members within a scaled-down state.

The most important impediment to Tieboutian competition between governments is the fact that moving to, and installing oneself in, a new institutional setting is expensive, in terms of money and of losing touch with family and friends. However, the relevant price is the relative price. If more institutions can spring up in this way (or in some other, unforeseen way), it will still limit the price of the status quo as established institutions can be inefficient up to the point where the difference between prices equal the moving costs.

Seasteading is not guaranteed to succeed, although the likelihood that it does, being above zero, is of course far greater than is reducing government waste through advocacy. At any rate, technology can help also if seasteading fails. Through the Internet, cheap long-distance phone calls, and air travel, individuals today are facing a world far more open than it used to be and advances which further reduce the costs associated with moving imply that we approach a world increasingly well-described by the Tiebout model.

IV—Conclusion

Government policy is determined, ultimately, by the distribution of preferences amongst the citizenry. Citizens are rationally ignorant and sometimes rationally irrational and therefore do not find it worthwhile to process information about the true effects of policy, allowing interest groups to reduce total welfare. Despite the presence of brilliant ideas in economic science to explain this unpleasant phenomenon, it has proved impossible to eliminate. This essay argues that those who hope for advocacy to make people aware that current politicians live on government failure and should be replaced miss the point that government failure is precisely the result of individually rational, maximizing behaviour.

Unfortunately, changing the incentives which voters face is impossible. While it would be good if everyone realized that a state which is somehow restrained from imposing tariffs or pouring money on doomed industries, if the penny is yet to drop given what we know, chances are it never will. However, this does not mean that improvement is beyond this world. Rather than hope for the impossible, one might take solace in the fact that the frontiers of civilization are yet likely to expand and bring along competition between different forms of organizing economic life. Developments may not come quickly, but reasonable hope, even if low, is better than empty promise.

References

Bastiat, Frédéric, Economic Sophisms, (1996 [1845]), Foundation for Economic Education.

Bastiat, Frédéric, Selected Essays on Political Economy, (1995 [1848]), Foundation for Economic Education.

Baugus, Brian, ‘Fredéric Bastiat: Libertarian Challenger or Political Bargainer?,’ The Independent Review, Vol. XII, No. 4, Spring 2008, pp. 575–589.

Burkhauser, Richard; Couch, Kenneth; and Wittenburg, David, ‘A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey,’ Journal of Labor Economics, Vol. 18, No. 4 (October, 2000), pp. 653–680.

Caplan, Bryan, The Myth of the Rational Voter, (2007), Princeton University Press.

Friedman, Patri, ‘Beyond Folk Activism,’ CATO Unbound, Lead Essay, April 6^th, 2009, available at http://www.cato-unbound.org/2009/04/06/patri-friedman/beyond-folk-activism/.

Olson, Mancur, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, (1982), Yale University Press.

Posner, Richard A, Economic Analysis of Law (2^nd ed.), (1977), Little, Brown and Company.

Stigler, George; ‘Director’s Law of Public Income Redistribution,’ Journal of Law and Economics, Vol. 13, (April, 1970), pp. 1–10.

Tiebout, Charles; ‘A Pure Theory of Local Expenditures,’ Journal of Political Economy, Vol. 64, No. 5, (1956), pp. 416–24.

Tullock, Gordon, ‘The Rhetoric and Reality of Redistribution,’ Southern Economic Journal, Vol. 47, No. 4, (April, 1981), pp. 895–907.

Tullock, Gordon, Toward a Mathematics of Politics, (1967), University of Michigan Press.