I’ll explain my reasoning about how it contributes to what I’m trying to achieve with Theoretical Foundations in Thursday’s post, but for now I’d just like to jump right into the exercise itself.
The work programme description on this topic starts by saying:
Many non-progressives profess that any significant state or collective action to try to achieve social and economic goals is bound to be ineffective or even counter-productive. They often use complex yet elegant theories and models drawn from neoclassical economics to prove this.
I want to compile a list of all of the main arguments along these lines. Or, as our opponents might put it, a catalogue of the reasons why progressive policies will always fail. Here’s what I’ve come up with so far:
(I should note that I’m not saying that every one of these arguments is necessarily wrong. In some instances, it may be that many progressive would accept the argument, at least up to a point. Nevertheless, they are all arguments that, if true and/or believed, make progressive action harder.)
- Government attempts to ‘pick winners’ by giving public assistance to particular companies or industries are misguided, as politicians and public officials cannot allocate resources as well as the market can.
- Similarly with efforts to take a strategic approach to assessing what training is needed to meet a country’s skill needs — this amounts to ‘manpower planning’ and has also been discredited.
- The market is better at fostering innovation than any form of centralised decision-making can ever be (an argument advanced by John Kay, as described in an earlier post).
- Public officials’ actions and advice are guided not by commitment to the public interest but by their own rational self-interest (as predicted by ‘public choice theory‘) leading to budget-maximizing and bureau-shaping activity.
- Public sector organisations are inevitably less productive and efficient than private sector ones because they are not subject to the same market discipline, including shareholder demands and the ultimate threat of bankruptcy.
- Because ‘exit’ is more effective than ‘voice’, it is better to give people more choice in the services they receive than to give them greater say in decisions about the way those services are provided (see this post).
- The effectiveness of government action will be undermined because people do not behave in the way that governments want them to, leading to problems with perverse incentives and moral hazard.
- Increases to public activity will ‘crowd out‘ innovation and investment by the private sector (which is where genuine wealth-creation takes place).
- Attempts to provide resources to the poor will tend to get captured by the middle class unless they are tightly targeted.
- Tax rates need to be kept low and relatively flat (i.e. not too progressive) in order to reward innovation and effort, or else the economy will suffer.
- In any case, efforts to tax the rich will inevitably be ineffective as they will find ways to avoid the additional taxation.
- Providing too much of a welfare ’safety net’ is counter-productive since unless income support levels are minimal this can create ‘benefit dependency’.
- Monetary policy needs to be tightly focussed on keeping inflation rates very low, and cannot afford to take into account the impact of its interventions on employment or investment.
- In fact, according to the ‘Policy Ineffectiveness Proposition‘, governments really cannot have any positive effect on the economy, because people will use ‘adaptive expectation’ to respond immediately to any government action (taking into account its long-term costs) and thus neutralise it.
This might seem like quite an economically-focussed set of arguments, and indeed most of them do derive from the discipline of economics.
But their potential application goes well beyond the economy, and has implications for just about any area of social spending. Some of the arguments, like #4 and #7 above, even have implications for the desirability and effectiveness of government regulation of societal behaviour.
It is also, almost certainly, an incomplete list. And I’d like to enlist your help in order to add to it. What other arguments against the effectiveness of progressive action can be included in this list?
I’d also be interested in any help in identifying the definitive texts setting out these arguments (and those that are added to the list). And, for that matter, any assistance in steering me towards devastating rebuttals to these arguments would also be much appreciated (although that’s primarily a task of a slightly later phase of this topic).
Do progressive policies always fail? I don’t believe so. But I also believe that they are much less likely to do so if we are aware of, and able to consider and take account of, the arguments that are mounted against them.
Tags: economic theory, manpower planning, middle class capture, moral hazard, picking winners, Policy Ineffectiveness Proposition, public choice
One that is often raised in New Zealand, which isn’t directly covered above is flight – brain drain, capital and entrepreneurship going overseas etc. “It’s an international economy and these people can move between nations so we’re encouraging them to leave with our progressive policies”.
Phew! what a depressing list. but it’s true to some extent that these are the hurdles that need to be overcome but naturally I disagree with the those that say they can’t be overcome.
Some variations on the theme of list item 1 -
The risk adverse mentality of the typical government official. Even though in the private sector you expect a lot of failed experiments – nothing is allowed to fail in the public sector. although ironically what I observe is that the obssession with short term risk advoidance leads to long term failure anyway.
There is also the fundamental idea in economic theory that a central planner would need almost unlimited information whereas markets only need price signals (yeah right!)
As to references hmmm the whole topic is summed up under the name of ‘government failure’ (cf ‘market failure’) so I would suggest searching on that term.
come to think of it – the seminal reference in NZ would be ‘Government management’ (The Treasury 1987).
What I never understood about their thinking which introduced concepts like asymmetric information, principal-agent theory etc was why that lead you to separating funders and providers as that just added another layer of principal-agent relationships to the whole bureaucracy. it also separated policymakers at ministries even further from the front line and therefore from operational information needed to inform decisionmaking. sigh!
Not really an effectiveness argument per se; but there’s also the argument that even if government intervention isn’t inefficient, it simply represents a wealth transfer between individuals for no actual gain (ie a variation on the picking winners argument but without the inefficiency, but with a moral ‘why pick them over me?’ line). You see it regularly between importers and exporters over exchange rate adjustment arguments. (and in that context I’m sympathetic.
Also the variation on #5 that private enterprise is inherintely better managed than the public sector and therefore privtae activity is more efficient. I think there is plenty of work here that has yet to be done, but I flatly reject the notion in NZ. NZ’s public sector has its problems but by and large the agencies are much better run than any private sector organisation I’ve ever worked with.
More extreme, pre-Keynesian arguments could be adduced since they still seem to be around.
A: Periods of immiseration are necessary to strengthen the economy, purge out old failing businesses to make way for the new. Schumpeter’s gale of creative destruction’ should be allowed to wreak its damage; the new industries built from the wreckage will be better in every way, and the new jobs will be for life.
B: coupled with the above is the idea that unemployed workers are choosing a vacation over employment. (This is a more hard-line version of your #12, and a favourite of the Austrian School.)
C: Governments must at all times and places balance their books, because getting into debt is always bad, and the government getting into debt on our behalf is doubly so. This “government is like a household” fallacy-cum-moralising is getting quite a run at the moment, and it seriously impedes progressive programmes.
D: A variant of #7 (policy resistance) is used to “explain” why efforts to improve, say, gender pay equity or health in minorities–affirmative action in general–won’t work. Another re-statement is “you can’t legislate behaviour”.
E: Building on 5 (inefficiency of government): The role of government should be restricted to the bare minimum, which amounts to protection of property rights. This boils down to the feeling that “government is too big” and too invasive, things were better in the old days, etc.
F: Flat taxes are fair, because everyone pays “the same amount”.
With the exception of #s 7, 8, and 13, and (partly) my points C and G, all of the items listed assume that efficiency is the overriding value. The fact that the public sector addresses the other three facets of economic policy–social justice, stability, and growth–is just ignored.
Item 13 is merely an assertion, by the way. I am not familiar with the argument that backs up the Reserve Bank Act; the assertion is ‘honoured in the breach’ overseas.
Locating the “definitive statement” of these arguments is quite a challenge. Put them as baldy as they are here, and academics will write them off as straw-man arguments (despite the fact that many people, including some who should know better, believe these things more or less as stated). The definitive academic statement, on the other hand, will a) be in a journal article, b) for that reason, omit assumptions, conditions and qualifications that the usual readers of the journal would have as a shared context, and c) be made mainly through the medium of mathematics.
Searching the writings of Milton Friedman and Gary Becker might be a useful starting point in the search, though.
Thanks folks, that’s really helpful.
Anyone else who has suggestions — it’s not too late to add them!
David,
Absent #13, most of these arguments are microeconomic ones. I think that the list is too light on the macroeconomic case against intervention. Classical economic doctrine followed Says Law: “supply creates its own demand”. Free markets and flexible prices (including wages) would tend towards a fully employed equilibrium. Keynes challenged that doctrine, not just from an institutional perspective (wages and prices sticky downwards), but also through the liquidity trap etc generating an under-employed macroeconomic equilibrium.
The resurgene of neo-classism , which required free markets and a minimalist role for the state, created a macroeconomic imperative to resist government interventions, and was a respose to the supposed demonstration of the fundamental flaws of Keynesianism evident in the stagflation of the late 1970s (which had entirely different causes, but more on that some other day)
For the purposes of your list then, (and without the necessary cross-references – apologies) I would add
# Government interventions inevitably ratchet up levels of public spending, leading eventually to unsustainable public debt, which is exposed during economic contractions.
# Financing government spending depends on an expansion of the supply of money, which because it outstrips the supply of goods, is inevitably inflationary.
{The corrections required are obvious!}
Cheers for that, Peter. Useful additions! The ‘Say’s Law’ line of argument was part of what I was trying to get at with #8, although not framed in an exclusively ‘macro’ way. On reflection, though, there’s probably a few too many semi-related arguments bundled together there in #8. And I agree that distinguishing between ‘macro’ and ‘micro’ arguments is useful.
An interesting argument that came through in the VSM campaigns around my university:
If people spend money on something directly they are more invested in it and can control it by withdrawing their funding of it. When electing people you cannot choose to withdraw your support of particular initiatives. Thus they are unable to respond to demand.
Thanks Rob, and politicaldumpground.com looks like an interesting site (love the logo!).