The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [119]
A year before the election of Reagan and ten years before the fall of Berlin wall, Thatcher launched an attack against the bureaucratic state, referring to it as the “greedy and parasitic public sector.” The result of these campaigns and the governments of these two leaders was an era of intense dissatisfaction with government bureaucracy.
The search for a more effective government continues, not least in the way the financial sector is regulated. The earlier discussion about the challenge of government debt, and the crises of fairness and trust, will make it plain that public sector reform remains an urgent issue. I’ll return later to the question of what shape it might take, given the scale of interrelated crises of sustainability described in the first half of this book. For now, we should note that although there is a clear appetite for more active and effective government, the history of public service reform, and even more the dismal history of the government-run, centrally planned economy, is disappointing.
Government failure has been a widespread reality.
Indeed, governments fail in many of the same kinds of contexts in which markets fail, and for the same reasons. Neither form of organization can deliver good results in contexts where there is asymmetric information, meaning that one person knows something that others cannot monitor in any way—for example, how much effort they’re putting in to their work, or how hard a task requiring certain skills actually is to carry out (think about calling a plumber to fix a leak—you have to trust his diagnosis; likewise with doctors or teachers). That asymmetry will often be linked to a principal-agent problem: public sector workers (agents) are carrying out tasks for citizens and taxpayers (principals), in the way that corporate managers are working for shareholders. The advantage in those relationships is on the side of the agents. Whether a certain task is in the public or private sector will not change the information structure. “Public goods” (in the economist’s sense) retain their characteristics making them hard to price and manage no matter who is providing them.
In addition, in both markets and government activities, there may be transactions costs in conveying very detailed and specialist information. One branch of economics has long recognized that very many transactions cannot occur in a market because of the kinds of externalities and information asymmetries listed above. This is why institutions such as firms exist at all. The classic example in the literature of institutional economics14 is a vertically integrated business that cannot rely on external suppliers because of inadequate information and/or a lack of trust in dealing with another business with its own incentives.15
A BROAD INSTITUTIONAL FRAMEWORK
There are problems or “failures,” then, with the two approaches to managing the economy that are usually taken to be both the only alternatives and mutually exclusive: markets and governments. However, this is an impoverished view of how economies operate. The array of institutions and rules is much wider. Families, firms, unions, and voluntary organizations are types of economic institution as well. So are informal arrangements such as car-pooling, babysitting circles, PTAs, and so on—sometimes described as civic society. Some thinkers, especially on the right, argue that the growing role of government in the economy has suffocated too many alternative economic institutions.16
In a famous passage, Nobel laureate Herbert