Government as Administrative Assistant

Noah Smith offers a practical critique of privatization of government services:

irreducible transaction costs are a fly in the libertarian soup. Completing an economic transaction, however quick and easy, involves some psychological cost; you have to consider whether the transaction is worth it (optimization costs), and you have to suffer the small psychological annoyance that all humans feel each time money leaves their bank account (the same phenomenon contributes to loss aversion and money illusion). Past a certain point, the gains to privatization are outweighed by the sheer weight of transaction cost externalities.

For certain things, government provision relieves individuals of the mental burden of engaging in numerous small transactions while imposing only relatively minor costs.  Noah argues that such a society “feels freer”.  This is an interesting argument for government intervention, and Noah makes a convincing case.  The anarcho-capitalist utopia does seem like a huge hassle doesn’t it?

How would a libertarian reply?  Perhaps by suggesting that institutions would emerge to relieve the individual of many of the expected burdens.  For instance, one might be able to join a group that allows access to a network of parks, benches, and roads for a periodic fee, thus eliminating the need to initiate a separate paying transaction every time one wants to sit on a bench.  One might also add that we have no idea what would happen, but if these hassles were a big problem for people, the market would probably find a way to fix them.

That said, unless you are writing your libertarian manifesto, it’s hard to disagree with Noah.  Arguing for real-world action on the finer points of libertarianism can get you into trouble.  Do you really want to lead the fight against government-provided parks?  You might even be right, but who cares.  There are more important things.

PS: The comments on Noah’s post are worth reading.

Advertisements

About brianbergfeld
I am an economics PhD student at Washington University in St. Louis.

5 Responses to Government as Administrative Assistant

  1. Adam says:

    Libertarian Manifesto? Nice.

    I’m also inclined to agree with Noah, and this post reminds me of some arguments made in previous discussion sections (the great privatising fire dept. debate comes to mind). The key point here is that government run services, while eliminating the possibility for free enterprise in that space, does serve the purpose of relieving consumers of constant evaluation of the best possible option in all transactions. It also excuses some necessary services (fire, parks) from the inherent state of flux of the market system. I know the fire department will show up if I need them to, my fire department isn’t going out of business, and I don’t have to think about it any further than that.

    I appreciate Bergfeld’s attempt at the Libertarian response, and I also appreciate his acknowledgement of its impracticality. Always good to be reminded that Bergfeld is not himself pinning a Libertarian Manifesto.

  2. brianbergfeld says:

    “The key point here is that government run services, while eliminating the possibility for free enterprise in that space, does serve the purpose of relieving consumers of constant evaluation of the best possible option in all transactions.”

    Right on. And let me add that one could reasonably come down on either side of a debate over the privatization of any particular service, and such services probably have to be considered on a case-by-case basis. Do I want government provision of roads? Sure. Do I want government to build automobiles? Not so much. I don’t know if there is a general principle here to help one develop a simple decision rule.

    In most of these cases, I typically believe privatization would be fine, perhaps even slightly better than government provision, but if they are about the same, I don’t really care.

    I have a hard time appreciating libertarian arguments when applied to local government questions. For three reasons. First, the issues are typically just not that important (who cares who does it, I just want it done right). Second, individuals can usually have more influence on local government than state or federal government. Third, if they don’t like the way their local government is run, many people have the ability to move to another place with a different local government. I think local governments are often more akin to neighborhood associations than they are the federal government. Even in relatively large cities, their concerns are mostly related to the everyday problems of running a city. Federal government is much different, of course, and libertarian arguments are more applicable at that level.

    Oh and I never said I wasn’t writing a Libertarian manifesto. It’s titled “1-2-Free” and I will be self-publishing it as soon as I finish my rap album.

    • Adam says:

      On the point of defining a principle, I believe it typically comes down to public goods are often best provided by governments, whether local or central. Policing, fire fighting, roads, defense, public parks, etc. The key here is obviously the definition of public good.

      “In most of these cases, I typically believe privatization would be fine, perhaps even slightly better than government provision…”

      I hate to disagree with Bergfeld, but I can’t get on board with privitization being better in these cases. It is difficult for me to believe that the private sector would administer parks better than the government. Probably a deeper discussion than this forum will allow. And I’m just kidding, of course. I love to disagree wtih Bergfeld.

      On the case of libertarian arguments falling short on local government questions, I am inclined to agree wholeheartedly. Another way to look at it would be to say that democratic process works best when the ability of citizens to influence government is optimized – the local government level being the most immediate in this case.

  3. Pingback: Zoning and Miracles « Brian Bergfeld

  4. Pingback: Brian Bergfeld

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: