Quotation of the Day…

by Don Boudreaux on December 23, 2017

in Hubris and humility, Myths and Fallacies, Prices, Trade, Virginia Political Economy

… is from page 54 of the 2008 Third Edition of the late Vincent Ostrom’s 1973 volume, The Intellectual Crisis in American Public Administration (original emphasis; footnote deleted):

No one can know the preferences of other persons unless they are given opportunities to express their preferences.  If public agencies are organized in a way that does not allow for the expression of a diversity of preferences among different communities of people, then producers of public goods and services will be taking action without information about the changing preferences of the persons they serve.  Expenditures will be made with little reference to consumer utility.  Producer efficiency in the absence of consumer utility is without economic meaning.

DBx: Yes.  Indisputably yes.

Among the most persistent myths of modernity is that political elections are a means at least as sound as are competitive markets for eliciting, processing, and distributing to all concerned parties accurate knowledge of individuals’ preferences.  Volumes of public-choice theory and research – public-choice 1.0 and public-choice 2.0 – reveal the many reasons why even the finest and most democratic political institutions operate with surprisingly poor knowledge of the preferences of the individuals whom those institutions in theory are supposed to serve.

And this lack of adequate knowledge occurs not only when the state takes over completely the provision of some good or service; it occurs whenever the state obstructs competitive markets.  Consider tariffs, which are often justified in the home country as a means of improving markets when foreign governments obstruct markets.  Foreign-government obstruction of markets is unquestionably regrettable (although this obstruction is regrettable overwhelmingly for those governments’ citizens and not for people who do not live or invest in those countries).  The global market adjusts to such obstructions with changes in product offerings and relative prices.  But when the home-country government – feigning a concern for the ‘efficiency’ of global markets – imposes ‘countervailing’ restrictions on its own citizens’ abilities to trade globally, the home-country government introduces further obstructions on the global market.

While in theory one can often portray on a whiteboard or in a journal article just how these ‘countervailing’ restrictions might promote greater efficiency in the global market, in practice there is simply no reason to suppose that the outcomes of any ‘countervailing’ restrictions are anything other than the creation of additional inefficiencies in the global market.  These additional inefficiencies result largely from the further destruction of knowledge-flows caused by the ‘counterveiling’ obstructions.

Among the relevant implications of Ostrom’s last-quoted sentence above is this: government obstructions of their own citizens’ freedom to trade, while often sold as a means of promoting greater efficiencies either at home or in the global market (or both), destroy much of the knowledge necessary not only for assessing whether or not home-country firms are producing efficiently, but also for actual use by firms and consumers to incite firms to produce more efficiently.


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