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Quotation of the Day…

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… is from page 95 of the late Stanford University economic historian Nathan Rosenberg’s insightful 1992 paper “Economic Experiments [2],” as this paper is reprinted in Rosenberg’s 1994 book, Exploring the Black Box: Technology, Economics, and History [3]:

One of the less-heralded but considerable virtues of competitive capitalism has been the speed with which firms have unsentimentally cut their losses as it became apparent that a particular direction of research was likely to prove unfruitful. Where funds come from the public sector, by contrast, monies are likely to be spent on unpromising projects for rather longer. Inertia and the reluctance to admit failure publicly play important roles here, but so does the fact that the decision-makers in government are not personally concerned over the financial losses involved.

DBx: Yep.

When advocates of active state direction of economic activity say, as Marianna Mazzucato says [4], that “There is nothing in the DNA of the public sector that makes it less innovative than the private sector” they are mistaken. Such a statement reveals a failure to compare the incentive structures that are inherent in political decision-making to those that are inherent in private market settings. And while it’s true that incentives in each sector can be tweaked – and true also that incentives in neither sector are wholly imperfect nor wholly perfect – many of the incentives confronting political decision-makers differ fundamentally from those confronting decision-makers in the private sector. Indeed, the very rationale that the more-serious advocates of greater politicization of society offer for their proposals is that decision-makers in government have better – i.e., different – incentives from those that push and pull decision-makers in the private sector.

The full set of socially beneficial incentives that cause private markets to work well simply cannot be injected into the public sector. One can say or hope or imagine that public-sector decision-makers can be given all of the good incentives that are confronted regularly by private-sector decision-makers but without any of the incentives that people such as Marianna Mazzucato suppose – sometimes correctly, sometimes incorrectly – operate anti-socially in the private sector. But any such statement or hope or imagination points to a reality that is no more credible than is one in which cats bark, pigs fly, and ham sandwiches are kosher [5].