In my latest column for AIER – a column inspired by a recent, superb blog post from Arnold Kling – I argue that government and the market, when considered as alternative means of achieving some particular outcomes, differ from each other categorically. (By this claim I mean more than that government is coercive while markets are voluntary.) A slice:
The single most important difference separating market action from government action is this: Unlike decision-makers in government, decision-makers in markets have access to detailed and reasonably reliable information about the net effects that any of their decisions are likely to have on all affected parties. In addition, decision-makers in markets also are uniquely incited to take those actions, and only those actions, that produce the largest possible positive net effects on affected parties.
The fact that the information available in markets is imperfect is indisputable. Also indisputable is the fact that even well-informed market actors often err. But equally indisputable, if not as widely recognized, is the reality that markets have (as an essential feature of their operation) a built-in process for detecting and correcting error, and thus taking into account over time as much relevant knowledge as possible. No such process exists in government. Because of this categorical difference, any supposed substantive symmetry between market action and government action is imaginary.
The foundational (if not the only) advantage of relying upon markets rather than upon government to supply, say, shoes is that only in markets is there a reliable source of information about which varieties of shoes to produce and how to produce these varieties efficiently – that is, how to produce these varieties of shoes in ways that leave as many resources as possible available for the production of goods and services other than shoes.
The amounts of their incomes that consumers choose to spend on Crocs, Nike sneakers, and Gucci loafers registers the intensity of consumers’ demands for each of these kinds of shoes relative not only to consumers’ demands for other kinds of shoes but also relative to their demands for all other goods and services available for sale.
The prices of each of the different varieties of shoes convey at least two critical pieces of information. First, the prices of Crocs tell entrepreneurs just how much consumers are willing to pay for Crocs compared to how much consumers are willing to pay for sneakers and loafers, and compared also to how much consumers are willing to pay for hamburgers, honey, housing, books, bananas, baseballs, and every other good or service currently for sale on the market. Second, the prices of Crocs relative to the prices of the inputs that might be used to produce Crocs tell entrepreneurs both if consumers’ desire for Crocs is high enough to justify using resources to produce Crocs, and, if so, just how many pairs of Crocs to produce.
If, as is usual, there is some unexpected change in the market (for example, consumers suddenly lose their taste for Crocs), consumers today will not be served as well as possible. Ditto if entrepreneurs as a group commit some error (for example, fail to notice the high consumer demand for blue suede shoes). Too many resources today will be devoted to producing Crocs while too few resources are used to manufacture shoes of blue suede. As a result, the prices of Crocs will fall relative to the prices of other goods and services, while that of blue suede shoes will surely soon be noticed by profit-seeking entrepreneurs to be high enough to justify increased production of this particular style of footwear. Such price changes, and more accurate recognition of existing prices, render what might be described as today’s inefficiencies (or market ‘failures’) as, also, today’s profit opportunities. Guided by prices, entrepreneurs will profit by shifting resources out of the production of Crocs and into the production of other items, including blue suede shoes.
Entrepreneurs who are insufficiently alert to market realities as revealed in the prices of both inputs and outputs, or entrepreneurs who are too incompetent to act profitably on market information, suffer losses. These entrepreneurs thus wind up ‘controlling’ fewer resources, with greater amounts of resources coming to be ‘controlled’ by entrepreneurs who are more alert or more competent.
The self-interest of entrepreneurs combines in the market with the self-interest of consumers and input suppliers – and also with the ability of consumers and input suppliers each to say ‘no!’ to offers they judge to be unattractive – to cause opportunities for improving the allocation of resources to be revealed in market prices. Again, such information is never revealed perfectly. Nor is it ever acted on with only unalloyed expertise. But the very essence of the market process is to reveal such information and to incite everyone in the market to act on it.
No such process of information revelation is available for government action. Precisely because government intervention into markets is intended to disregard or to override market signals, government officials, if they are to improve the welfare of citizens, must have access to information that is superior to that which is available on markets. But government officials, in fact, not only have no superior source of information, they have no good source of information at all. The best they can do is guess.