Is it theoretically possible for government-intervention X to improve human welfare?
The question seems straightforward, but it’s actually more complex than it appears. The reason for this complexity is that the question unjustifiably presumes a simple answer to the meaning of “theoretically possible.” If “theoretically possible” means that a welfare-improving outcome exists and can be achieved without violating laws of physics and of logic – and if, further, it’s possible to give responsibility for designing and carrying out the policy to an omniscient being – then it is theoretically possible for a huge number of government interventions to improve human welfare. Indeed, the case for the free market in such an imaginary world would be very weak, especially if we also assume that government officials are angelic.
But if among the constraints in our theory is the impossibility of human omniscience – or the impossibility even of knowledge that’s superhuman – then the number of government interventions that can, even in theory, improve human welfare is greatly diminished.
Incorporating as part of one’s economic theory human beings’ inability ever to be fully informed, many propositions that are said to be “possible in theory but unlikely in practice” become impossible even in theory.
An example: If creatures with god-like knowledge were in charge of designing and carrying out industrial policy, it would be theoretically possible for these creatures to use tariffs, subsidies, and other interventions to achieve outcomes that are superior to outcomes that are achieved on free, real-world markets in which all agents are ordinary human beings. It’s common practice even for skeptics of government intervention to say that, “Therefore, while theoretically industrial policy might work, it is unlikely to work in practice.”
I believe that the more-accurate assessment of the conclusion of an economic analysis of industrial policy that uses realistic assumptions about human beings is that “It is theoretically impossible for industrial policy to outperform free, real-world markets.” Being able to describe outcomes achieved by government officials possessing superhuman knowledge does not establish the theoretical possibility of government policies run by ordinary humans achieving the outcomes that would be achieved by government policy run by superhumans.
The above thought occurred to me as I reviewed earlier today some history-of-economic-thought on the so-called “infant-industry protection.” J.S. Mill, Alfred Marshall, Frank Taussig, and some others argued that infant-industry protection can work in theory under certain conditions. This conclusion is true, but only if the government officials in the economic model are assumed to possess superhuman knowledge. If instead the government officials in the model are assumed to have no more capacity for gathering and processing information and knowledge than do ordinary human beings, then it is theoretically impossible – not just practically unlikely – for infant-industry protection to improve the overall performance of the domestic economy except by pure dumb luck.
That which is transformed from “practically unlikely” to “theoretically impossible” only further expands if we include as part of the description of the agents in our economic theories human self-interest (that is, exclude the possibility of human agents consistently acting as angels).
It’s long past time that economists (and other social scientists) quit not only assuming that that which is possible to be achieved only by creatures with superhuman knowledge supplies relevant benchmarks for assessing real-world outcomes, but also to quit treating such outcomes as being theoretically achievable. They’re not achievable, not even in theory. When theory is properly done, such outcomes are prohibited.
No one would dare say, “In theory it’s possible to reengineer porcine genes so that pigs will fly.” Yet just as silly is an economist saying, “In theory, government officials can impose tariffs and dispense subsidies in a manner that will result in economic outcomes superior to those achieved by free markets.” Or, at any rate, such a statement by an economist will remain silly until someone offers a theoretically compelling reason to believe that government officials can gain access to all the detailed knowledge that is routinely used by the millions of individuals in markets.