Feedback and Correction in Government and the Market.

AuthorHiggs, Robert
PositionEtceteras ... - Column

Comparisons of competing institutions often turn on theoretical models of how, say, a government or a market may be expected to produce particular outcomes under ideal conditions or under specified less-than-ideal conditions. For example, neoclassical models of so-called perfect competition show that in equilibrium the perfectly competitive economy brings about an efficient allocation of resources. Altering the assumed conditions to allow for, say, the existence of negative externalities in certain markets, the altered model shows that the less than perfectly competitive economy brings about an inefficient allocation of resources. Finally, a model with government intervention shows how the government uses taxes, subsidies, or regulations to remedy the inefficiency produced by the economy with negative externalities. Such comparisons contrast one equilibrium with another. In each case, the outcome is imagined to reach its equilibrium by virtue of the assumed structural conditions and the incentives they create for actors in die model. But rarely do analysts stop to consider how the contrasting institutions operate if something goes awry before an equilibrium is reached. In a perturbed situation, what is the path to a reestablished equilibrium? Who does what along this path? And what incentives drive these actions?

To understand how competing institutions correct or fail to correct themselves when something is amiss, we must consider how feedback reaches the actors and the incentives they have to respond appropriately to that feedback. One might, therefore, contrast not a perfectly competitive economy and a government-shaped economy but rather an economy with effective feedback mechanisms and responsive actors and an economy with ineffective feedback mechanisms and unresponsive actors. This characterization, it turns out, amounts to a contrast between a real-world market economy and a real-world government-distorted economy.

Consider a workaday example: a comparison of my dealings with Walmart and my dealings with the state Department of Motor Vehicles (DMV).

First, notice that my dealings with Walmart are entirely voluntary. No Walmart agent threatens me with punishment or violence if I abstain from shopping at that store. Second, when I go there, the employees are courteous and helpful. If I ask them where I can find a certain item in the store, they either tell me or, often, take me there and show me the item on the shelf. Third, the price...

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