Why Government Fails so Often--and How It Can Do Better.

• Author: Munger, Michael
• Position: Book review

Why Government Fails so Often--and How It Can Do Better

By Peter Schuck

Princeton, N.J.: Princeton University Press, 2014.

Pp. x, 471. $27.95 cloth.

Many economists think "government failure" derives from "market failure." If markets are the default way of organizing human activity, problems arise when these processes "fail" to achieve "Pareto optimality" or gains from mutual cooperation. Government then arises to provide public goods, correct for information asymmetries, internalize externalities, regulate natural monopolies, and so on. But giving this power to the state has a dark side: if the state apparatus goes wrong, we have government failure. Nevertheless, the state is useful overall and in fact necessary, dark side or not.

Nobody else thinks that way, which may explain (along with the plaid sport coat) why economists often stand alone at cocktail parties. Defects in state action may be analogous to market failure. But it is important to recognize that government failures are prior to market failure. Further, the problems are not the consequence of hiring "bad" people but are instead systematic problems in the way government works. As Adam Smith put it, "It is the system of government, the situation in which [people] are placed, that I mean to censure, not the character of those who have acted in it. They acted as their situation naturally directed, and they who have clamoured the loudest against them would probably not have acted better themselves" (The Wealth of Nations [1776], book IV, chap. 7, para. 193). Smith was talking about the employees of the East India Company in this passage. But the insight is a general one: the failure of a system of organization often arises from the incentives, the logic of action, or the inconsistencies inherent in that system. The people who work in that system probably act in much the same way that other people would act if they found themselves in that system.

The "public choice" tradition of scholarship, operating along the hedge between politics and economics, has recognized that government failure is a primitive, not a derivative, feature of attempts to organize groups of people in a society. The results of this body of scholarship might be summarized in terms of "problems" of government:

Aggregation--the Arrow Problem

Collective Action--the Olson Problem

Delegation and Agency--the Niskanen/McNollgast Problem

Information--the Hayek Problem

Institutions--the North/Ostrom Problem

Limitation--the Buchanan Problem

Rent Seeking--the Tullock Problem

This is an enormous body of scholarship, some of it very influential (there are five Nobel Prize winners on that list) in the study of law and government. The reason that public choice is important in this context is that it examines government--or, as early versions of the approach had it, "nonmarket institutions"--as a...