In a recent EconLog blog post, Alberto Mingardi justly praised Tyler Cowen’s latest book, Big Business. In that post, Mingardi favorably quotes, directly from Cowen’s volume, this passage: “So many of the problems with business are in fact problems with us, and they reflect the underlying and fairly universal imperfections of human nature. Yet we respond to this truth somewhat irrationally.” (The irrational response to which Cowen refers is hostility to business and the resulting support for government-imposed restraints on business activities.)
Reacting critically to Mingardi’s approving quotation of Cowen, commenter “Thaomas” wrote that “this marks the exact spot or one of them where Cowen fails to consider how we might through taxes, subsidies, regulation, or reassignment of property rights mitigate those problems. But of course this requires a very fine-grained response not one based on loving business more or less.”
“Thaomas’s” point is that government policies toward business should be judged not by any principles against or for intervention but, instead, by objectively analyzing in each particular instance if and how government can intervene in ways that yield benefits greater than costs.
This attitude toward government intervention is almost universally shared among people, such as “Thaomas,” who think of themselves as pragmatists – reasonable and objective people who are neither bridled nor blinkered by ideology. After all, who but an ideologue opposes government intervention that yields benefits greater than costs?
The Pragmatists’ Ideology
Deeper investigation, however, reveals a false pretense with “Thaomas’s” seemingly objective approach to government policy-making - namely, beneath its surface this approach is just as ideological as is that of libertarians who oppose nearly all government intervention.
Re-read “Thaomas’s” criticism of Cowen and ask this question: In what sort of world would this criticism make sense?
For “Thaomas’s” criticism to begin to make sense at least two conditions must hold. First, government officials must possess enough knowledge to intervene productively into the affairs of individuals acting in markets. Second, these adequately informed government officials also must have incentives to intervene productively into the affairs of individuals acting in markets.
Alas, in reality, these conditions are met only rarely.
Nothing is easier than observing the countless ways in which reality comes up short of the ideals that we can conjure in our imaginations. And almost as easy is imagining how god-like creatures could intervene to move reality closer to our imagined ideal outcomes.
But government officials are not god-like creatures. They are human beings no different in brain capacity or in motivation from the human beings whose actions in markets produce outcomes that are less than ideal. As such, there is no reason to suppose that giving government officials power to override market outcomes will generally improve upon those outcomes.
Pragmatists will respond by insisting that, precisely because people acting in markets have the same limitations as people acting politically, we libertarians, blinded by ideology, err in our wholesale opposition to government intervention. Pragmatists declare that the proper and objective approach is to assess the merits of intervention on a case-by-case basis.
Knowledge and Incentive Problems All the Way Up
But the ones who err are the pragmatists. The same knowledge limitations that counsel caution when considering any particular government intervention also counsel caution when considering what we might call a ‘policy of pragmatism.’ How will anyone know when intervention will likely work and when it won’t? The individuals who must make this determination in each case are always flesh-and-blood human beings.
Although pragmatists concede that government officials in some specific cases lack sufficient information to intervene successfully, pragmatists nevertheless assume - usually unawares - that government officials (or their advisors) do not lack sufficient information to determine when intervention will work and when it won’t. Yet this assumption is unwarranted.
The very same limitations on human knowledge that even pragmatists admit prevent government officials from successfully intervening in many specific instances also prevent government officials (and their advisors) from successfully distinguishing those real-world instances in which intervention is likely to ‘work’ from those real-world instances in which intervention is likely to fail.
This problem is compounded when we consider incentives. The same government officials who, in specific instances, have poor incentives to intervene in ways that promote the general welfare also have poor incentives to distinguish instances in which the general welfare will be improved by intervention from instances in which the general welfare will be damaged.
In short, the same government officials who are not god-like when charged with carrying out particular interventions do not become god-like when charged with deciding “pragmatically” when to intervene and when not to intervene. Yet pragmatists’ ideology holds that government officials can indeed be trusted to intervene pragmatically only when intervention will improve the general welfare.
And note: the indisputable fact that it is possible to describe theoretical conditions under which intervention will succeed does almost nothing to give real-world government officials the information necessary to intervene successfully - and it does absolutely nothing to give real-world government officials the incentives to intervene successfully.
Because free markets typically give to producers as well as to consumers strong incentives to use their unique bits of knowledge in ways that promote the general welfare, that both the knowledge problem and the incentive problem exist at all levels of government decision-making means that what is warranted is a strong and general presumption against government intervention – or, worded differently, what is warranted is an ideology of freedom.