Dealing with Mistakes: Government Action versus Private Action

36928961 - supreme court of united states columns row in washington dcGovernment can hardly ever do just one thing. Its action has repercussions, and these repercussions have repercussions, and so forth. Even when the government’s initial action may seem compassionate or productive, it is highly unlike that the repercussions will prove likewise.

Of course, private action also has repercussions, some of which may be unpleasant or harmful. But in the private sphere, the likelihood is much greater that people will respond to the negative feedback of information about adverse repercussions by finding diverse ways to rectify mistakes that have been made, whereas in the government sphere any bad action will either generate no negative-feedback incentive for rectification of mistakes or will, instead, only set in motion a Madisonian-Misesian dynamic in which one cruel or destructive action becomes the initial link in a long chain of reactive interventions, each as adverse as the proceeding ones, if not worse.

Scholars and analysts have put a great deal of effort into the design of economic systems or arrangements that will give rise to optimal outcomes. Usually, however, the model is premised on the assumption that decision makers make choices that reliably yield the result they seek. Such an assumption, in general, does not describe the real world, where the intrinsic uncertainty associated with physical, technological, social, and economic variables, among other things, guarantees that mistakes will occur. So, the crucial question is not simply how to choose the best course of action, but also how best to respond to errors when they occur.

State bureaucracies are notoriously inept in reacting constructively to their own mistakes. For example, they continuously seek to increase their budgets, staffs, and authority, even when their projects have proven counter-productive or disastrous. It’s almost as if they promote their institutional objectives best by fouling up their programs, then coming back to their funding sources to explain that they cannot succeed unless they receive more resources to do so. Thus do public agencies pour money and effort down the rat hole for years on end, wasting the public’s money every step of the way. The feedback system in this case is obviously perverse so far as serving the public interest is concerned.

Such perversity is practically guaranteed in government operations because government operates outside the realm of private property rights, the price system, and the profit-and-loss accounting that constitute a feedback system in the market realm. In the market, money-losing projects do not persist indefinitely. Their owners and managers eventually decide against throwing good money after bad and close the unprofitable operations. Owners who refuse to read and respond correctly to the clear message transmitted by profits and losses suffer reductions of their own wealth, which serves as a powerful incentive to act correctly and to rectify the mistakes they have made before even more wealth goes down the drain.

So, to return to the initial thought, government cannot do just one thing, and some of the repercussions of what it chooses to do will be, as it were, mistakes in the perspective of the public even if the initial action were not. But the public’s dissatisfaction with these adverse outcomes can make itself known only via the politically charged process of complaint to authorities, petition for redress of grievance, lobbying, payoffs to public officials, and all the rest of the endlessly complex apparatus for the operation of the government’s political and bureaucratic setup. One is lucky to get any constructive response at all from the government, whose effective control is apt to be in the hands of entrenched politicians, bureaucrats, and private-sector cronies in the various iron triangles that pervade the state at large. If one does succeed in getting a constructive response, it is likely to come forth only after years of expensive and time-consuming delays.

This lack of an effective feedback-incentive mechanism is among the greatest flaws of all government activities. Markets, in contrast, are certainly not perfect relative to the model criteria economists have devised to evaluate them, but they are undoubtedly superior in the operation of their feedback information and response to mistakes. To remove an activity from the market and place in under government control is to ensure that henceforth mistakes, whether they arise from bad judgement, corruption, or ignorance, will not elicit a proper or timely response. In the government realm, mistakes and the slow, counter-productive responses, like doomed lovers, sink together slowly in the quicksand of bad actions being made ever worse by ill-fated reactions.

To understand how once-thriving countries ended up as disasters such as Argentina or Venezuela, just think of their histories in the light of the considerations laid out in this post. What happened in those countries can surely happen elsewhere. Indeed, the United States of America has already traveled far down that disastrous path.

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.
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