As a libertarian, my general notion is that before government takes over, we should try liberty and free markets first. I’m radical like that. And when government intervenes and the problem isn’t fixed, perhaps the solution is not even more government intervention.
But whenever that argument is put to someone who disagrees, they often counter by saying, ”Government isn’t bad. Government is people.” That’s the argument used by frequent O’Reilly Factor guest, Dr. Mark Lamont Hill in a special by John Stossel.
But just because there are people in government, and we want to believe that people are generally good (despite all evidence to the contrary), that doesn’t mean that government is therefore good. By that logic, gangs and drug cartels are good. They are all made up of people, too, right? I’m not saying the government is as bad as a drug cartel (again, despite all evidence to the contrary). I’m trying to point out that the government is not just people, just as a firm is not just people.
What is a firm? Ask 10 economists and you’ll get 10 different definitions, but my best attempt is this: a firm is a collection of assets, long-term contracts, people and incentive structures designed to maximize profits. Change the people in a company and you often get different results. Change the contract structures in place and you’ll get a different outcome — just ask Netflix, who proposed a different form of video rental business that has helped destroy the traditional video store like Blockbuster. Change the incentive structure for your employees and suppliers, and you’ll get a different outcome.
Some incentive structures are good, and people are rewarded for working hard. Other incentive structures are bad. Take those evil subprime lending banks. Loan officers had an incentive to make NINJA loans (no income, no job, no assets) because they were paid a loan origination fee. Why take the risk of making bad loans for your company? Because the company could sell them off to Fannie Mae and the risk was no longer their problem. The incentives and contracts that were in place induced utility-maximizing employees to behave in a certain way that, in the end, was destructive to the economy. The collapse of the housing market should not have been a surprise if you just followed the incentives that were created from a) The Community Reinvestment Act and regulations requiring banks to lend to less-than-qualified borrowers or face regulatory scrutiny, b) loan companies that pay their loan officers a commission of every loan they make, c) Fannie Mae’s policy to buy more subprime loans, and d) securitization of these loans so that the risk was spread over a wide swath of investors. That doesn’t mean the banks who made the loans were bad — it means the laws, regulations and incentives all combined to create a bad outcome. And instead of blaming the laws they put in place, people in Congress simply villify the banks.
I recently tried to save my university money by buying a 3-year membership to the Western Economics Association International instead of a 1-year membership. One year was $60, 3 years was $125. I opted for the 3-year “green” membership to save money and trees, which cost me $110. When I applied for reimbursement, so that the $110 would come from my professional development fees, I was told that I’m not allowed to buy a 3-year membership, and must buy a 1-year membership instead. Instead of being thanked for saving money for the university, I was told that we’re not allowed to do that. Do I think that the person who e-mailed me informing me of this policy is bad? No — she’s just doing her job. There’s a reason for the rule (so that all payments are counted in the right fiscal year), but that doesn’t make it a good rule overall.
So when people like myself say they distrust government, or think government is bad, please don’t counter with the simplistic argument that “government is people.” Government is a set of laws, institutions, and regulations that often end up rewarding people for behaving in ways that are not optimal for the economy or society as a whole.