The anatomy of government failure
Date
2015
Authors
Keech, William R.
Munger, Michael
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Kluwer Academic Publishers
Abstract
Government failure is a much bigger problem than its contemporary treatment
implies. Setting aside natural disasters, most of the great catastrophes of human history
have been government failures of one sort or another. We argue that many so-called market
failures are government failures because government defines the institutions in which
markets succeed or fail. The concept of government failure has been trapped in the cocoon
of the theory of perfect markets. Narrowly defined deviations from market perfection have
been designated market failures, for which government corrections may or may not really
be a solution. Government failure in the contemporary context means failing to resolve a
classic market failure. We propose an alternative approach for evaluating whether government
fails: the Pareto standard. If an available Pareto improvement is not chosen, or is
not implemented, that is a government failure. We organize government failure into two
types: substantive and procedural. Substantive failures include the inability or unwillingness
to maintain order, to maintain sound fiscal and monetary policies, and to reduce
risks of transaction costs, which we classify as corruption, agency and rent-seeking. Procedural
failures are inadequacies of available social choice mechanisms, causing collective
decisions to be arbitrary, capricious, or manipuated. We conclude with some reflections on
human rationality and the implications of behavioral economics.
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2037-12-31