Some imagine the government as the neutral umpire, the objective referee who keeps the playing field level and fair. Others imagine government as the benevolent patriarch, reaching in with parental wisdom to adjust market forces. But neither of these images prevails.
Instead, governments routinely get in the way of wealth creation, and inhibit the very opportunities which they often claim to foster. James Buchanan, recipient of the Nobel Prize, sought to explain this quirky characteristic of governments, as journalist Dylan Matthews writes:
Buchanan is most famous for breathing new life into political economy, the subfield of economics and political science that studies political institutions, and in particular how they affect the economy. In particular, Buchanan is strongly associated with public choice theory, an approach which assumes that individual actors in political contexts are out for themselves, and then uses game theory to model their choices, with the hope of gaining insight into the incentives faced by political actors.
Policymakers have various motives, and the average of these motives - much like the net effect of several vectors in physics and engineering - determine their policy choices. Legislators are not thinking in the abstractions of equations and graphs which constitute academic economics.
Governmental regulators are flesh-and-blood human beings who are concerned about public perceptions, about private success, and whose preconceptions and ideologies shape their decisions with as much efficacy as empirical data.
Before Buchanan, economics was primarily about how individuals make choices in the private sphere. He was among the first to argue that it could explain their choices in the public sphere as well. Traditionally, economists have treated the government as a dictatorial “social planner” which is capable of impartially correcting failures in private markets. Buchanan's contribution was pointing out that that social planner also responded to incentives, and that they sometimes pushed him to make markets worse off than he found them.
Legislators, even those with the best of motives, nudge policies in suboptimal directions merely by being one of many vectors which will be averaged out: a perfect policy, when averaged with many other policies, does not steer policy toward perfection.
The legislators who have less than the best motives will clearly see opportunities for gain as they shape policy. This need not be flagrantly illegal or immoral, but merely an opportunity to benefit his constituency, which is, after all, the reason he was elected. But what benefits his constituents in the short term might harm others areas of the country in the long run, and therefore ultimately be suboptimal for everyone.
Government intervention will never be the crystalline abstraction which some academic economists hope it to be. At its best, it will be an approximation, an averaging of policies, in which even very good policies, when averaged, might produce less than very good results.
The safest conclusion, itself also not quite perfect, is to minimize regulation. Given that governmental intervention is never perfect, it would be wise to have as little of it as possible.
