Why Government Shouldn't Be "Run Like A Business"

A common refrain from some conservatives is that "government should be run like a business." That means that government should attempt to emulate the free-market system to make itself more efficient. But they fail to understand this truth: government and markets are two different things; the former depends on the use of force while the latter depends on the use of voluntary exchange. The twain shall never meet, and the best system is one where the government exists only in a very limited state (or not at all) and never interferes in the voluntary exchanges that occur in an economy. The only interventions allowed are to prevent fraud and aggressive violence.

C. Jay Engel at The Reformed Libertarian has written an insightful piece on this entitled "Must We Pursue Efficiency?", which I think is helpful in addressing some of these common myths.

Says Engel:

All that said, we often hear, correctly, that the establishment in Washington wants to keep spending, borrowing, wasting money, growing its size and influence, and become more and more involved in every aspect of the global marketplace.  Against this trend come some well-meaning and self-described conservatives who have as their aim to make “government more efficient.”  That is, we are told, the “leaders” ought to run DC like a business!  ”No more wasting money!”

If you ever hear someone, usually coming from businessmen like Herman Cain and Mitt Romney, claiming that the way to “fix” this broken government is to run it like a business, realize one thing: their entire goal is to perfect government operations and “save” the government which has in the past been mismanaged.  Now, we must tread carefully here.  The problems with this sentiment is not that business is bad, that capitalism is problematic, or that rich people ought to be ostracized.  The problem with the Cains and the Romneys of the world is not that they are free-market oriented.  The problem is that they are too socialistic.  For if government is the problem in our modern economy –and society –then our goal should never, ever, be to make it stronger and to “fix” it.

What we must realize is that for all the talk of “fixing” Washington, there are much fewer objections stating that Washington is a parasite which leaches, and sucks the blood from, the true economy of productivity and growth.  In other words, by “fixing” the government to make it run better, the continual down spiral of the American economy would be inevitable.  We should aim to fix the economy, not the government.  And how should we fix the economy?  By making government smaller, not by making it better!

And Robert P. Murphy, a free-market economist, has pointed out that government can't be run like a business based on sound economic reasoning.

Says Murphy:

According to a common but naïve worldview, there are objective, well-known techniques for producing various goods and services, and the consumer preferences regarding these outputs are also common knowledge. In such a worldview—which even many professional economists, in discussing policy, seem to hold—it seems only natural to conclude that government officials could improve upon the decentralized market outcome. After all, the government has access to the same "production function" as private firms, and if it decides to be the monopoly producer of a good or service, it can avoid wasteful advertising expenses and other redundancies. Such arguments were behind the proposals for outright "market socialism" in the era between World Wars I and II, and, to this day, they guide recommendations for heavy government regulation of "natural monopolies" such as utilities. 1

However, more-practical economists recognize the limits of their textbook diagrams with elegant marginal revenue and marginal cost curves. In reality, we operate in a world of uncertainty. The "least cost" method of producing a good or service is never obvious, nor is what consumers will be willing to pay for various items. In a famous lecture, "Competition as a Discovery Procedure," Friedrich Hayek explained how markets in the real world stumble upon this hidden knowledge.2 Various people with access to different information make piecemeal discoveries and constantly modify their operations accordingly; they receive feedback from market prices in the form of profit or loss. Firms mimic particularly profitable innovations, and if a firm does not adapt quickly enough, it will go out of business. Hayek thus viewed competition as a process rather than a condition or end-state. The state of "perfect competition" described in the textbooks—which includes the property that all firms in an industry use the identical "least-cost" method of production—is actually something that would emerge over time only because of the competitive rivalry between the firms, and only if the conditions in the real world remained static long enough for all firms to fully adapt. 

From this Hayekian perspective, we have little reason to expect government provision of a good or service to reduce costs, if only because such an institutional arrangement limits the number of minds brainstorming on how to cut costs. Under competitive free entry into an industry, and even into a "natural monopoly," an outsider always has the freedom to supplant the established firms if he or she comes up with a new, cost-saving idea. Thus, in principle, the entire society contributes to solving the problem of minimizing costs in the particular industry. 

In contrast, with government provision (or government anointment of one firm as a regulated monopolist), there may be only a few people who can contribute to cost-saving innovations. This insight provides a strong reason to expect government-managed enterprises to have higher costs of operation than a private-sector firm would have—out of sheer ignorance. In this view, government officials waste money and offer shoddy output relative to private managers, simply because they don't know any better. 

Beyond these subtle problems of knowledge is the stark issue of incentives. If a government enterprise is funded through tax dollars, it does not face the same market test as a genuinely private business. The problem is all the more severe if the government grants an outright monopoly to the enterprise. The bureaucrats running it have little reason to cut costs or to please their "customers" if they receive a guaranteed level of funding regardless of their outcomes. In an extra twist of perversion, when a government agency botches its job, it often receives more funding. In this view, government officials waste money and offer shoddy output simply because they can.

These two truths prove that no matter what one tries to do, one cannot make the government to be like a free market. They are two very different spheres, and they will never meet, nor should they.