Thursday, November 18, 2010

Game Theory and Government

After a couple of blogs on game theory, let's now tackle how it fits with government. I already mentioned the foolishness of city governments throwing taxpayer money after professional sports teams. Sports leagues make sure that a city has essentially no added value. That leaves the league with all the power in negotiations so the league and the team owner win every time

However professional sports are small potatoes compared to other government functions. What about those? Do they have added value? The answer is that some do, some do not.

At its best government provides added value in what economists call external benefits. That is benefits not worth the price to any individual user but useful to enough people to make them worth the cost in the aggregate. For example few companies would find it worth the cost to build a road for their customers. However if we consider all the users of that road it becomes worth the price. Government can use tax money to build the road which then gets used by not only that company but nearby businesses, shoppers, even visitors from far away. The road provides external benefits.

Notice that if there were no government there would probably be no road. The value of the road represents added value provided by government. Whether that value exceeds the cost is another question but that is not our concern here.

Police and fire departments also provide added value. Few homeowners could afford their own fire department but the city or county as a whole can spread the cost over all citizens. The fire department can then save homes and lives as well as lower insurance costs. It represents an added value.

However many government expenditures add no value to the game. What happens in a typical economic bail-out? The statists would claim added value because they think it really helps the economy but does it? So far in this crisis our government has saddled us with huge debts, yet unemployment remains high. Where is the added value in that? The fact is that such programs merely move money from one pocket to another, they do not create goods or services. Instead they take money one business or person might have used to create wealth and give to someone else.

The real effect of many government programs is apparent only in retrospect so it will probably be years before we can really understand the effects of the Bush-Obama bail-out. However there are eerie parallels with the Great Depression and the measures taken by Hoover and Roosevelt. Most economists now recognize that the New Deal prolonged that depression.*

The problem with government it that it has not only a monopoly but also the power to force its will on others.. A business that insists on being paid more than its added value will soon find itself with no customers at all and thus no business. However government has the ability to take what officials want or think necessary. That allows it to grab more value than it provides. In almost all cases, government provides no added value if it does something a private business could reasonably do

The only solution is a strictly limited government, one constitutionally restricted from expansion and in which the citizens insist on following that constitution. And please note that the added value problem is only one of many reasons to limit government. Even if government can add value there are often good reasons for it to stay out of the game.

*cf the book New Deal or Raw Deal by Burton Folsom, Jr.

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1 comment:

Bobkatt said...

Good points Hal. It slays me that people, especially Americans can't see that there is no country in the rest of the world that we could emulate that would provide a better chance for freedom, prosperity, independence, creativity, and opportunity. None. Some countries may offer a better example of one of these conditions but none offer all of them in an unconditional promise of opportunity.
In a nutshell the bigger the government, the smaller the individual. I just wish that the people that insist on changing our government into some already proven failed European model would simply go there and leave us alone.