Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“It is the fundamental theory of all the more recent American law...that the average citizen is half-witted, and hence not to be trusted to either his own devices or his own thoughts.”     H. L. Mencken

April 6, 2006

Where Markets Beat Government — and Vice Versa

by Brad Warbiany

I checked out Perry’s site the other day, and ran across this post on Wal-Mart. It looks like Wal-Mart is opening its doors again in New Orleans, while Congress is still pointing fingers. It got me thinking: why is it that we see for-profit businesses flocking to the area, while FEMA is still trying to figure out where to park their beautiful trailers?

I originally wanted to issue a snark-filled rant on why government is inefficient, bloated, and ineffectual. But this, combined with Massachusetts’ insanity, calls for something a little better. I’m not an anarcho-capitalist. I realize that there are places where government can get necessary things done that the market cannot. It is only when we ask it to do things it is not suited for that we run into problems.

Bear in mind, this is an off-the-cuff treatise, so I welcome comments pointing out all the places I am wrong.

I see there being a few major types of services provided by the government and markets:

1. Distributed provider, distributed user: This would fit the mold of most day-to-day interactions. When you go to buy lunch, you have a wide range of choices. Purveyors of those products can sell to anybody; there are few long-term interactions.

2. Single-provider, distributed user: This would fit things such as roads, sewers, police, military, courts, etc. In these types of interactions, there action between the provider and the user is often severed. In the case of roads/sewers/etc, it is common that an individual homeowner or driver could not contract with a provider to build a new sewer system or road to service them. Often, maintenance of these services are paid for by some sort of taxation, and only occasionally by a true “user fee” arrangement. Courts, police, and military are even more so, because there is not often a true link between what police or courts do for those who aren’t currently the victim or perpetrators of crimes, but they offer a sort of “blanket of protection” for everyone. Again, the link is fairly severed between provider and user.

3. Specialty provider, specific user: This is a tough category. In this, I place things such as medical care, which often is difficult to procure in a true competitive environment (outside of general-practitioner care), and is highly tailored to the specific user. There may be 3 hospitals in a close area, but only one specialist in the field you need. This may also include education and other services, where the relationship between a specific provider and user is difficult to break. For example, when you put your child into a school, you don’t want to have to change that school without good reason, because of the relationships your child generates with classmates/teachers/etc. Last, it includes such things as insurance, where acute costs are very high and risk may need to be pooled.


The first case is a place where markets always beat government, hands down. Government action, nearly by definition, is one of monopoly, and monopolies are known for poor efficiency. They don’t innovate to serve their customers, they don’t bring costs down through competition, and they have no reason to do either. This one is so obvious that it needs no further discussion.

The second case is the poster child for government action. This is the one agreed upon by everyone except the anarcho-capitalists. There is a little point of distinction on things like roads (the “pure” libertarian will ask for them to be privatized), but I’m going to gloss over that. I chose sewers but left out other utilities for a reason, as well. Without getting too heavily into it, there are certain “common carrier” services that form a bit of a gray area. Electrical or gas service doesn’t lend itself quite to competition very well, due to the extremely high infrastructure costs in service. Georgia’s take on natural gas, however, is one where the actual distribution of gas is centralized, but you have your choice of “service company” to sell you that gas. It blends some of the benefits of competition without the drawback of requiring multiple companies to lay redundant infrastructure. But in most “common carrier” utilities, some sort of government action is required, as local government is typically granting monopolistic licenses to providers. The cases of courts, police, and military, however, are specialized enough where we leave government to provide these directly. This is the one case where we grant a monopoly on initiating force, and choose to keep that power in the hands of government we control with our vote.

So I think we can all agree that communist Russia showed us how dangerous it is to let the first case be provided solely by government. And I think we can look post-communist Russia to see how lack of infrastructure and legitimate courts/police/military to protect the rule of law will lead to anarchy and rule by the strong.

But the third case is problematic. This is a case where it is easy for politicians to advocate government action, and easy to dupe unsuspecting voters into agreeing to it. Usually, they play to emotions. It is always hard to watch people go without adequate medical care or education. It is far too easy to go from watching this to thinking that it simply shouldn’t happen, and therefore the government should take over and provide the service. But while this is different than the first case, it is still not a place where government monopoly works. Our current educational system is evidence of that. In the case of medical care, nobody wants to see people lose their entire livelihood due to high medical costs. But the proper way to pool risk is with insurance. Just as we would not ask the government to provide flood insurance, car insurance, or homeowners insurance, medical insurance is not for the government to pay. It would help, of course, for the government to end its policies which make it nearly impossible for individuals to provide their own coverage reasonably cheaply, but that’s a whole different debate. Again, look at education. Education would be much better provided in this country if we returned to a competitive market, with parents paying for school directly, and (at best) a safety-net program to help the poor. When even the NYT is realizing that vouchers work, it is obvious that we need to change our strategies.

As I said, there are times when government action is the best way to get something done. Those cases are few and far between, and in all of them I suggest making the services controlled as locally as possible, to allow a “market in governments” to form. Just as people choose which business to patronize, and should be able to choose which school to patronize, the experience of federalism and local control allow people to choose which local government to patronize. This will allow people to choose local government based upon the ability of government to provide necessary services, and allow competing localities to learn through competition how to be more efficient. You can ask states like Massachusetts (the only state in the union to lose gross population year-to-year) just how important this is.

But where government action is not efficient (almost everywhere), we need to make sure our policies are designed to facilitate the working of a market, not impede it.

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  1. The argument that government needs to regulate common carriers, or take them over entirely, is not supported by reality.

    In this country, before the creation of the Federal Communications Commission, there were thousands of different phone companies, all competing with each other over various areas. AT&T was only the largest of these. It argued that the government needed to step in and solve the problem, and thereby secured its monopoly.

    As we’ve seen in recent years with partial telecom deregulation, the problem, if you could call it that, was something that the market could easily have solved in the first place, had it been allowed to do so.

    Comment by Michael Hampton — April 6, 2006 @ 7:13 pm
  2. A good post. I agree with the above poster, and I also submit that there have been historical anarchist societies (medieval iceland, for instance) which didn’t devolve into the rule of the strong. It takes time to get peace from chaos, regardless if the end game is anarchistic or statist — Russia happened to choose the statist route.

    That said, having given it a lot of thought, I’m of the mind that the difference between federalism and peaceful anarchy is largely 6 of one, half a dozen of the other — that is to say, the distinguishing feature of the two societies would be a technicality. The only question in my mind is the stability problem. What sand could we have thrown in the gears to prevent the atrocity that is our modern day federal government? On the other hand, anarchy is inherently difficult to coax into such a configuration, but for all we know it might not be feasible in the modern age.

    So, although the path I take is a little different, I conclude in agreement with this post, and add that as we get closer and closer to a truly minimalist government, the degree to which we can rid ourselves of this necessary evil will become more obvious.

    Comment by Peter Bessman — April 6, 2006 @ 9:43 pm
  3. Well, unfortunatley we DO ask the government to provide flood insurance.

    And banking insurance

    And medical insurance

    And accident insurance

    The problem isn’t so much the asking, as it is the unconrtollable urge of politicians to say “yes” whenever enough people ask them for something even though they KNOW they should say no.

    Comment by Chris Byrne — April 7, 2006 @ 10:34 am
  4. [...] And my post over at The Liberty Papers, entitled Where Markets Beat Government — and Vice Versa, was also submitted to the Carnival of Liberty XL. [...]

    Pingback by The Unrepentant Individual » Carnival Time! — April 11, 2006 @ 7:32 pm
  5. Chris has a good point, unfortunately. People, in large part, get the government they want — or rather the government they deserve.

    Comment by Peter Bessman — April 13, 2006 @ 7:20 am
  6. Hey Peter, nice to see you commenting here. It’s not as active as ESR’s blog, but still good conversation!

    Comment by Eric — April 13, 2006 @ 9:31 am

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