29 August 2012

Day 82: Government Failure

Previous blog-posts would have made it clear by now that the market is not perfect and never will be - and this is something many economists are willing to admit. However, they believe that governments are able to 'adjust' the market when necessary through acts of intervention. Within this blog-post we're having a look at the problems related to government intervention, or otherwise: 'government failure'.

In terms of government failure, let's discuss three major weaknesses of governments and how they attempt to manipulate the economy, namely:
- Politicians
- Bureaucrats
- Rent-seeking by interest groups


Politicians are those who are elected by a population to represent their interests in government. However, in most democracies, people only get to voice what they want politicians to do on their behalf at the moment of election. After that, politicians can pretend to represent the people, but they can pretty much make decisions that suit their personal interests. Due to the desire for power and wealth, they wish to remain in their current position or progress their careers for more influential positions and do this, they need people/more people to vote for them. Therefore, politicians will have a tendency to take the limited time they are elected for to satisfy their voters in the short-term in order to 'prove' that they are the right choice - without considering long-term consequences. They'll implement programs and organise interventions that have clear benefits to particular people, of which the costs and disadvantages are vague or ignored. Another tendency is to make decisions that will give a small group a whole lot of benefit, while a large amount of people accrue relatively small costs.


Bureaucrats are not even elected by the population. They are 'civil servants' and are responsible for the supply of goods and services by the government. They, thus, have quite a lot of power and, just like politicians, often use this power to pursue personal gain. They'll attempt to maximise their salaries, power or prestige. For instance, the defense  establishment often exaggerates the military threat so that a lot of money is allocated to this department and this, obviously, allows them to increase their salaries.

It is claimed that bureaucracies are often inefficient because there is no competition to keep each other in check. In terms of simply overseeing the efficiency of bureaucrats, it is claimed that this is mostly impossible and for some reason it is very difficult to fire inefficient bureaucrats.

Rent-seeking by interest groups

Due to politicians' sensitivity towards buying votes, they are easily manipulated. Interest groups will attempt to pressure/persuade/seduce governments to use their ability to intervene in economics in a way that benefits them - and these attempts are often successful.


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