I spend a lot of time railing about economics on this blog. One of the points that I keep hammering away at is that the science of public choice dictates that government agents are subject to the same economic laws as everyone else; they respond to incentives and act in their own interest.
Not always and not perfectly, but just as in the market, the aggregate analysis is correct. Politicians, bureaucrats, treasury secretaries, presidents and ambassadors respond in aggregate to incentives in the same way that everyone else does.
The problem is that the incentives for government–because their funding is forcibly extracted from the private sector–tend to be skewed in ways that run counter to the general interest. This is not to say that all government actions are inimical, but it is to say that over time, the incentives that drive government will undermine good works and reward graft, corruption and the arbitrary exercise of power. It’s not that everyone in government is feckless and corrupt, just that all of the incentives that surround them encourage them to become more and more feckless and corrupt.
But it’s not just people that are corrupted by ingrained incentives, it’s entire institutions. Incentives work across large populations over time to effect results regardless of the intentions of the individual actors involved. That’s the “invisible hand” of the marketplace. The aggregated incentives of trade compounded across a large population over time result in consequences (most notably, increased wealth and opportunity) to the whole that no individual actor necessarily intends.
The same is true of government. The aggregated incentives of taxation and redistribution compounded across a large population over time result in consequences (most notably, a reduction of wealth and a reduction in opportunity) to the whole that no individual actor necessarily intends.
This quote from Timothy Noah (HT Glenn Reynolds) sums up difference in incentives quite nicely,
On Wall Street, financial crisis destroys jobs. Here in Washington, it creates them. The rest is just details.
It’s not that everyone in Washington wants to feast off the carcass of the productive economy, it’s just that… well, that’s the only food they have. Washington makes money when the rest of the country loses money.
