Perspectives from Around the World 170

Gaining Ground: Markets Helping Government

Clifford WINSTON
Brookings Institution

Like many countries, the United States continues to experiment with alternative forms of government and market cooperation, as complements and substitutes, to solve critical economic problems. Economic analysis attempts to help US policymakers solve three of those problems, which are consistent with the goals of American citizens.

The first goal is to maximize the material quality of life. Economic theory indicates that this goal can be accomplished in an economic environment where sufficient market competition exists; consumers and workers make informed choices; negative externalities are reduced efficiency; innovation is incentivized in accordance with cost-benefit considerations; and socially desirable public goods are provided.

The second goal is having a chance to succeed. This goal can be accomplished if employers are prevented from discriminating against specific individuals or groups when they make hiring and promotion decisions and if education admissions committees are prevented from discriminating in favor of or against specific groups of applicants.

The third goal is having a decent quality of life when faced with hardships, either because of the adverse household circumstances in which they were born or because of unexpected shocks. This goal can be accomplished if resources are provided to keep households above the poverty level and to provide households with merit goods—that is, goods that individuals or society should have based on some concept of need rather than on an ability and/or willingness to pay.

I refer to the first goal—maximizing the material quality of life—and its elements, which are generally associated with economic efficiency, as economic goals, and I refer to the second and third goals and their elements, which are generally associated with economic redistribution, as social economic goals, or social goals for short.

Unfortunately, we currently are in a moment during which the public's faith in economists and capitalism to help accomplish those goals is at a low point. The result is that many Americans, especially younger adults who are struggling financially, are quick to reject market solutions. However, this is a serious mistake because it overlooks the accumulated empirical evidence on the efficacy of market forces to help accomplish the nation's goals.

The purpose of my book, Gaining Ground: Markets Helping Government, is to synthesize the available evidence and to argue that, in contrast to current dissatisfaction with markets, American society has gained considerable ground when government has allowed markets to help accomplish economic and social goals, especially when government policies have made little progress in achieving those goals. I further argue that society could gain even more ground if government removed constraints, which would enable markets to play a greater role in the process.

A central theme of the book is that through intense competition and technological advance, markets have the dynamic ability to help accomplish economic and social goals and to produce beneficial interactions to simultaneously address those goals. Markets also have additional strengths that government does not have including their responsiveness to efficiency incentives; accountability in the form of suffering the consequences of failure; ability to make difficult and often time-consuming adjustments to respond to changing circumstances and overcome failure; and the capability to develop and implement innovations, often by trial and error, that enable participants to disrupt conventional activities by performing them more efficiently or to engage in entirely new activities. In practice, markets encourage participants to conduct many small-scale experiments where success may eventually be achieved in later experiments following failure in the initial experiment.

The primary virtues of markets—competition, efficiency incentives, innovation and technological change, and the potential to expose government abuses and inefficiencies—appear repeatedly in the different settings discussed in this book. Repetition can be boring, but it is important here because it indicates that a common set of tools enables markets to be versatile and to address a variety of problems.

Table 1 summarizes how competition and technical advance unleashed by market forces have helped improve on government economic policies, generating trillions of dollars of direct and spillover benefits in lower costs and prices, higher-quality products, and new products and services. The cumulative benefits, based on the empirical studies discussed in the book, have increased the US annual growth rate by at least one percentage point, if not more.

Table 2 shows that firms' incentives in a market environment to pursue business opportunities and improve their brands also have helped government social policies reduce poverty and labor market discrimination, and provide merit goods, which have helped improve the quality of life for the most vulnerable members of American society.

Government policy reforms could enable market forces to further increase consumer welfare by reducing prices and improving service quality in many markets that are still subject to partial government regulation; developing technological advances that reduce environmental externalities; and by creating private markets that replace inefficient public production of various services. Finally, policy reforms also could enable markets to further help to accomplish social goals by developing technological advances and creating new, efficient private markets.

Table 1. Market Forces Helping Government to Accomplish Economic Goals
Table 2. Market Forces Helping Government Accomplish Social Goals

The many ways that markets have helped government and, if given the chance, could provide further help to government are extremely important because we cannot simply identify an efficient policy reform and tell policymakers to overcome the obstacles to enact it. That will not happen because we do not know—and we may never know—the right buttons to push to vanquish the status quo bias that pervades policymaking. Thus, inefficiencies persist indefinitely, unless markets can correct them.

I conclude the book by indicating that it would be useful to advance the perspective of markets helping government by forming a commission composed of policy researchers who would write detailed and granular proposals in several areas where markets potentially could help government and present those proposals for a debate among academics, policymakers, and the business community. The commission would recommend a set of policy experiments that would explore how markets could help government, which could be assessed, say, five years later by another commission. Hopefully, such an effort would spur a fundamental change in the mindset of the policy community to regularly consider how markets could contribute to accomplishing economic and social goals by providing efficiency incentives, various sources of competition, and innovations that lead to technological advance.

This is a summary of a book "Gaining Ground: Markets Helping Government".

August 27, 2021

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