Commentary: Summer always turns the mind to liberty. Liberty because summertime is when vacations give us freedom from school and work. Liberty because of the 4th of July. So, it was that watching a fireworks display inspired me to turn my mind to the issue of how economics can help to define the boundaries of government in the organization of society.
Government is often defined as the institution having a monopoly on the legitimate use of coercion. If we take this definition seriously, then it follows that government action of necessity is a limit on liberty as coercion is being used.
At the same time, the lack of government does not mean liberty, as no government means no monopoly on power, which is anarchy. And anarchy is the opposite of liberty as protection of property rights and personal safety become the paramount priority. The secret then is to find the balance of government that maximizes liberty and social value.
At one extreme is national defense, which nearly everyone—except maybe Somali warlords—believe are a legitimate role for government. At the other extreme are decisions about the furniture arrangement inside one’s own home, which no one believes should be controlled by government.
The interesting cases are those in between. This is where the controversy rests. Private toll roads—transaction costs are too high; better are government run road system. Besides gas taxes—collected by the government—are an efficient way to charge people in proportion to their use.
Then there are private prisons. Here conflicts of interest to reduce costs by skimping on services is very difficult to overcome. In a typical market, this sort of conflict of interest is dealt with by customers who switch their business to competitors. This obviously is not possible with prisons.
Then there are other difficult cases that fall the other way. Electricity is a natural monopoly, meaning that it is more efficient for a single provider to service the market. But of course, this means that a private provider would have pricing power allowing them to gauge consumers.
An alternative would be to have the government provide electricity. Many countries do this as do some municipalities in the United States. But running an electric company requires making highly technical investment decisions. Governments just aren’t very good at this sort of thing while the private sector, motivated by profits, excels.
In fact, over the last generation, the trend has been toward privatization. The world is more and more adopting the U.S. model of a regulated monopoly rather than government agency for electricity.
Then there are hospitals. Government provision of medical care via government run hospitals use to be a common model. But again, the incentives for government just don’t align. Better to let the private sector provide medical care. The government can pay for the care via insurance.
When there is a tie or even if the government is slightly more efficient at providing a service, a libertarian leaning economists, that is, me, will come down on the side of the private sector. The reason for this is that private transactions based on self interest is inherently promotes liberty over a government action backed by the coercive power of the state.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. Chris has taught economics for more than 30 years. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu