25 Mar 2011

Nature of knowledge and government's role in society

Beyond maintaining a basic framework of law and order, under what circumstances do you think governments ought to intervene in the economy?

Government role in society is still ambiguous. Proper analytical approach asks for critical view and consideration of arguments on every side of the debate. I find stronger arguments for far less government engagement in society. Moral and practical arguments have to be considered. If we base analysis on methodological individualism, subjective rationality and inherent unpredictability of economic system we have to conclude that, beyond the point of maintaining the basic framework of law and order, government’s role in society is very limited. Why is that so?

Human behavior is subjective to the preferences and expectations of the individual (sometimes, preferences remain unknown even for individual himself, even though he makes choices). When we make decisions on the market our knowledge is limited by our subjective projection of objective world, and it is also limited by our inability to reason all the available information. Even if we were able to collect a complete set of available information, we would not be able to take into account remaining, unknown, information at the time of decision making. Expectations of individuals are often wrong. Therefore it is impossible for the individual to predict all of his future actions, or future behavior of others with exact precision, nor does he have ability to foresee state of the Extended Order. If we find it impossible for the individual to use available information and predict accurately, how can we think that government will do any better with system that is much more complex, the whole society?

On moral side of the debate, we as rational humans have freedom to make choices about our current reality and “guesses” about our future. We have freedom to gain benefits from our rational behavior and market appraisal for our good guesses. Our welfare on the market depends on the utility that we, with our actions, deliver to others. We also have right to be wrong. But we have obligations to suffer costs from our bad choices. And in this point I find it important to stress that many government programs deliver benefit without measuring rationality of the individual behavior. It is a problem of moral hazard when government programs interfere in economic activity in such matter that it detaches irrational or irresponsive behavior with costs of such actions. Any government intervention that divides liberty in action and accountability for bad choices has to be withdrawn.

Making such points I conclude that there are many current government programs that are unsustainable, inefficient and morally wrong. Modern pension systems have to be dismantled. In such a system benefits and contributions are weakly connected. Governments are also usually unable to invest pension funds in productive ventures. I think that government role must be strictly limited in market regulation. Government has only to ensure “rules of game” so it can deal with inherent unpredictability. It must not limit prices or quantities of goods and services exchanged on the market.

On topic of education I find enough arguments for support of basic education covered (not provided) by government. It is question that goes beyond strict borders of economic analysis. But even such system should be market oriented (voucher systems, charter schools etc.). With healthcare and substance control I think that we cannot be strict. There are inherent problems in these fields (moral hazard, negative selection, externalities etc.) that do much harm, however you design those systems or they freely emerge. But existence of market failure in such field does not necessarily mean that government should step up. It is still questionable if state can do it any better. I find topic of social security the most sensible and flexible one. Development of the society cannot be analyzed without a care of those at the bottom. Many are unable or invalid to compete at the market. However this is still not an argument for extended government interventions. But I can see how basic social security, untargeted and inclusive to all can be supported.

I will conclude with opinion about climate of ideas that covers intellectual sphere in today’s society. Economists and intellectuals usually make a common mistake, that extensive modeling, statistical and empirical coverage of events that occur in society, combined with understanding of philosophical principles is enough for proper design of any system. It is vastly spread opinion that academics know how to “fix the problem”, that it is only practical problem of proper design that stand in the way of such fixing. But limited knowledge is an illness not restricted to individuals on the market or government in charge, rather it attacks academics too. Little do we know about the nature of the man, and even least about nature of interactions of individuals that combined create society and economic system. We can be only strict about few points in analysis (ever present scarcity, individual decisions as object of analysis and hardly anything more). Our models, econometric analysis and empiric inquires are only guesses and sometimes even results of unsound science. Every academic and intellectual has to be aware of that. Such point would lead us to much less confidence in ability of government programs to really “fix the problem” and our ability to reason through particular aspects of economic problems. If we live in such undetermined and unpredictable world, with limited knowledge and limited ability for proper economic analysis, how can we be sure about policies that we are proposing?

Ovaj post je prikaz (dopunjenog i proširenog) eseja koji sam napisao pri aplikaciji za jedan letnji seminar.