There seems to be a general tendency for modern governments to get bigger, more bureaucratic, and less efficient. Why might this be the case?
Lately, many econometric studies are finding that the size of government in most countries is beyond the optimal level that is needed to provide maximum economic growth. When this condition exists, any further expansion of the government leads to a reduction in the rate of economic growth.
Economic growth is essential for progress. It is economic growth that enables the standard of living to rise. It is through economic growth that surpluses above the basic needs of society become available. These surpluses can, in turn, be used for investment in human capital, physical capital, research, infrastructure, and other important uses thereby creating a virtuous upward investment growth cycle.
One of the key tenets of economics is that design or structure determines performance. A purely competitive market structure results in better outcomes from the viewpoint of society than monopoly even though business in both cases is conducted by self-interested profit maximizing individuals. Similarly, within the framework of democracy, some governmental designs will be better than others from the social point of view. The question is what type of changes in the structure of the government is needed to move in this positive direction.
A major factor underlying inefficiency in government is that government bureaus, commissions, and programs are not, unlike the private sector, subject to a market test. Government agencies, programs, and departments that have long lost their functionality and purpose continue to exist. In the market place, when a product is no longer in demand because, for instance, it has been supplanted by a superior product, such as was the case with typewriters by computers, the business of the inferior product becomes unprofitable and quickly ceases to exist. Resources are freed from unproductive uses and become available for more valuable pursuits.
Grapevines, roses, fruit trees, and other plants need pruning on a continual basis to be healthy and to bear abundant fruit. Similarly, the government needs to trim off ineffective parts of its body so as not to develop into a cumbersome, burdensome, useless social entity. How might this be accomplished? One possibility is that anytime there is a legislative establishment of a new body, agency, or government commission for some purpose, that at the very same time legislation is enacted that the newly created body, agency, or commission will be automatically discontinued or cease to exist in a specified number of years, unless it is proven at a reasonable time prior to its anticipated dissolution, to still be important. In other words, all agencies, commissions, and bureaus, of the government should be considered as temporary, and there should be a general felt consciousness by the public and by government employees of their temporary nature. Everyone, most especially those working in the agencies, must have an understanding that agencies are for public service and will only continue to exist as long as they have a worthwhile future from the point of view of society as a whole. A second possibility is for the government to do an entire comprehensive evaluation of all agencies on a periodic basis with each and every agency’s continued existence contingent on their worth at the time of the evaluation.
Even if future evaluation of government agencies is predetermined at inception or there is a periodic general evaluation of all government agencies, a major problem, perhaps even an insurmountable one, is that, the evaluation of government functions, especially in democracies, is extremely difficult, and, the pruning, the winnowing down of the government and the elimination of agencies deemed no longer to be effective is even more difficult.
An essential reason for the complication is the valuing of government goods and services and the agencies providing them. For most government goods, there is no market value on these goods and services. How does one value these goods and services when there is no market value and when different people, different constituencies, value them differently, sometimes totally differently? Can cost benefit analysis be used effectively when the very value of the benefits is just what is under question? In the process that is commonly used to assess the value of an agency, there is generally an upward bias in the estimate of the worth of an agency. Typically, in order to evaluate an agency, to evaluate the value of the good or service an agency provides, experts or professionals in the good or service are generally consulted. However, a lot of times, these experts are experts or have become experts precisely because they work or have previously worked in providing the good or service. This means, as a rule, that they have a vested interest in the continuance of the good or service and are inclined to overstate the value of the good or service. For instance, the government might bring in an army general to discuss whether there is need for the continuance of a particular military agency for defense.
In addition, there is a potential unemployment problem. The government is always subject to competing welfare goals that are not necessarily compatible. In a democracy, people expect the government to help them in the face of life’s difficulties, or, at least, to try to help them. One of the goals of government is to maintain high levels of employment. If the government eliminates an agency of government that is now dysfunctional in order to increase efficiency within the government itself, or in the economy as a whole, it generates unemployment. If there are a large number of people in the agency, its elimination is also likely to have substantial negative multiplier effects on the economy.
Making a judgment on the continual existence or elimination of a government agency may be less onerous than deciding on the scale of operation of an agency once the decision for its continued existence is deemed to be appropriate. Of course, the optimal size of an agency is up to the point where the marginal benefit equals the marginal cost of running the agency. If there is a hard time agreeing on valuing the total value of an agency, how much more so, if even possible, of getting people with different assessments of value, to agree on the value of the marginal benefit of an agency.
What about planning? Is economic planning valuable? How valuable? The answers are, to say the least, both historically and at the present time, a bit controversial. The valuation of planning differs depending on who you ask, and, it must be kept in mind, it is the valuation of planning that is fundamental in making the decision of whether or not to have a planning agency and in properly ascertaining the scope and nature of a planning agency. Those on the left place a high value on planning, while those on the right give little, or no, or negative value, to planning.
A potential positive aspect of planning, upheld by those who place a high value on planning, is that it leads to greater economic stability. A capitalist system's main concern is with profits, not with consumption. Its focus on profits makes it highly unstable and subject to recurrent crisis. Planning can be used to dampen the unwanted gyrations in the economy stemming from a market system.
On the negative side there is power and the threat of power that comes with planning. It is no accident that a centrally planned economy like the Soviet Union produced a Stalin. Hierarchy and power is part and parcel of the very nature of planning. Planners believe they know what is best for others and impose their will on others. Power, employed in planning under the rationale and guise of doing well for others, is an unwanted problem. Power is anti-freedom and addictive. A real risk of planning is that, without careful monitoring, it can easily get out of control and usurp freedom.
In psychotherapy, they have found that human beings tend to blossom in relationships that encourage them to find and develop their own inborn potentiality, their own direction, and to discover their real selves and become authentic, independent, autonomous actors in the drama of life. The economy is a social system consisting of human beings in a nexus of social relationships. A government that promotes a healthy social environment and refrains from interfering with the development and natural direction of social relationships by the imposition of its will is likely to reap the fruits of a more creative, a more productive, and more innovative society.
There is a general human tendency and belief that once we understand the operation of any phenomenon we can then bring it under our conscious control for our own benefit. However, there are some instances for which detailed conscious control may not be the preferred option. Scientifically, we might know all the intricate movements and the necessary coordination of the various muscles to lift a water glass form the table to get a drink of water, but would probably go insane if we had to consciously decide to do each and every step involved.
The recent overall interpretation of planning by the West has been from a triumphant point of view. The west points out that the world has had a major social experiment in planning in the former Soviet Union and in other countries and that centralized planning has failed, especially in the areas of economic efficiency and economic growth. A more nuanced view is the notion of convergence. The notion of convergence is that countries are becoming more and more alike over time, so that, the capitalist west is incorporating some planning aspects into their system, and the planned economies are becoming more capitalistic by incorporating market elements into their systems.
There is little doubt that extensive centralized Soviet style planning is inefficient and dampens incentives to produce. However, the historical record seems to indicate that it is possible that planning, when used as an overall guide or as a general blueprint for the direction and coordination of an essentially market economy, may be helpful, or at least, not harmful, in facilitating the transition from a less developed to a modern economy. China is a case in point. South Korea and Japan are other examples in which overall planning were used in combination with the market in the development process.
In terms of economic development it may be that there are different amounts and kinds of planning that are optimal for different stages of economic development. Perhaps at an initial stage of development, a lot of centralized planning may be helpful, but with further development, it needs to be set aside to allow markets to rule, but with further development, as economies become older and more mature, greater planning may once again be needed.
In early stages of development, a planned economy may be helpful to jump-start the economy. Indeed, perhaps, limited human capital resources can only be used in an effective way by consolidating them in a planning agency. However, in later stages of development, a directed economy may retard economic development as the economy now has a life of its own which is not given free reign to express itself when directions are given from above. However, once the planning authority or any agency becomes established in the government it becomes entrenched and is difficult to remove even when its functions become obsolete or dysfunctional. An analogous thing often happens in a relationship between a father and a son. In the father son relationship, when the son is a small child, there is an advice giving role adopted by the father and, at this stage of development, the advice that is given is really needed by the son. To take just one striking example, the son as a little child may be naturally attracted to the beauty of fire but is unaware of the danger of fire, so the father warns him not to touch fire or he will get hurt. When the son becomes a young man, inappropriate continuance of the habituated advice giving role by the father can inhibit the independent development of the son and deflect him from following the path he is inherently meant and destined to go.
References and Additional Thinking
Chobanov, Dimitar and Adriana Mladenova. (2009). “What is the Optimum Size of Government”, Institute for Market Economics, http://ime.bg/uploads/335309_OptimalSizeOfGovernment.pdf, June 2010.
Elliott, John E. (1958). “Economic Planning Reconsidered”, Quarterly Journal of Economics, 72(1), pp. 55-76.
Friedman, Milton. (2009). Capitalism and Freedom (Fortieth Anniversary Edition), University of Chicago Press, Chicago.
Hauner, David and Annette Kyobe. (2008). “Determinants of Government Efficiency”, IMF Working Paper No. 08/228, International Monetary Fund (IMF), Washington, DC.
http://www.imf.org/external/pubs/ft/wp/2008/wp08228.pdf August 2010.
Potts, Nick. (2001) “Is it Time to Finally take Dr Kalecki’s Rational Planning Medicine?”, International Journal of Social Economics, 28(3), pp.667-680.
Rogers, Carl A. (1961). On Becoming a Person, Houghton Mifflin Company, Boston.
Sakharov, Andrei. (1990). Memoirs, Alfred A. Knopf, New York.
Vedder, Richard K. and Lowell E. Gallaway. (1998). “Government Size and Economic Growth”, Joint Economic Committee, U.S. House of Representatives, pp. 1-15, http://www.house.gov/jec/growth/govtsize/govtsize.pdf, February 2010.
(The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)