Markets or Governments

The choice between markets and governments in the conduct of economic affairs is one of the cardinal issues of our time, but both entail predictable and serious shortcomings. Nevertheless, modern economics treats these shortcomings asymmetrically. This Note attempts to rectify this imbalance by developing and applying a theory of "nonmarket" (i.e., government) failure, so that the comparison between markets and governments can be made more systematically. The author reaches the following conclusions: (1) The choice between market and nonmarket systems is not a pure one, since actual systems inevitably involve combinations of governments and markets; the relative involvement of each, however, greatly affects the performance and the fairness of the economic and social systems. (2) With respect to both static and dynamic efficiency criteria, markets do a much better job than governments. (3) Government can play an important role in improving and extending the functioning of markets. (4) Market forces themselves can play a significant role in improving the functioning of government.