Wednesday, March 30, 2011

Singapore, Efficiency, and Monopoly

The economist has a profile of the government of Singapore and why it should be taken as a model for the West. The main point is that Singapore is successful not because of a heavy-handed industrial policy or because of its authoritarian restrictions on civil liberties (which, to be fair, have lessened of late), but rather because it provides quality governance at a low price (the state consumes only 19% of GDP). The efficiency of Singapore's government is what attracts foreign capital and labor. The article ends by recommending that Western nations adopt some of Singapore's methods which don't involve sacrificing liberty, such as firing teachers who don't perform well or paying civil servants more (to attract talent away from the private sector).

I don't know enough about Singapore to comment of the specifics of the article, but the focus on government efficiency got me thinking about the benefits of increasing competition between governments. One of the reasons why government is often inefficient is because it lacks sufficient competitive pressure. What's interesting is that most people have a healthy fear of business monopoly power (indeed, perhaps an excessive fear, given the difficulty of maintaining a monopoly or cartel in even imperfectly free markets), but they lack a corresponding fear of government monopoly power. In part because it is costly for people to move to a different country, most governments don't feel the pressure of competition to retain their base of residents, citizens, and corporate bases of operation. Choosing which government to pay taxes to is not like choosing a cell phone company, it's more like "choosing" a family, in that most cases one is simply born into it. If this were the case with cell phone companies, we wouldn't expect them to provide a very efficient product. Market power, whether in the form of a cartel or a monopoly, tends to increase the price and decrease the quality of a good or service, compared to cases where firms are forced to compete with rivals for market share. Why should the case of government be any different?

We tend to think that democracy works to constrain the inefficiency of governments, because bad governments can be thrown out of power. To a certain extent this is probably true, and it may explain, at least in part, why the government of modern parliamentary democracries is so much better than most governments throughout history (in terms of levels of crime, corruption, infrastructure, and so on). But there are still massive inefficiencies even in "good" governments such as those of Japan, South Korea, Europe, and North America. To begin to understand why, imagine an analgous case of non-government monopoly plus democracy. Let's say that Walmart is granted a monopoly on all retail stores through an act of Congress (historically, most monopolies are only created and maintained through government action, although that's a topic for a different post). We would of course expect Walmart to restrict supply, raise prices, and lower quality, in order to increase their profits. Why does the monopoly give Walmart the power to do this? In the absence of the monopoly, Walmart would lose customers if they increased prices and lowered quality. The only way they can continue to get customer dollars is by providing a product that is about as good and that costs about as much as those of other firms. (In fact, even if there are no other firms in the market, as long as it's possible for another firm to enter the market and seize market share, that still provides an incentive for Walmart to keep their prices relatively low and their quality relatively high, so that they don't risk losing market share to such a firm in the future; this is the disciplining effect of potential competition, as opposed to actual competition with firms currently in a market.)

Now suppose people get fed up with the Walmart molopoly and try to improve matters by replacing its current corporate government with a nationally-elected assembly. Would we expect as much benefit from democratizing a still-monopolistic Walmart as we would from simply exposing Walmart to more competition? Probably not. Sure, politicians would tend not to be re-elected if they passed laws that greatly and obviously hurt the Walmart consumer, but there are all kinds of inefficiencies that would remain. Two important sources of government inefficiency are the lack of voter decisiveness and the externalization of the costs of voting.

When a consumer decides to buy from a different firm, his choice is decisive; once he makes up his mind, he either reaps the reward of higher quality or lower price, or suffers the cost of lower quality or higher price. The case is different with democratic government, becuase a voter only gets the government he votes for if he happens to be in the majority; his vote does not decisively determine the government he receives (and, in fact, the chance that a single vote will sway an election is close to zero). Moreover, the costs of bad government are not internal to those who voted for it, but are externalized to all taxpayers, regardless of who they voted for. As Bryan Caplan has argued in his The Myth of the Rational Voter, these two factors (lack of decisiveness and externalization of costs) makes it cheaper for voters to hold irrational beliefs about the quality and cost of their favored policies or parties. A consumer with an irrational bias about a product at least feels the pinch in his pocketbook, and therefore has a standing reason to revise the irrational bias. A voter with an irrational bias about a party or policy does not receive the same feedback, both because his vote is not decisive, and because the costs of the policy or party he supports are in any case distributed throughout all of society, which makes it much cheaper for him to support a bad policy or party if he gets even a mild feeling of pleasure for doing so (or avoids the pain of having to change his mind and abandon a cherished belief or party affiliation). Irrationality is cheaper for voters than for consumers, and we should therefore expect voters to be more irrational than consumers, and to vote for less efficient policies. This is as true with a democratically run Walmart monopoly as it is true with democratically run governments.

In addition, there are other sources of inefficiency in government apart from lack of voter decisiveness and the externalization of the costs of voting, such as the fact that many unelected civil servants lack adeqaute accountability. Therefore, even though it makes sense to doubt that markets are perfectly efficient, there is good reason to believe that governments are even less efficient than markets. Opponents of the efficient markets hypothesis should also oppose the efficient government hypothesis.

So how does Singapore manage to do such a good job? It's probably a matter of the incentives facing the rulers. Singapore is not very democratic (they have a virtual one-party system, and lots of power is concentrated in the office of prime minister, of which Singapore has had only three since 1959). Usually this is a bad thing, but in the case of Singapore the rulers for some reason have felt the need to attract foreign capital and labor, which put a check on the normal tendency for authoritarian governments to simply feather their own nests at public expense. A ruler can make himself wealthy through corrupt governance, but he can't make a nation wealthy through corrupt governance. The centralization of power in Singapore has made it possible for the government to plan for the future and to commit to a consistent policy over the long-run, but centralization of power is not itself enough for government efficiency, in the absence of the incentives to rule well which the government of Singapore seems to have faced. The key thing is that, in the case of Singapore, what saved the day was not democratic competition within a polity, but competition for labor and capital between polities. In order to attract foreign wealth and labor, Singapore had to provide firms and workers reasons to move to and do business in Singapore.

To my mind, this is the only way we will see sustained improvements in the quality of government over time: if governments lose their monopoly character and become increasingly competitive. Libertarian anarchists, such as Murray Rothbard, David Friedman , and Roderick Long, propose a market for services normally provided by the state, with competing firms providing protection and other state services within the same geographic territory, and with no state having monopoly on any good or service provided within that territory. This might work, but I think it is unlikely ever to happen, given that states will probably never give up their monopoly privileges over their territories, at least not willingly. A much more plausible route to competitive governance is for there to be competition between states which retain monopolies over their territories, but which are disciplined by their efforts to attract freely-moving labor and capital from other states. A glimpse of this scenario may be found in the behavior of the government of Singapore; what's needed now is for more states to feel the pressure to attract individuals and firms through providing efficient government. This doesn't seem likely to happen, but on the other hand, if it happened in Singapore, it might happen elsewhere as well.

But what about democracy? What about the power of the people? And what about the authoritarian character of Singapore--should this really be a model for other states? First of all, it is not the authoritarian character of Singapore or the conservatism of its laws which have produced success; it is the fact that the rulers have actually felt a need to provide good government. In fact, insofar as firms and individuals benefit from liberty as much from the services provided by government, there is a reason for Singapore to respect liberty insofar as this attracts firms and individuals--and this may explain why Singapore has become less conservative and authoritarian in recent years.

With regards to democracy, it is over-rated as a political ideal. Empowering people is important, indeed essential, but democracy is a lousy way to give power to the people. It is more important to give people the power to choose between states than it is to give people the power to vote. The former is decisive, and internalizes costs and benefits; the latter is not decisive, and externalizes costs and benefits, and as a power is therefore pretty thin gruel.
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