Chapter 16 dealt with “market failures,” ways in which the Invisible Hand might go wrong when it came to achieving economic efficiency. When market incentives fail, it is natural to turn to government for remedies. Section 17.1 considers the other side of the coin: government failures. Are government actions likely to realize citizens' desired ends, any more than private actions? Section 17.2 looks at the likely outcomes of democratic politics and majority voting. Finally, although the text so far has dealt almost exclusively with how people make a living through mutually advantageous market transactions, a crucially important alternative way of acquiring resources is taken up in Section 17.3: the method of conflict, confiscation, and war.

THE OTHER SIDE OF THE COIN: GOVERNMENT FAILURES

Economists once thought of economic policy as a shotgun with two barrels. The first barrel favored free trade and laissez faire, owing to the efficiency advantages of a market economy guided by the Invisible Hand. The second barrel favored state intervention and regulation in order to correct imperfections and failures of the market economy. (For example, antitrust action to counter monopolies, and taxes or subsidies to correct for externalities.)

Neither barrel of the shotgun hits the target. Suppose the Invisible Hand worked perfectly. Even so, the efficient allocations of goods and resources achieved by the market economy might violate other goals of public policy, such as distributive equity or preservation of community values.