The government as a rational agent

In chapters 2 and 3 we identified market failures at both the microeconomic and macroeconomic levels, thus showing the need for intervention by an agent that, having collective motives and objectives, would be able to transcend these failures.

Our analysis in this chapter focuses on the abstract potential for action by such an agent in a market economy with the aim of correcting the market's operation or replacing it altogether. We develop a theory about what this agent, acting rationally, should do to compensate for market inadequacies. From this point of view, we will be in a position similar to that held by much of neoclassical theory, which deduces the optimal (maximising) behaviour of various (private) agents on the basis of certain postulates.

In chapter 5 we examine the actual behaviour of government, comparing it with the abstract structure we intend to sketch out here, so as to identify ‘non-market’ failures in the same way we illustrated market failures in our earlier discussion.

Both steps – i.e. the formulation of both a normative and a positive theory of public involvement in the economy – are necessary if we wish to reach some sort of conclusion regarding the relative roles to assign to government and the market in ‘regulating’ the economic activity of individuals.