The Government Calculation Problem

• John Vandivier

Most people with an eye for economics are aware of the <a href="http://en.wikipedia.org/w/index.php?title=Socialist_calculation_debate&oldid=619966446">Socialist Calculation Problem, also known as the <a href="http://en.wikipedia.org/w/index.php?title=Economic_calculation_problem&oldid=626534860">Economic Calculation Problem, but did you know that calculation problems exist outside of Communism as well?

Asymmetric information is a less severe form of the Economic Calculation Problem, but it can still cause transaction failure - whether we are talking about market failure or government failure in the public sector. It is widely noted that asymmetric information affects market decisions, such as the determination (calculation) of the efficient price and quantity of certain goods in certain markets.

Asymmetric information is often taken as justification for government intervention. There is a problem with that. Governments are subject to these kinds of calculation problems as well. I argue that, ceteris paribus, government faces a larger calculation problem then the market does:

  1. As government continues to intervene in the market, price and quantity information in the market becomes distorted, or inaccurate. With full intervention comes the complete cessation of useful price information from the market. This is the Socialist Calculation Problem. In democracies and so on there are price signals, so many would argue that they do not fall victim to the SCP, however they do still have a problem because the price signals they possess are non-randomly distorted. Government sometimes even outright selects the price (or a roof or a floor) and directly chooses the price signal they desire to see, which is extremely dangerous as they can then craft justifications for further involvement.
  2. Government possesses less local knowledge. The market operates off of local knowledge at every point of transaction.
  3. Government has fewer minds, resources, and calculators. Even if the government had the same quality of information as the market does, which is fundamentally impossible, it would still reach more faulty conclusions and it would do so at a relatively slow rate of information processing compared to the market.
This critique applies to any government where government is defined as an agency which manipulates consumers by force or otherwise to produce a choice they would not produce under a voluntary situation. The misinformation stems directly from this abuse, in the same way that a person under torture may give faulty information as a result of forced cooperation.

Additionally, government faces more severe problems of moral hazard and other issues, but that is an entirely separate critique.