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Wednesday, 9 June 2010

What Governments Are For

The claim of the state to our allegiance rests on its ability to provide services which individuals could not provide (or provide efficiently) for themselves, even by clubbing together. The perennial problem for the state is that such services are ones which will benefit those who do not contribute towards the cost - the free riders. So the provision of collective or public goods goes hand in hand with the coercion of those reluctant to contribute their share of the cost.

The defence of the realm against foreign enemies is the core example of the collective goods and services which states provide to their citizens.

Taxation is by its nature something which can be more easily evaded than can payment for goods which you are buying over the counter. Even in the most advanced and sophisticated societies there are large Black Economies - in some countries in Europe, the black economy may be responsible for a quarter or more of a country's total GDP. So taxation turns even the best organised states and their governments into rather inefficient middlemen - the costs of revenue collection are always going to be large and sometimes disproportionate and vast areas of legally taxable activity will escape taxation.

Over time, states and governments have expanded the range of services they provide to include many which could quite clearly be paid for by individuals at point of use. So they are not part of the "core" remit of public goods provision. In general, this is seen as politically progressive because it ensures that everyone regardless of means has access to things like schools and hospitals.

However, this expansion creates a second problem. On top of the inherent inefficiency of tax gathering, there is now added the inherent inefficiency of not-for-profit bureaucracies administering not-for-profit services. You pay a lot of money and end up with third-rate schools and dirty hospitals.

If you have the misfortune to live in North Korea, even your food is provided by the state, through the state food distribution system. And you starve. In very large numbers. It was Amartya Sen who originally made the absolutely fundamental remark that famines do not occur in democracies. The business of electing governments at least guarantees a minimum of responsiveness to the satisfaction of basic needs.

It's hard to avoid the logic of the argument that when governments expand the acitivity of the state into the provision of privatisable goods and services, they inevitably turn into very expensive middlemen, charging a lot to collect taxes and charging even more to spend them on goods and services of indifferent quality. It is unknown for government departments to operate with the efficiency of Ryanair.

Governments do have advantages arising from their size. They can achieve economies in such areas as bulk purchasing. The trouble is that the bulk purchasing is often of the wrong things. Historically,the bulk purchases end up in Army Surplus shops. But there are no shops which will help you offload your stockpiled swine flu vaccine.

The average family, apparently, gets back in goods and services (schools, doctors, libraries) roughly what it pays in taxation. So they are quits. The case for the minimal state is that they would be much better off paying no taxes and instead paying for the services they need at point of use. They would be better off because the middleman's costs would be eliminated. In all likelihood, the services would be of better quality.

It's a hard argument to beat.

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