Economic Rationales for Government Intervention

Abstract

The only rationale for considering intervention in the operation of an entity is that it is functioning poorly. Poor functioning may be defined as wrong or insufficient output or excessive wastefulness in the way the output is produced. Justified belief that some aspect of the functioning of an organisation or economy is deficient is a necessary, but not sufficient, rationale for intervention. The scarcity of management time means that the deficiency must be "material", must be "of significant magnitude", to warrant attention. It must also be the case that (a) interventions are available that address the cause of the deficiency, unless symptomatic relief completely eliminates the deficiency, and (b) the intervention selected contributes at least as much to performance as it costs. The rationale for government intervention in an economy may concern the efficiency of the economy (the focus here) or the social outcomes of the economy. Efficiency rationales exist when the poor functioning of the economy is due to some inherent feature of the economy itself. Social rationales are choices society makes which indicate a rejection, to some degree, of the effects of the otherwise good functioning of the economy. These are choices to privilege members of society, and resources, differently to the way the economy does at a point in time. Economic theory has useful analytical tools for distinguishing problems from non-problems in the functioning of the economy, diagnosing causes of problems and identifying useful interventions. This is particularly helpful given the complexity of economies and the characteristic of all complex systems that intuitively-appealing understandings of their internal functioning are often wrong. Tools have also been developed which can assist in the structuring of the analysis of problems with the outcomes of economies; this is the domain of welfare economics.