It's not the initial cost, it's the upkeep
Posted by aogSaturday, 22 February 2003 at 13:01 TrackBack Ping URL
I strongly oppose any direct government involvement in the economy. I think that providing rule of law and contract enforcement is basicaly the limits of what government both should do and can do that is overall beneficial. It's become obvious over the last century that planned economies fail. But does that mean all government intervention is counter productive? One argument is that intervention to foster new industries is a proper and beneficial role for government. This seems reasonable on the surface but it suffers from the "benevolent dictator" problem which is that it is negatively stable. As long as the right person is the dictator, everything is wonderful. But once the dictator is not quite so right things start going downhill and more importantly the odds of getting a even worse dictator as a successor go up. It's a positive feedback cycle that ends in disaster and which can be started very easily. The primary advantage of democracy is that while it functions much more poorly than a benevolent dictator it is far more robust and far more likely to recover from bad leaders. It is positively stable. That doesn't mean that it can never fail, just that it is far more likely to recover from a disturbance.

Government support for industries (even nascent ones) suffers the same problem. It can start out well and do a lot of good because the officials don't have vested interests over time the funding and regulatory structure will be captured by specific business interests. Once some fraction of the staff is captured, they will tend to bring in others of the same attitude with much more vigor than the non-captured, yielding negative stability. This is a key point - the objection to such programs is far more about what those programs will be in 10 or 20 years rather than their original form.

It could be that I'm misinterpreting the original post, but I just can't see what form beyond standard rule of law support that government intervention to create a "fertile breeding ground" for businesses could take. Clear, simple regulations and goverment transparency benefit small businesses more than large ones because large companies can afford the lawyers and institutional knowledge to deal with obscure regulations and smoke filled room politics. Small businesses can't spend the time or money to deal with such things. That's why big businesses frequently support additional regulation, accepting the cost as a reasonable price to pay to stifle any upstart competitors. The best substrate for business formation is a minimalist rule of law government.