Government Efficiency

I recently criticized the idea that policymakers should focus their attention on making government more “efficient.” Instead, I argued that policymakers should focus their reform efforts on reducing government’s size.

Government efficiency proponents make the mistake of viewing the cost of government in the same light as the cost of operating a private business. However, government cannot operate like a business because it isn’t a business.

Private businesses obtain their revenue through voluntary exchange: consumers willingly give a business their money in return for a product. Businesses must control the cost of providing a product in order to maximize profits. A business that does not adequately control its costs can find itself undercut by a competitor offering a like product at a lower price. In the private sector, the market sets the price of a product through the interaction of supply and demand.

Government is unconcerned with “profit.” The “cost” of government is equal to the taxes extracted from the private sector to pay for government activities, plus the economic damage caused by extracting resources from the private sector. Taxes are involuntarily obtained through compulsion and force. Regardless of the value a citizen assigns to the services provided by government, a citizen must pay for those services, and at a price set by government. The price one pays for government is primarily a function of political factors, which are only indirectly influenced by economic considerations.