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Tuesday, October 29, 2013

Neither Gods nor Angels

Agency cost and knowledge problems confound Washington’s bipeds

As the leaves fall and the jack-o-lanterns appear, Americans are greeted with yet another scary example of a swollen government’s effort to defy age-old problems of human organization and human nature.

President Obama and his White House staff were placed in the embarrassing position of admitting that they did not know that their own National Security Administration (NSA) spies were monitoring the personal telephone calls of the elected leaders of France, Germany, Brazil, and a handful of other countries. Even though undoubtedly aware that all governments snoop, German Chancellor Angela Merkel was more than a little dismayed to learn that her personal mobile had been hacked. Apparently, Obama was also disturbed to learn that the snooping was being carried out by his own staff without his knowledge and explicit approval.

The NSA debacle came on the heels of two other episodes. Some citizens were more than a bit chagrined (and others outraged) to learn that the Internal Revenue Service (IRS) was systematically reviewing and delaying tax treatment for not-for-profit organizations promoting freedom and other “conservative” ideas. Like the NSA, the IRS seemed to be out of control. Even worse, President Obama indicated that he was not in charge of the IRS, that it was an independent agency of government. He quickly learned otherwise. The IRS is a part of the U.S. Treasury.

To some extent, though, the NSA and IRS problems, as serious as they are for freedom-loving people, were small when compared to the magnitude of failed efforts to centralize markets for health insurance by way of the Affordable Care Act (ACA).

As the purchase deadline approached, millions of Americans were forced into frustrated and mostly failed efforts to make required purchases of health insurance by way of government internet exchanges. With information system servers humming, and hundreds of millions being spent to bring America online, data were garbled, computer screens were locked down, and no single government authority could say, or would say, how so few citizens successfully worked through the maze. With more money, more servers, and more experts engaged, Obamacare’s technical problems will no doubt be solved. Someday. The complete economic toll has yet to be counted. But to put it mildly: Obama has a knowledge problem.

The knowledge problem was highlighted long ago by Nobel Laureate Friedrich Hayek when he emphasized that knowledge of human wants, needs, and ways to produce and serve is dispersed across billions of people. But while dispersed, that knowledge can be tapped and conserved spontaneously by way of unrestrained markets where people interact and independently select (and provide) the basket of goods that pleases them most. Prices coordinate. Deciders decide. Actors act—all in distributed fashion.

Efforts to centralize decision making by way of command and control destroy knowledge networks, kill off incentives to innovate, and risk destroying more wealth than can be created via command-and-control processes.

Hayek emphasized markets and decentralized decision making in a grand debate about the relative merits of socialism. As some say, Professor Hayek won the academic debate, but not the political one. Because, somehow, hope springs eternal in the minds of those who believe that if we just empower the brightest and best to make decisions for us, we will learn the errors of our ways and all rise up and call their names blessed.

But alas there is yet another problem. It is called agency cost.

Even if a host of the brightest and best could be found to prescribe spy, tax, and healthcare policies for all of us, there would still be the problem of agency cost. Each genius employed has his or her own idea about what is best for mankind. Left to their own devices, White House staff and appointees will attempt to create the world in their images, not necessarily in the image of a sovereign people or even their own bosses.

If only men were gods, there would be no agency cost and no knowledge problem.

But even if they were, James Madison reminds us there would be an angel problem:

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

Clearly, current evidence suggests government faces immense and insurmountable knowledge problems compounded by agency cost to the point of being out of control. First it was taxation, then it was national security, and now it is healthcare. What next?

People have attempted to govern too much for too many for too long. It is time to pause, to rethink, and to restrain a command-and-control State that’s gotten too big to succeed.

The trouble is, that task also seems too big for mere mortals.

  • Bruce Yandle is dean emeritus of Clemson University's College of Business & Behavioral Science and alumni distinguished professor of economics emeritus at Clemson. He is a distinguished adjunct professor of economics at the Mercatus Center, a faculty member with George Mason University's Capitol Hill Campus, and a senior fellow emeritus with the Property and Environment Research Center (PERC).