Recently, we explored the merits of the idea of a perfect government and came to the conclusion that it is not very much of a productive endeavor although it is not improper to discuss. So instead of thinking about a perfect government to compare against the market, it would be better to consider a government that was well-intentioned and set aside the idea that there might be people who try to seize power for evil reasons. But we never made the case why it is important when comparing the government to markets.
This is why we care to ask these questions, is it not? We want to determine the best way to structure society: how big of a role, if any, should the government play in our lives?
People are not preprogrammed and cannot be expected to act in whichever ways we plan. This does not mean that we cannot make reasonable predictions on human action, but we can never know for certain how someone will act. This is because each person is an individual with his or her own sets of subjective wants, needs, and preferences. However, from praxeology, the study of human action, we can agree on one central point: all individuals act in their own rational self-interest. This is the action axiom.
What does this mean? It is important that we correctly define the term “rational self-interest.” Self-interest does not mean selfishness. It means that you act to satisfy whatever your desire is. You eat to satisfy your hunger. You sleep to satisfy your desire to end your tiredness. You work to earn money to live your life. You give money to charity because you get satisfaction out of helping others. Acting in self-interest is doing what is best for you. It is important to add the “in their own rational” modifier because while a person may believe that he is doing what is best, it may not be the case that his choices will lead to his desired end. Given the information available at the time, no one does anything that will intentionally cause him to arrive at an outcome that he did not want. This even applies to an insane person, who in his warped sense of rationality nevertheless believes that he is doing what is best.
This is the basis for a lot of people who advocate for no interference by the government in the market. Each individual is acting independently with a unique set of attributes and reasons for why he acts. So there is no way of knowing how to successfully satisfy everyone’s wants equitably. There is no “perfect knowledge.” One may take the position of utilitarianism where they can seek to give the majority what they want. But what should be done about the minority who lose in this scenario? Are we to shrug our shoulders and say, “You can’t please everyone!” That seems unfair at best and more accurately wrong.
Even if you believe the utilitarian approach is the best way to organize society and even if you are willing to accept what happens to you when you end up in the minority, are you justified in making that decision for other people?
The market is a system where individuals are left to act to satisfy their own wants and needs in the way they deem fit. The “perfect” market would be one that is free from coercive forces. This is a purely free market. But even in a purely free market, it is not possible to predict with complete certainty what its outcomes would be. No one claims that every person will have everything he or she wants. There is no utopia although it can predict that there will be general increases in wealth and that the best ideas will surface to the top.
What is the best idea for any given problem? That is what the market is for.
So you cannot set a goal that you will achieve financial success in some market and then claim that it will happen because we are assuming a perfectly free market. This is because people may not share your views on what is best for that market and may decide against doing business with you. If you cannot find enough people who share your views, your endeavor will fail. This is a success, however, for the market overall since it will free up resources to be directed to better or more efficient ideas.
Now we have to compare this idealized market to some idealized version of government. Is it proper to assume that a government, while not perfect in the sense that we described before, functions exactly how it is meant to function? Let us pass it through the requirements we set for the analyzing the market. This is to ensure that we are comparing apples to apples.
It is vital to keep in mind that government is an institution that is made up of people. It may put systems in place that are supposed to work a certain way, but they are dependent upon the actions of individuals who make up the government.
How can a government function exactly as it is supposed to if the people within it have imperfect knowledge and have subjective ideas about what is best? They have imperfect knowledge about what is best for themselves. In other words, they are prone to mistakes. Given that the person an individual has the most knowledge about is himself, then it follows that they are even more prone to making mistakes about what is best for other people.
We want to have markets and government competing on a level playing field where the actors in each system are held by the same rules, so we must assume that an idealized government is one where everyone has good intentions. How it can now be expected to function is the reason for our comparison to the market.