Last week I wrote about the difference between big government and big market intervention. The purpose here is to change the debate from the impractical (should government be big or small?) to the useful (what services, exactly, should government run?) I promised an answer to the latter, more meaningful, question, and today I deliver.

1. National Defense

Anybody who has read Machiavelli will understand why government has to run the military. It’s quite simple really: if the military were independent from the government, whoever was in charge of the military could take over the government. Yes, concentrating military power also enables tyranny, but assuming military power is concentrated, it is pretty clear that it must be run by government, not private industry.

2. Critical Infrastructure

Certain services are necessary for a functioning society: running water, electricity, and transportation are typical examples. Without these things, society collapses. Leaving it to the market to provide things like electricity is too risky because of the asymmetry of penalty when things break.

If, for example, the power fails in the entire city you live in, for three days. The power company loses a 365/3 = less than 1% of its potential revenue for that year. Meanwhile, the tens of thousands of businesses in the city that require electricity ALL lose three days’ revenue, many people don’t get paid because there’s nothing for them to do at work, and the whole city basically shuts down. And nobody can sue to recoup their losses because an unregulated power company could write a software-like end-user license agreement that says they’re not responsible for power failures.

Free-market enthusiasts will fallaciously claim here that somehow the market will provide uninterrupted service to those willing to pay for it, but this is not backed up by the facts. The barriers to entry for a competing power company are enormous when there is already an incumbent power company with the huge installed base of capital equipment. You would need to raise billions upon billions of dollars just to get a new power company off the ground, and many people wouldn’t pay the extra cost for a guarantee of no blackouts.

Therefore, critical infrastructure such as power companies must either be government owned or heavily regulated.

What else is critical infrastructure? If you look at the dependencies between modern life and services and then among the services themselves, critical infrastructure would include at least the following things: electricity, transportation infrastructure (e.g., roads, rails in airports), public transportation (e.g. buses, trains, planes), telecommunication (e.g. phone and Internet), running water.

Yes, I am implying that government should run or heavily regulate companies that provide phone, Internet, bus service, flight and so on. It is frightening but true that electricity depends on telecommunication, telecommunication depends on and electricity, running water depends on electricity, transportation depends on all three, and we as a society fundamentally depend on transportation, telecommunication, electricity and running water. Subjecting these services to market forces is inherently risky.

3. Any industry in which economic consequences undermines efficiency or morality

In some cases the quest for profit will, from a societal perspective, have an unacceptable cost in either efficiency or morality (although this often applies to critical infrastructure, here I refer to non-infrastructural cases).

As an example of profit interfering with morality, two cases come immediately to mind: health care and education. In an unregulated, privatized healthcare environment, the care a person receives is proportional to their wealth. I’m going to go out on a socialist limb here and claim that sick people deserve treatment, regardless of their income. Moreover, the care received by children should not be determined by whether they were lucky enough to be born to rich families. Similarly, all children have a right to a good education regardless of the wealth of their parents. Of course I recognize that rich kids will always have advantages poor kids do not (although the reverse is true is well), can you imagine the problems with a fully-privatized education system? The rich kids go to the expensive schools with all the good teachers and equipment, the poor kids would be lucky to learn to read. It would be classism in its worst form.

As an example of economic consequences destroying efficiency, consider auto insurance. Where I live, there is one auto-insurance monopoly, owned by the the government. When I moved here I was shocked at how low the insurance premiums are. The key is that insurance companies waste millions fighting with each other in court. When you only have one insurance company, and two people have an accident, they just send an investigator to figure out who’s at fault and act accordingly. You can contest it in court, but most people don’t, and piles of cash aren’t wasted on lawyers.

Conclusion

In conclusion, I have identified three classes of industries or services where Government should either regulate heavily or take over entirely: national defense, critical infrastructure, and industries that, left to themselves, will produce unacceptable consequences from a moral or efficiency perspective. In the third and most complex case, the extent of government control should not exceed that required to eliminate immoral or inefficient consequences.

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