What is the role of government? This question needs to be answered before any discussion of institutions.
As citizens, we need someone to protect us from crime and from attack by foreign invaders. We need the police and defence for a secure and stable society. There is no question about that.
Whether the government should print money is not clear. In some nations, the printing of money started out from private banks, and it is debatable whether the government should be the sole custodian of the money supply. The power to print money tempts governments to forget their limitations, and leads to politicians wiggling out of self-created budgetary mistakes by printing more money – contributing to out of control inflation. But let us for the moment allow a statutory, independent central bank to enter the business of printing money.
What else? Public goods such as roads should be provided by government, albeit using a diverse mix of toll ways, freeways and public-private partnerships with competitive tendering at each stage of the process. Where feasible, private initiative must be allowed to flourish.
The case for government intervention becomes fuzzier with the success of privatisation and competition in the telephone, energy, air transport, postal, education and health sectors, which were at one time thought to be “natural” monopolies and hence the preserve of government. Though the monopoly argument is not valid, one can allow for some government role in health in terms of reducing the costs to disadvantaged people.
And yes, one must ensure that people pay for the mess they create. In other words, government has some role in regulating pollution and keeping the environment clean. Note that this does not necessarily entail Pigouvian taxes or large scale, expensive action to tackle problems of uncertain magnitude decades away (such as global warming). It means government should promote voluntary codes of practice, negotiation and ensure a responsive legal system where contract and tort law can deal with environmental externalities in the most efficient manner possible. Even if, in some cases, prices do not reflect the “socially optimal” information it is best to begin with a market system as the starting point, and to then change prices to the extent required.
What else? Zoning. Sure. This is critical. Property rights must be enforced. The government (at the local level) should follow standardised zoning practices to ensure the growth of cities is not haphazard and clumsy.
Finally, the government should regulate markets, such as financial markets, to minimise loss to consumers through unfair practices. Government should not, however, regulate to stamp out so-called anti-competitive practices. Complete free trade is the best anti-trust policy.
That’s about it. There is no role for government in the business of charity* (poverty alleviation and subsidisation of small industries) or the business of business. Governments should not own or operate media organisations, hotels, transport companies, clothing companies and so on.
* There is no a priori reason for governmental involvement in welfare. But I think there should be some welfare given to the disabled and unemployable as part of a humane society. This must be treated as a special case, as should all targeted government subsidies to low-income earners. It is open to review once empirical data on the need for government involvement becomes available.
