July 14, 2015 Print

Perhaps the most challenging problem in economics lies in how to devise and maintain institutions that facilitate good government. Australian economist Wolfgang Kasper addresses this challenge in “Governments Cannot Choose What is Good for Us,” an essay published by Atlas Network partner Southeast Asia Network for Development (SEANET), a project of Institute for Democracy and Economic Affairs (IDEAS), based on Kasper’s recent public lecture at INTI College in Subang.

Kasper examines three primary issues in his paper:

  • The role of the state in governing a free and democratic society.
  • The harmful side effects that often accompany government intervention.
  • The underlying principles that allow the invisible hand of the market to foster positive economic outcomes for society.

He explains that modern democratic governments are understood to fulfill three essential functions: protecting citizens from external aggressors and internal thieves and fraudsters; providing certain goods and services; and distributing essential resources to the needy. As Kasper points out, however, these assumptions about what governments should do contain inherent flaws, such as the harmful side effects of redistribution: high costs, poor economic growth, political and social tensions, and the unfair exploitation of producers and the young.

Kasper brings to bear the insights of public choice economists like Nobel laureate James Buchanan and his colleague Gordon Tullock in explaining fundamental flaws in the incentive structure of the public sector, like the principal-agent problem. In their positions close to the reins of power, politicians have the knowledge and incentive to act in “self-seeking, opportunistic ways,” while voters, who are far from that process and unable to have much of an individual impact, largely remain in “rational ignorance” about the political process. Kasper also delves into some important methodological distinctions in the history of economic thought, tracing their development from Adam Smith through Austrian economists like Carl Menger, Ludwig von Mises, and Friedrich A. Hayek, and applying it to the institutions of modern Malaysia.

“There is a powerful, uncontroversial policy message for Malaysia in this,” Kasper concludes. “If it wants robust economic growth beyond the easily attained middle-income status, it has to develop the institutions that guarantee better economic freedom for all and strengthen the rule of law.”

Read Wolfgang Kasper’s full analysis, “Governments Cannot Choose What is Good for Us.”