Enterprise and Small Business Principles
Limitations on government action
The difficulties of finding a niche for government actions are increased by the difficulties of acting effectively once a cause for intervention is found. The existence of a market failure or ‘need’ in itself does not justify government action. Not only are there other non-market approaches as alternatives to government, but also, and most importantly, attempts to overcome market failure may result in actions which do more harm than good, because there is also possible government or bureaucratic failure. The result of such failures is that government can harm small firms and can reduce the welfare of society though diverting resources, deflecting or impeding businesses. As a result, the costs may exceed the benefits of intervention and far exceed the costs of accepting the market failure that existed in the first place. Market failure problems and ‘needs’, therefore, do not necessarily always have effective government policy solutions.
In general, the difficulties of government action cover each stage, from problem identification to policy execution. At the design stage, how is it that government and its officers, who are not themselves running a business, are likely to be better than a small business at identifying a development problem and designing a solution for business? The constraints on government action are:
■ lack of appropriate and up-to-date information
■ lack of technical business skills
■ adoption of targets for public policy rather than business policy
■ difficulty of policy termination (admitting that mistakes have been made and exiting)
■ difficulty providing help that adds to total net output, rather than helping one firm and thus displacing another (achieving additionality of policy)
■ difficulty of aligning and coordinating policies so that they do not conflict with each other
■ embeddedness of policy with multiple layers of complex decision making with many and conflicting targets that are slow to change.
As noted by Peacock (in Bannock and Peacock, 1989, p. 6) ‘Too often it is assumed that a case for public production... is the sole answer to so-called “market failure” ... (but) when consumers have only an indirect control over what is produced and how it is produced, the checks operating on bureaucratic efficiency are weak.’ Peacock goes on to identify four specific weaknesses. First, consensus views are usually necessary in policy implementation; this means that the aims are deliberately obfuscated to keep everyone happy and this suits bureaucrats and politicians since it is then less easy to identify when the policy fails. Second, there are no real costs or risks to policy makers when things go wrong, especially if the aims are unclear in the first place. Hence, the quality of design is not incentivised and correction of error is slow; policy termination in the face of failure is rare. Third, proliferation of specific schemes fosters clients who defend pet schemes. Instead of the small firms focusing on business development, they put extra resources into bargaining and lobbying with government; this is distortion - ary, undermines firm efficiency and creates dependency and clientelism. Fourth, the costs and benefits of alternatives are rarely assessed and there is no civil service career to be made from not spending allocated public finance and, therefore, reducing tax burdens and improving general economic conditions; as a result, improvement in government policies is usually, at best, slow. Indeed a recent Treasury Review (2002, p. 153) admitted that: ‘A variant of Gresham’s Law might operate, in that bad services drive out good.’
