MARKETS AND GOVERNMENT: REALIZING THE PROMISE OFGAINS FROM EXCHANGE AND COOPERATION

Recent policy debates have focused on the boundarybetweenmarkets andgovernment, as if one could partition them. The placement of this boundary hasbeen debated using the established theory of marketfailureand the developingtheory ofgovernmentfailure.But the questions raised by this approach are notwell-posed, and miss several important points. First, markets and governmentstogethercan achieve and have achieved enormous success in the last two hundredyears in broadening geographical settings. Second, markets need government,and government needs markets to enable societies to capture the gains ofcooperation and exchange. Third, we challenge the relevance of idealized“competitive equilibrium” asthe reference point against which real outcomes areto be compared. As an alternative, we propose that the appropriate benchmark forcomparison is Pareto improvement through solving problems of collective action.In that regard, both firms operating in markets and government agencies operatingin a statutory setting should be considered together as organizations. Viewedfrom this perspective, both firms and government agencies have some sharedfeatures and some sharply different features in their capacity for fostering cooperation. In this paper we outline the advantages and risks of complexorganizations, and provide some general guidelines for public policymaking