Government Failure

Government Failure

Society, Markets and Rules

Wilfred Dolfsma

This highly unique book takes a fundamental look at when and how a government can fail at its core responsibility of formulating rules. Government, representing society, relates to the economy by formulating the rules within which (market) players should operate. Although market and business failure are much discussed in the economics literature, government failure is often overlooked. This book addresses this gap, exploring in detail what constitutes government failure.

Chapter 10: Establishing government failure or success: a dynamic welfare perspective

Wilfred Dolfsma

Subjects: economics and finance, institutional economics, law and economics, political economy, public choice theory, welfare economics, law - academic, law and economics, politics and public policy, political economy, public choice, social policy and sociology, economics of social policy


In Chapter 17 of his Capitalism, Socialism and Democracy Schumpeter (1943: 190) introduced some fundaments for a dynamic welfare economics. One passage is especially worth noting: we shall call that system relatively more efficient which we see reason to expect would in the long run produce the larger stream of consumers’ goods per equal unit of time.This chapter will start from the perspective that the newly emerging reality of our economies today is that they are knowledge economies (OECD 1996). Baumol (2002), for instance, claims that over 60 per cent of the labor force in the United States are knowledge workers. This is recognized in diverse strands of thought in the economics discipline after the puzzling findings in the growth accounting literature (for example, Denison 1967). Romer (1987, 1993) has been developing ideas about how knowledge impacts on economic growth, better known as the New Growth Theory. The work of Baumol (2002) relates to this. Studying a dynamic, knowledge-based economy requires that a conceptual understanding of knowledge and its role in society is developed and used in economics. The first section discusses this in some measure, arguing that welfare economics for the knowledge-based economy requires different, partly additional concepts that would allow one to evaluate developments in society or government policy. The second section gives a brief and admittedly incomplete outline of the welfare economic perspective that is now mostly adhered to, following Pareto.

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