By John O'Shaughnessy

Adam Smith in The Wealth of Nations noted three obligations of government: defense, administering justice and assuming public works which no one individual or private group would find it profitable to undertake.

Milton Friedman, the Nobel Laureate economist, questioned the need for governments undertaking other than defense and administering justice, arguing the market could supply all else except for the need to control the money supply to keep inflation down and secure economic stability (this claim is the core of the doctrine known as monetarism.).

Typically, Americans believe that a government's authority be kept in strict bounds when it comes to authority over individuals and the government's role in commerce. And most Americans seem to believe that private ownership of business is more likely than government ownership to achieve the best economic outcomes. Commonly the role of government is expressed minimally as ‘securing the rights and freedoms of individual citizens' as stated in the American Constitution and the Bill of Rights.

We might ask ourselves whether Friedman is right. Despite the claims of neo-anarchists, Government provision is needed when national coordination is a requisite. What changed things in 19th century Britain, from insisting that the Government should only be charged with national security, were the sanitary and public health issues arising from factory conditions and urban living with the advent of the industrial revolution.

A major motivating factor was the acceptance of the germ theory of disease developed by Louis Pasteur and Robert Koch and popularized in the 1860s by Pasteur and Lister. This meant everyone (the rich as well as the poor) was vulnerable (e.g., Prince Albert, the Consort of Queen Victoria died of typhoid at the age of 42 years through poor sanitary conditions) unless there were regulations enforced by a central body.

The next thing was the recognition of the need for everyone to be able to read and write to cope with the demands of newly emerging industries. A national policy was called for and National Schools the response.

With the arrival of the internal combustion engine there also arose the need for better roads, not just in London but throughout the country, while only the central government could coordinate the standardization of gauges etc., needed with the coming of the railways.

All other subsequent government services arose from this overall need to coordinate and enforce a national need on a national level. But ideology and politics can interfere with what is the rational thing to do. Thus in the U.S.A. many laws should be uniform throughout the country but the dogma of state rights says otherwise.

In Europe they have no problem in doctors moving from one country to another to practice medicine (unlike the U.S.A.) but there is a failure in the European Union to acknowledge cultural differences among nations with the consequent attempt at uniformity in laws that results in putting in standard systems when standard cultural conditions do not exist.

The reasons we use to justify any decision can be classified under six criteria: technical; economic; integrative; legalistic; adaptive; intrinsic liking, though in what follows we put economic and technical reasons together. We should use these criteria as a check list when making a decision.

Take the subject of capital punishment which arouses so much emotion. Often it is evaluated purely in terms of technical criteria: Does it work as a deterrent? (It does prevent repeat offending!) But the other five criteria are relevant. There are economic criteria in judging relative costs in relation to benefits. Capital punishment should save money (‘If you can't save souls, save money') but in practice the cost of constant appeals over decades can be more expensive than the cost of incarceration over a life time.

There are legalistic criteria in that capital punishment for many people violates human rights or at least violates guidelines issued by international bodies like the United Nations. There are integrative criteria in that capital punishment is divisive, with some claiming it falls disproportionately on minority groups or in contrast, that, without capital punishment, people would feel like taking the law into their own hands in the interests of ‘justice'. There are adaptive criteria in that there is always some uncertainty that an innocent person may be executed. There is finally the criterion of intrinsic liking in that the very idea of taking the life of another is repugnant or at least distasteful. Anyway let us look at these sets of reasons in respect to the role of government. 

Economic and Technical Criteria: Some services have to be undertaken by the national government because the government is the only organization in a position to undertake the function (e.g., national defense) or has the resources to do the job (e.g., getting a man to the moon) or has the buying power to achieve the potential from economies of scale.

Legalistic: There needs to be some uniformity at the national level in laws to protect individual rights, property rights, enforce contracts and resolve disputes. There is also the need for the government to intervene in the business world for health and safety reasons; to protect the consumer from harmful products and from being ‘ripped off' by monopolistic practices or deliberate fraud.

Integrative: Certain national laws are passed that help people integrate, feel part of the culture; laws that show concern for all citizens so they respond to appeals to solidarity in times of need. A media culture that propagates contempt for government contributes to a disheartening climate for its citizens.

Adaptive: All people and commercial organizations are faced by uncertainties and all forecasting is to an extent a projection of ignorance. Adaptive criteria are concerned with adapting to uncertainty and information overload. One reason for this uncertainty in scientific matters is that the future may be based on scientific concepts not yet discovered and so cannot be extrapolated (as occurs in technological forecasting from an established base). When pharmaceutical houses, for example, reacted to uncertainty by avoiding basic theoretical research, the Government stepped in to subsidize such research at universities.

Intrinsic Preference: The gut reaction of liking or disliking distorts our outlooks and prejudices our decisions so we are apt to collect evidence not to test our ideas but to support them. Although when a decision has major consequences, more time and care should be taken in making the decision. This frequently does not happen as we collect more evidence only if the collected evidence so far is insufficiently supportive of an implicit favorite option. This is a somewhat cynical view but with a good grain of truth.

We should look at options in terms of desirability, feasibility and commercial viability but our values enter into the evaluation and discussion of all these elements. These values are critical in determining tradeoffs and can be overriding in decision-making since rationality proscribes but does not prescribe.

John O'Shaughnessy
Professor Emeritus of Business, Columbia University
Formerly Senior Associate, Judge Institute, Cambridge University

June 2011