Can we determine the optimal size of the government?

Economists have never come to a consensus on what the optimal size of the government is. Some economists, on the other hand, have proposed that the degree of economic freedom that the citizens of any country have is a better measure of the soundness of government policies and government’s outlook towards their own role in the economic activities taking place within their jurisdiction.  To discuss these issues, the members of the Liberty Discussion Group sat down on 29th January 2016 at Gaia Restaurant and Coffee Shop, Thamel. The reading for this discussion was “Can we determine the optimal size of the government?”, a paper by James A. Kahn.

Some of the issues discussed were:

  • Access to credit is an important aspect of starting an enterprise, especially for the people from regions with lowest levels of economic development. Given this background, access to credit itself might also be a relevant indicator to consider while talking economic freedom. To this, the members further discussed that it is the free credit market (one without government regulation) that can actually solve the problem under consideration. Excessive government regulation (for eg. the regulation of the spread that banks are allowed to maintain), high administrative costs for the banks and financial institutions that have to be incurred while dealing with smaller sizes of credits, lack of policies facilitating venture capital, etc. that restrain the poorest individuals’ access to credit. If a prospective entrepreneur isn’t capable of getting loan from a bank, they have an option of accessing credit from a venture capitalist. This credit market regulation, again, is considered by the economic freedom.
  • Some members proposed that there could be an ‘arguable size of government’ instead of an ‘optimal size of government.’ The argument was that it could be justified for the government to expand or contract its activities depending on the nature and the state of the economy of a particular jurisdiction. Some other members disagreed with the notion and pointed out that once the government expands, it rarely contracts, and when we say “maybe it is justified during special times…” we are taking for granted the economic freedom of other members of the society which will be violated during the process. These members that disagreed with the proposed notion held a belief that ends do not justify the means.
  • Developing a robust methodology for measuring the size of the government is difficult.
  • Apart from using the tangible/ monetary measure to determine the size of government, intangible/non-monetary measure can also be used. Looking into the socio economic conditioning of the people is one way. For example, people didn’t rebuild their houses assuming that the government would do it. These people were guided by the historical trends where the government had always provided some kind of special service and/or benefit to the affected people during difficult times. This incentivized the people to shy away from planning one’s own private affairs and relying on the government to play the savior.
  • Poor countries aren’t poor because people work less; they are poor because their people work less efficiently. To this, few members raised strong disagreements. The issues could not be discussed at length due to constraint of time, and the members agreed to delve further into this matter over the facebook platform of the group.
  • When a country is at the bottom of the pyramid, small reforms hold the potential to deliver large relative changes in the economy. Nepal can actually benefit from this, given that Nepal is towards the very bottom of economic growth and economic freedom for its individuals.