Why Not Have Profit-Maximizing Governments?

An interesting thought experiment by Arnold Kling:

Instead of being answerable to voters, what if governments were answerable to shareholders?

Assume that the leader of a territory, whether the United States or Zimbabwe, is elected by shareholders, each of whom may or may not be a resident of the territory. In each territory, the leader would control fiscal policy, monetary policy, and regulations. She could set tax rates at whatever level she liked. Some of the tax revenues would be used to fund internal investments. However, the remainder would be disbursed as dividends to shareholders.

Shareholders would be looking to maximize their returns. If the leader engages in arbitrary confiscation, she may be able to pay a nice short-term dividend. However, such a policy will lower the society’s wealth and reduce future dividends. Shareholders would prefer a more farsighted policy. A leader who protects property rights and invests in public goods probably will generate a higher share price.

A poorly-run country, such as Zimbabwe, probably would be taken over by investors seeking to profit from a turnaround. These investors would buy up shares and install new management.

The lessons from this thought-experiment are:

1. Profit maximization is not such a bad motive. Even a government motivated solely by profit maximization might do as well or better than existing governments at serving the public good. So we should not be quick to disparage profit maximization as a goal for corporations.

2. Norms and institutional processes matter more than motives. If you can remove some of the institutional impediments to creating wealth, then a lot of poverty will be eliminated without changing anyone’s motives. Conversely, if the institutional environment entrenches ineffective leaders and fails to restrain violence, then no improvement in motives will achieve better outcomes.