Don't expect the great Leviathan to provide better than private incentives under competition

A philosophical approach to government management of state assets.
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on June 14, 2024
on June 14, 2024
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Thomas Hobbes (left) and John Locke (right) revolutionized the way of thinking about the nature of government and executive policies in the 17th century.


The government, what a beautiful social structure created by the people for serving the people. Alternatively, what an impressive political institution through which political power is concentrated for the very few involved in or with its structures. Does the government have the willingness to support the economic and social interests of all the subjects that it is supposed to regulate at the expense of supporting the interests of a political minority? In doing so, should the government be constrained by a well-defined social contract through which government policies remain strictly limited to serving the national interest? The present article aims to answer these questions by applying the philosophical and economic works of Thomas Hobbes, John Locke, Friedrich von Hayek, Adam Smith and Vilfredo Pareto. The first part is dedicated to exposing the real interests of the government, which oscillates between maintaining a general social welfare and protecting political gains. The second part focuses on how different executives` behaviour changes between the national and political interests because of government policies. The conclusion of the paper will summarize how best to judge whether government policies are helping or harming the social wellbeing and state economy.

Hobbes and Locke on the size of the government

The early debates on the power and aim of the national government gave rise to a conflict of opinions in the first years of the Enlightenment between Thomas Hobbes and John Locke. Hobbes considered that the government was a necessary entity to maintain order in society in what was then referred to as 'the state of nature', a period of continuous anarchy.[1] According to the philosopher, only the government could prevail in maintaining a social order as a consequence of its subjects renouncing certain rights and transferring them to a central structure. The government thus represents the product of a popular social contract with the population delegating power and legitimacy to a central regulator obliged to guarantee the protection of their rights.[2] The government as almighty or a great 'Leviathan' as Hobbes described it was not particularly convincing for John Locke who, unlike Hobbes, sought a reduction of the government's power and influence on society.[3] Just like Hobbes, Locke saw the government as an entity resulting from a state of nature, but contrary to Hobbes it should be more accountable to respecting the same social contract with the general population. In other words, while Hobbes considered that the government cannot be questioned in terms of the prevailing social contract, Locke envisaged that the government could be even overthrown if it failed to guarantee the social contract properly.[4]

Placing the seventeenth century debate into a more modern context, the general social contract is represented by the responsibility of the national government to ensure social welfare for the general population. A modern Hobbes would say that the government is aimed to do so in exchange for recognition of its legitimacy by the population. A Locke instead would see the government as subject to continuous evaluation by the population regarding the nature of its mandate. How these two perspectives shape the nature of the real interests of the government? A Hobbesian government would prioritize maintaining the legitimacy obtained as a result of its social contract with the population. While the government knows that its legitimacy is due to the people's expectation that the government will ensure an increase in social welfare, the institution instead considers that the priority is to maintain this legitimacy even at the cost of not respecting the mandate given by the people. Let’s consider the Hobbesian government as a democratic government that ensures its legitimacy through democratic elections. To maintain the expected results in the next elections, the government engages in public policies aimed not to improve the economic and social situation of the population, but to guarantee its own survival through political patronage and indirect influence over the future vote.[5] These two are manifested by handing over the right to execute some national projects (e.g. infrastructure, energy, etc.) to companies run by the loyalists of the government and/or the nationalization of some companies and their transfer to the same friendly class, as well as an uncontrollable growth of the public sector. The government will manage to maintain its legitimacy once the loyalists will return the favour by financially supporting the executive during political campaigns, while those newly employed public servants with wages far above the market average will hardly vote against their current employer.[6] While the government gains legitimacy from a social contract imposed from the centre through public policies favourable to one party (and its allies), the expectations of the rest of the population remain unfulfilled.

A Lockesian government, on the other hand, not engaged in political patronage and influence over the vote (in Locke, the government has less power to do so since it is not an oversized Leviathan but an institution accountable to the general population) will prioritize the satisfaction of national interests at the expense of maintaining political legitimacy. Since the government under Locke's influences is afraid of the population's response to its performance in increasing social well-being, it will engage in public policies aimed to support efficiency and innovation, rather than political linkages. The only way the government could gain legitimacy was in response to its positive records. While a Hobbesian government could influence legitimacy by spreading its tentacles over all the economic activities of the state, a more limited Lockesian government could do so only through good-for-everybody policy and decision-making.

The choice between nationalization and privatization under Hobbes and Locke

The rational choice between having a Hobbesian or a Lockesian government rests at the base of the debates between when nationalization and privatization policy serving the general interest of the society is good to be pursued. In doing so, I do not wish to insinuate that nationalization is perfectly positioned with the Hobbesian government due to the increase of state-owned assets and therefore the size of government, or that privatization is favourable to Locke due to the limitation of state power at the expense of the private, as there could be private loyalists to the executive in a Hobbesian government as well as having good public nationalization in a Lockesian government when the private is unsuitable to respond to the needs of the population. Otherwise, a Hobbesian government will choose between nationalization and privatization with the main goal of maintaining its political clientele, while a Lockesian government will do so to ensure economic efficiency, maintain innovation and meet the general expectations of society. The choice is rather simple for a Hobbesian government unconstrained by innovation and efficiency demands. It will refrain from privatizing the least profitable state assets for fear of public opinion following possible private restructuring (many would lose their jobs in the process), while selling the most profitable ones to private loyalists as the most suitable channel for indirect wealth transfer. But choosing between nationalization and privatization is more difficult for a government aiming to do good for society. Therefore, how should a Lockesian government know exactly what to privatize and what to be kept national? Introducing the renowned Austrian School economist Friedrich von Hayek into the philosophical debate on the role of government, the notion of private information becomes of paramount importance.[7] According to Hayek, the main objective of society is to make best use of its knowledge which will never be found in a concentrated or integrated form, but rather in incomplete pieces that everyone possesses to best maximize the outcome in its favour. Once there is private information in society, a central entity will not know how to use this information better than each member of society who possesses it. In other words, the government cannot presume to know more about individual needs than the individual does. Only when there is no private information as such, could the government imply to be a highly wise Leviathan in making decisions for the whole society.[8] But how to make sure that private information is then used in the interest of society? Here is when the overly accepted theory of Adam Smith provides an answer. Smith considered that in competition, individual ambition serves the common good. What has remained known as the `laissez faire' proposition, claims that competition ensured, any Hayek-mentioned private information will be used with the indirect aim of improving social welfare in aggregate. This set of notions supports the argument for the privatization of state assets by a Lockesian government. Since improving efficiency and ensuring innovation are the goals of the executive to increase the living standards of the population, private knowledge is regarded as more suitable than the government to achieve these based on the very incentives of the private to use its knowledge to improve the quality of the goods and services responsible with the provision of, as well as maintaining a cost-efficient production for the company and not incur losses sustained subsequently by taxpayers.[9] Moreover, since the private possesses the whole ownership of the asset, it is in its interest to continue to innovate and ensure qualitative efficiency to maintain not only an increase in profits but also a dominant position on the market. These incentives are less depictable within the ranks of public managers as the lack of ownership makes them weakly interested in improving once the profits are transferred to the state, rather than private budget.[10] However, this does not mean that there are no limitations to the laissez faire theory of always using private knowledge in the interest of society. Since the private sector is concerned with cost efficiency and quality improvement, sometimes the incentive of the former might surpass that of the latter.[11] As such, a private company might hire less experienced employees paid with low salaries and who can bring little expertise in the innovation process. Ironically, nationalization would seem now as a more favourable policy because the lack of incentives to reduce costs from state managers would ensure maintaining quality at high costs.[12] But before discrediting the free enterprise regime in favour of nationalization, it is of paramount importance to remember that particularity which makes free markets efficient and innovative. As mentioned earlier, laissez faire subscribes to the importance of competition in the market, and while this was advanced by Adam Smith, it was taken up by the Italian economist Vilfredo Pareto who stated that absolute efficiency is given by competitive markets.[13] As markets are Pereto-efficient when they are completely competitive, any large distortion of private incentives to innovate in favour of that of reducing costs will be penalized by a transfer of the consumer's demand to another entity that maintains a more suitable balance to the customer's needs. A public policy aimed towards nationalization by a Lockesian government is thus regarded as necessary when the cost-reduction incentives cannot be reduced to an acceptable level of having quality and innovation-driven incentives, there is no private knowledge and market competition, or when there is private knowledge, but the markets are not Pareto-efficient.[14]


Based on the available evidence exposed in the main body, it is the conclusion of this paper that a more limited in size Lockesian government is more adamant than an over-intrusive Leviathanic Hobbesian executive to enact public policies designed to help the society improve well-being and the national economy to innovate. Therefore, while a Hobbes-inspired institution will choose between nationalization and privatization based on which option better preserves government legitimacy and political gains, a Locke-advanced institution will orientate itself between the two options depending on which will bring efficiency and quality to society. Nationalization under Hobbes is demanded when the national assets are less profitable and the private temptation to restructure it might have dire consequences for employees with voting power. Privatization under Hobbes is chosen among the most profitable assets to be transferred to those few willing to share the gains with the government by financially supporting the governing coalition to preserve its position in the next elections. Privatization as envisioned by a Lockesian government is taken in conjunction with the superiority of private knowledge at the expense of public knowledge/centralization and based on the argument that on competitive markets any such knowledge is involuntarily pursued in the interest of society with the private ownership creating better incentives to innovate and be efficient once profits are retained by the same investors rather than being transferred to the state budget by managers of state companies. Nationalization if pursued by the Lockesian government is advised when there is no private knowledge, the incentives for cost reduction are unfairly much higher than those for innovation, and the markets are Pareto-inefficient in terms of competition.[15]



Farrell, Joseph, "Information and the Coase Theorem", The Journal of Economic Perspectives, Vol. 1, No. 2 (Autumn, 1987).

Leighton A. Wayne and Edward J. Lopez, "Madmen, intellectuals and academic scribblers: the economic engine of political change", Stanford University Press.

Shleifer, Andrei, "State versus Private Ownership", The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998).

[1] Wayne A. Leighton and Edward J. Lopez, "Madmen, intellectuals and academic scribblers: the economic engine of political change", Stanford University Press, pp. 32-33.

[2] Ibidem.

[3] Ibidem, pp. 33-34.

[4] Wayne A. Leighton and Edward J. Lopez, "Madmen, intellectuals and academic scribblers: the economic engine of political change", Stanford University Press, pp. 34.

[5] Andrei Shleifer, "State versus Private Ownership", The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), pp. 141-143.

[6] Ibidem.

[7] Joseph Farrell, "Information and the Coase Theorem", The Journal of Economic Perspectives, Vol. 1, No. 2 (Autumn, 1987), p. 116.

[8] Ibidem.

[9] Andrei Shleifer, "State versus Private Ownership", The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), pp. 137-138.

[10] Ibidem.

[11] Ibidem, p. 138.

[12] Ibidem, pp. 138-139.

[13] Joseph Farrell, "Information and the Coase Theorem", The Journal of Economic Perspectives, Vol. 1, No. 2 (Autumn, 1987), pp. 113-114.

[14] Andrei Shleifer, "State versus Private Ownership", The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), p. 140.

[15] Andrei Shleifer, "State versus Private Ownership", The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), p. 140.

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