New Institutional Economics, New Public Management and Government Failure

Although the growing literature on government failure has undermined the authority of the once dominant market failure paradigm from its throne in policy analysis, and obliged both theorists and practitioners alike to rethink the appropriate role of government in advanced market economics, uncertainty still surrounds the implications of this literature for public sector reform. After all, as we saw in Chapter 3, an emerging consensus is developing around the concept of the ‘enabling state’ as a means of describing socially desirable forms of government intervention. Moreover, this consensus represents something of a compromise between the interventionist bias of the market failure paradigm and the radical proposals for limited government offered by the public choice variant of the government failure literature. But both the theory of market failure and its government failure counterpart focused heavily on the desirability or otherwise of government intervention in market or exchange processes rather than on the public sector per se. With relatively few exceptions, like the economic theory of bureaucracy (Niskanen, 1972) and its derivative notion of bureaucratic failure, until very recently economists have ignored public sector organizations. If the core assumptions of economic analysis consist of rational maximizing behaviour, stable preferences and comparable equilibria, and if neoclassical economics adds peripheral concepts like perfect information and costless market exchange (Eggertsson, 1990), then this reticence about examining hierarchical relationships characteristic of public bureaux would appear warranted. However, with the development