Market failure as ignored determinant of the choice between public and business administration

Abstract

Abstract In the epistemology of administrative science, one of many important dimensions has been the different subfields of the study of administration. Perhaps the biggest, longest running ‘turf’ battle between these different areas of administrative knowledge is that between public and business administration. This is a controversy that goes back at least to Adam Smith, with his specific limitation of the role of ‘the sovereign’ (government, or public administration) to justice, defense, and public works. In limiting government to these areas, note that Smith was also implicitly asserting that these were market, or ‘invisible hand’ failures: areas where the pursuit of self-interest would not yield the good of society, the specific moral justification Smith identified for market exchange. Contemporary discussions of the relative role of market and state are generally framed in terms of the role of the State, with market provision the default option. We will argue that even discussions of the role of the State can best be assessed through the concept of market failure. The nine broad types of market failure discussed include institutions, public goods, monopoly, asymmetric information, externalities, substantive issues, principal/agent problems, irrationality, and the implications of ‘creative destruction’.