Yesterday’s post about the government’s anti-Midas touch concluded with the question of what explains the sordid performance of practically anything undertaken by the government. I believe that the answer has to do with what is called the objective function of the government.
Loosely defined, an objective function embodies the goal of an economic agent and which the economic agent attempts to optimize in some sense. So for a commercial enterprise, the objective function could be to maximize market share, or it could be to maximize profits. For a consumer, it could be to maximize utility. For a government, it could be to maximize social welfare, or to minimize unemployment, etc. The objective function for a central bank could be to keep inflation below a specified value while maintaining adequate liquidity in the money markets, etc.
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