In a fascinating post Dani Rodrik says there are two genres of economists: first besters and second besters.
From my understanding of his post, the first besters always trust the market and "their take on the issues of the day are driven by a straightforward, almost knee-jerk logic." Dani puts Gary Becker, Tyler Cowen, Greg Mankiw, and Brad De Long in this category.
The second besters, who include Joe Stiglitz, George Akerlof, Bob Shiller, Alan Blinder and Paul Krugman, argue that "that market outcomes can be improved by well-designed interventions", and eschew straightforward free-market prescriptions as hopelessly oversimplistic.
Tyler has now weighed in to say "I think of myself as a better-than-first-best economist" and that "An oversimplified version of my view is that anything good is underprovided at the margin."
I think that one could perhaps better frame this debate as how economists view the government. In this case the first besters would be those who tend to uncritically view the government as a benevolent externality corrector (or at least that it would be if we could just elect the right people). The second besters would be the Public Choicers (the Bob Tollisons, the Gordon Tullocks); people that view government agents as acting in their own interest and thus amenable to aiding narrow monied interests.
Me? I think that any real world market outcome could hypothetically be improved mainly for the reasons Tyler gives, but that starting from where we are now, the actual outcome of turning our government (further) loose on any given outcome would most likely make things worse.
We have made a bollix of the tax system, we are moving towards making more mistakes in our economic relationship with China, we are probably going to continue to give protection to domestic steel for no good reason, we just passed a truly disgusting farm bill, we continue our surrealistic approach to social security, the reform of earmarking lasted about 5 minutes, our alternative energy policy is being run by the corn lobby; its hard for me to see an area in economic policy where new government action is making things better.
What about education? Starting from where we are now, would you favor more government spending and regulation or more competition and market based experiments? I'd opt for the latter.
I'm not a no government guy, I don't favor private money or private law. I think our government has gotten many big things approximately right (anti-trust, rule of law, protection of individual rights, compulsory education). I just think the supposed naivety of the Rodrikian first besters about the market is only surpassed by the naivety of the those who assume the best when it comes to the government!
The relevant comparision has to be between the current market outcome and the most likely result of further government activity as predicted from a positive model of its behavior. We cannot simply assume that government will implement what we consider to be the optimal policy intervention.