Government Intervention Is the Real Problem
JANUARY 01, 1999 by RUSSELL ROBERTS
As we approach the millennium, the pace of economic change quickens. Consumers have always wanted better products at lower prices. But in today’s economy, the market delivers “better and cheaper” more quickly than at any time in human history The time between product improvements gets shorter and shorter. Competition drives prices lower.
It’s a wonderful time to be a consumer. For entrepreneurs and business leaders, it is feast and famine at the same time. The opportunities are unprecedented, but the risks are formidable. Even Bill Gates doesn’t sleep well. Today’s genius can be out of business tomorrow because of technological advances we cannot dream of. New business starts are at extraordinary levels, but more of these ventures fail than succeed. Competition is fiercer and more unforgiving than ever before.
Two fundamental forces drive the pace of economic change. The first is technological innovation, particularly in handling and disseminating information. Computers get more powerful, smaller, and cheaper. The Internet expands the reach of customers in ways that are just beginning to be explored. And in traditional markets such as retailing, the application of information technology pushes prices down and pressures those who do not keep pace.
The second fundamental force driving change is the increasing accessibility of global markets. The increase in international opportunity means new markets for products and workers and greater economies of scale.
We like the wealth and opportunity that come from technological change and globalization. Alas, there is no free lunch. Innovation displaces established firms. A factory opens in Malaysia and one in the United States closes. Financial markets in Asia swirl with rumor and speculation affecting our markets as well. Russia teeters on the edge, it seems, of chaos.
Who is in charge here? The desire to take control, to improve the system via some “third way” is always tempting. Chaos and uncertainty are never pleasant. The natural response is to try and hold back the forces of innovation or reduce the sway of global markets. After all, are these not the cause of the confusion?
In a recent piece in the Washington Post, economics writer Robert Kuttner blames the chaos on a naive worship of free markets. He blames speculators for the problems of Asia. He blames the United States for encouraging capitalism in Russia then failing to help out when capitalism fails. Kuttner is not alone. Numerous commentators see the current state of world markets as an indictment of capitalism and free markets.
Yet much of the chaos comes from previous government attempts to meddle with the system or control it. In Asia, government tinkering with capital markets is endemic. Special interests get favors, and markets react. Speculation is not the cause of Asia’s economic problems; it’s the result. Government policy cannot stand in a vacuum; speculation is the market’s judgement of the wisdom of the policymakers.
In Russia, policymakers have partially dismantled socialism without putting property rights in place to allow markets to work. You cannot buy and sell land freely. Banks cannot enforce mortgages, so home equity cannot be converted into capital for new businesses. The tax code is capricious. Too many people still work in government-controlled firms where wages are determined by politics rather than market forces.
Many of the current problems in Asia and elsewhere come from the government’s inexorable urge to cushion the hardship that results from bad economic decisions. We see the same problems in the United States. We implicitly bailed out banks that made bad investments in Mexico. And we had the Federal Reserve pressuring private investment banks to bail out the Long-Term Capital hedge fund lest it fail. These maneuvers only encourage future investors to take more risk unwarranted by potential returns.
Security Through Protectionism?
But what about the changes in the marketplace that are due not to poor public policy but to the market forces of innovation and global competition? As we get wealthier, it is natural that we think of ways to reduce risk and uncertainty. One way is to limit the role of global competition via protectionism in its many forms. Or to soften the blows of competition, we can support businesses that fail in the marketplace. Should the government intervene to reduce the chaos that comes with competition?
The simple answer is that competition and free markets make us rich, which surely beats the alternative. But wealth creation is not the only reason for allowing free markets to work their magic. Free markets maximize the menu of opportunities available to us as individuals. Whenever I speak to high school students or college freshmen, I like to ask them whether they want the same careers as their parents. Inevitably, only a few want to pursue the careers of either of their parents. The next generation has its own skills and dreams. The incredibly vibrant marketplace that we live in today allows it to live out those dreams.
Dealing with the menu of opportunity presented by free markets is a challenge. It means preparing for those opportunities by investing in knowledge and skills. It means embracing some opportunities and forgoing others. It means living with the consequences of our decisions. The marketplace is not kind to all people at all times. But coping with the challenge of opportunity is what allows us to feel fully alive.
There are two ways to cope with the uncertainty that comes along with economic opportunity. One is to lobby the government for special treatment to insulate your industry, your job, your lifestyle from market forces. Whenever this is an option, men and women divert energy and resources from the world’s business and instead devote their skills to influencing government. This diminishes the human enterprise. Using government to protect one industry always means punishing another.
It is far better to prepare for the economic adventure that lies before us by investing in skills and knowledge that can be used in the increasingly competitive marketplace. Coping with the market’s challenge enhances the lives we lead and, through our efforts, the lives of others.