Tuesday, March 4, 2008

So Far, So Good

"A market economy is like an internal combustion engine. It can get a lot done at 45% efficiency. It's a waste of time to try for 100% efficiency. The question is, can we get to 50% or 55%?"

University of Chicago professor Richard Epstein.

The amazing thing about free enterprise is not how much goes wrong. The amazing thing is how much goes right. Free enterprise begins with the unpromising prospect of error-prone humans working with dispersed and limited knowledge. Yet it produces a complex, adaptive economic system that gives the average person the opportunity to daily enjoy the kinds of things once reserved for kings.

A key feature of the free enterprise system is how it deals with errors. In this, it differs dramatically from political systems. Free enterprise regularly purges itself of errors. We call it bankruptcy. On the other hand, political systems retain -- and continue to fund -- their errors for years, decades, even centuries.

For example, if a private pension scheme tried to operate the same way Social Security operates, it would be declared deceptive and illegal, and its organizers would be doing time in a federal prison. As it is, Social Security is hailed as a great success in perpetual need of just one more fix, and its organizers are living it up at the Willard Intercontinental Hotel in Washington, DC.

College tuition grants and loans? These programs are working so well that college tuition is rising at twice the annual rate of inflation. It seems no one explained to the legislators who dreamed up these programs that if you give people more money to spend on something, they will spend it, in turn driving up the price of whatever you wanted to help them buy in the first place. This is just another version of a monetary phenomenon called inflation. Print more money, all prices go up. Print money just for college and...college prices go up faster than other prices.

Home loans and home buying programs? For decades, the federal government has been active in the market for homes, all in the name of trying to make homes more affordable and lending less restrictive. Well, if you give people money to buy homes, they will buy them, and thereby drive up the prices of homes, leading to an unprecedented bubble in home prices, which of course results in more calls for more government programs to make homes affordable, until somebody borrows too much money to buy a home he cannot resell or refinance. Credit crisis.

Anyone else smell another government "solution" coming soon?

The track record of human errors making a mess of things is so large we have a special name for it: history. The difference between human errors in free enterprise and human errors in government is the difference between a mid-course flight correction and a plane headed straight down while the pilot tells everyone on board "So far, so good."


J. Powers said...

Is this comment seriously supposed to advance our knowledge of "how freedom works" (to quote this blog's epigram)?

Some questions.

First, at whom is Prof. Epstein's comment aimed? Who says we should expect 100% efficiency from our economy? (And in any case, what can it possibly mean to talk about a market in terms of "efficiency?" Oughtn't we to talk about it in terms of "efficacy?") And in any case, I see your Epstein and raise you one Thoreau: "In the long run, men hit only what they aim at."

Second, aren't you conflating "market economy" and "free enterprise system?" Please correct me if I'm wrong, but I thought that all economies, being systems of exchange, rely on markets. I'd appreciate it if you could supply me with an example of a free enterprise system which developed absent laws (read: political system) which define, nurture, and defend free enterprise.

Third, don't you think that distortions in markets can be created by businesses as surely as they're by governments? As Bastiat himself recognizes, monopoly can distort a market as surely as any governmental subsidy. There is no such thing as freedom without limits or boundaries; freedom is always within a system of constraints, and constraints derive from government as well as many other sources.

Fourth, don't you think you're being just a tad dismissive when it comes to history being nothing by a great mess of human errors? And even so, can it possibly be fair to blame them all on one institution (namely, government)? At the very least don't you think you have to account for different kinds of governments?

I frankly expect better from Bastiat's defenders.

Ben Rast said...

Sorry, but I'm a bit confused about exactly what you don't like.

Prof. Epstein's comment was directed at those who believe social science can engineer a nearly perfect world, a world better than market science.

A "market economy" and a "free enterprise system" are, in fact, the same thing. All economies do not rely on markets. Much of the human misery of the 20th century was the direct result of wise men who believed they could dispense with such a primitive method of production and distribution.

Of course markets need rules. The question is where do the rules come from? Top down or bottom up? The evidence is not clear. Many scholars believe government rules simply codify evolved behavior.

Yes, business can distort markets, but only when it resorts to force or fraud. When it comes to force and fraud, nobody does it better than criminals and politicians. Sometimes it's hard to tell the difference.

As for history being a great mass of errors, I don't think there's any question it is. It is also a great string of successes. One you can't see, the other you can. Like biological evolution, the human world proceeds by trial and error. Consider what is seen, and what is not seen.

I don’t think Bastiat would be disappointed in that.