By Joe Campbell
June 12th, 2009
Trillions of dollars of capital are being allocated sub-optimally, by politically tainted government calculations rather than by the economic rationality of markets. Hence the nation’s prospects for long-term robust growth – and for funding its teetering architecture of entitlements – are rapidly diminishing.
The president’s astonishing risk-taking satisfies the yearning of a presidency-fixated nation for a great man to solve its problems. But as Coolidge said, “It is a great advantage to a president, and a major source of safety to the country, for him to know that he is not a great man.” What the country needs today in order to shrink its problems is not presidential greatness. Rather, it needs individuals to do what they know they ought to do, and government to stop doing what it should know causes or prolongs problems.
One thing that has frustrated me greatly over the past months has been George Will’s apparently unshaken faith in the perfection of the free market. Here he demonstrates this again – speaking of the “sub-optimal” allocation of resources by the government. I have to wonder what he makes of how the financial sector allocated resources over the past few decades. At this point, I think most of us can appreciate the value of “sub-optimal” investment when compared to the catastrophic investments the “free market” allowed.
It’s not that I don’t think Will has a point. For one, I tend to agree with his anti-royalist attitude towards the executive branch. And secondly, I agree with him that a free market, by distributing resources and power among many actors, can achieve a kind of collective wisdom – and by allowing constant tinkering and creative destruction we allow for the possibility of positive black swans. This is the genius of the market, rooted in the knowledge that no one person or team of persons can know enough to guarantee the right decision. Instead, the best results are obtained by creating many seperate decision-making bodies and creating a structure that allows those that are actually successful to be rewarded.
But Will doesn’t seem to have noticed the serious flaws in the American and worldwide market – or at least, the only flaws he seems to have noticed are those involving government interference.
What Will fails to acknowledge is that our markets are constricted by lack of government interference. The freedom of the financial marketplace – especially the distribution of power and decision-making that makes the market work – is severely restricted by the size of our banks. Their size not only makes them too big to fail, it also prevents the market from being free.
Our financial and automobile industries have ended up combining the worst aspects of socialism and capitalism – without the benefits of either – and that is even before the government stepped in.
Think about it – the free market is effective because it prevents any small set of individuals from monopolizing decision-making. Especially in the world today with so much information available and events moving so quickly, the “right” business choices to make aren’t always clear. A free market – by allowing each business to make its own choice – prevents decision-making from falling victim to individual follies. But our current economic system – with it’s enormous corporations – ends up recreating the feudal system in which power is not centered in a single place, but in a handful of powerful “princes.” While these “princes” push for free market reforms, it is not in their interest to actually achieve this ideal free market – as Yglesias points out:
As a market approaches textbook conditions—perfect competition, perfect information, etc.—real profits trend toward zero. You make your money by ensuring that textbook conditions don’t apply; that there are huge barriers to entry, massive problems with inattention, monopolistic corners to exploit, etc.
George Will himself has pointed out that those “reforms” that are passed tend to be of a specific sort, following what Will calls, “the supreme law of the land…the principle of concentrated benefits and dispersed costs.” What free market supporters rarely seem to admit is that the free market exists not in spite of the government, but because of it. And today, our market is far from free because the government has failed to protect it – and has instead allowed the worst characteristics of capitalism (exploitation of labor; externalizing as much cost to society as possible, for eg. pollution) with the worst characteristics of socialism (concentration of power and limitation of competition) to create a kind of modern feudal society. In this feudal society, freedom is enjoyed by the “princes” of finance and industry while the creative ferment of a real free market is formally protected but effectively quashed.
I would like to see George Will take on the limitations of capitalism at some point. As a conservative and an intelligent man, he must see they exist.
[Image by mischiru licensed under Creative Commons.]