Posted by on October 13, 2013

Thanks to my friend Jay for this excellent example of just one of the reasons why government regulation and planning are so prone to failure.

Remember this the next time that you hear someone talking about a “market failure” as a justification for governmental intervention. Are markets perfect? Of course not, but at least they are largely self-correcting and there are usually alternatives. Governments are much further from perfection and their mechanisms for correction – the ballot box and the free press, when it actually does its job – are slow-moving bludgeons compared to the surgery of a company losing its customers due to lagging performance. Think of Blackberry in its death throes less than 10 years after being dubbed “Crackberry”.

As for alternatives, governmental services are often monopolies, rigorously enforced, or you are given the “choice” of paying twice: once through your taxes and then a second time privately. Think of the public school system.

Watch the eviscerating cherub, Milton Friedman, and remember the words “is it really true that political self-interest is nobler somehow than economic self-interest” and “just tell me where in the world you find these angels”. I strongly suspect that Francis Underwood in House of Cards is a lot closer to the truth than our “public servants” would care to admit.

Roger Barris, London

PS. It is highly instructive to listen carefully to the questions from Phil Donahue in the interview with Milton Friedman. He talks about “concentration of power” and “it seems to reward, not virtue, but the ability to manipulate the system”, and he then goes on to ask if Friedman ever has any doubts about capitalism. This is an excellent example of muddled thinking. What “power” is Donahue thinking about? What “system” is being manipulated? From the context, it is pretty clear that he refers to the ability of those with political power to manipulate the political system to their benefit. Then, in an amazing transposition of responsibility, he implicitly blames capitalism and free markets for this when they occur precisely because of the absence of these things.

One of the strongest arguments for free markets is that, whenever the government intervenes in the economy, it make itself ripe for exploitation by those best able and most motivated to manipulate the system. This is the phenomenon of “regulatory capture” discussed earlier in this blog. Muddled thinkers like Donahue think that the solution to this problem is to “reform” government. Realists recognize that this “reform”, like all attempts to overcome a fundamental economic law, has been tried for decades and has not worked. The only solution is to eliminate the means of exploitation by removing the intervention. In other words, the only solution is more free markets and not less.

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Posted in: Economics, Policy

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