Tuesday, October 20, 2009

A Market Economy

Last time I pointed out some major problems with a managed economy, problems, which are and promise to remain intractable. Human ability simply does not extend to being able to manage even a small part of the economy, much less the entire thing.

“But wait,” some will say. “What about the problems of a market economy? Don't private companies create surpluses by over production or shortages by underproduction? Don't they sometimes have quality problems or even have to lay off employees?”

All that is true. A market economy is messy for several reasons, most of which also provide advantages to the citizens. There are good reasons to prefer a market economy.

For one thing, a free market facilitates innovation by allowing, even encouraging, individuals and businesses to take risks. Any time large numbers of people take risks some are going to lose. However some will win and those winners drive progress. That is one reason most of our inventions, from electric lights to personal computers, are the product of market economies. That innovation is a messy process, one that often offends those who like to control everything, but it does work to our benefit.

Controlled economies can produce a few showpiece projects such as the Soviet space program, but they do not produce the consistent advances that come from free markets. Indeed controlled economies militate against innovation. They tend to protect existing industries which requires that they discourage competition from innovative newcomers. Computers, for example, have essentially wiped out the typewriter industry and eliminated the jobs of people who used to build typewriters. Could the personal computer have been developed successfully in a country where bureaucrats allocate resources and determine which products will be produced? That is unlikely, and it would certainly have taken longer under such constraints.

The fact is that older products will always have a larger constituency than will innovative ideas. The new ideas start small and must compete with established enterprises, many of which have significant clout with government authorities. The people who depend on older industries will always outnumber those who want the innovation to move forward. This effect also plagues corporations with most large companies finding it difficult to be truly innovative. (I intend to write a blog on that subject soon.)

A related benefit of the market is that it prunes the deadwood. Inefficient, non-competitive enterprises fail and their resources become available to those that are more to the taste of the consumers. In a controlled economy, such deadwood is often protected and continues to waste resources.

Another benefit of a market economy is that it is more effective than one that is controlled from the top. Individual business owners or managers are closer to their customers than are government bureaucrats. They are more likely to notice changes in customer preferences and to react accordingly. If a city is plagued by a particularly hard winter, the local shoe store is likely to order up more boots and warm socks while the local clothing store stocks warm coats and other clothing. The bureaucrat, removed from the scene, may just send the same merchandise as was sold last year.

The local store owner has not only the knowledge but the motivation to meet customer needs. If he doesn't do that, his business will decline and he may face bankruptcy. However the bureaucrat is a third party decision-maker, he neither wears the shoes from the local store nor loses money if they do not sell. His incentive is to meet the quotas someone else imposes on him.

The effectiveness of a market system means that market systems often create a land of plenty for the people. While controlled economies such as the USSR or China (before the introduction of market reforms) are typically plagued by shortages, free markets such as the U.S. often face the problem of surpluses. As a consumer, I prefer a surplus.

Yet another reason to prefer a market economy is freedom. In a market economy, each person has a right to seek the employment of his choice, subject only to opportunity and his ability. Then he can spend his money as he prefers. Nobody sets a quota of so many bakers, so many movie stars, or so many carpenters. Nor does any bureaucrat decide what kind of shoes a logger or an office worker shall wear. In fact, if a computer technician wants to wear hiking boots to work, he is free to do so as long as his boss does not object – and many have done just that (a source for several jokes about such employees*).

In my opinion, freedom is the most compelling reason to prefer a market economy. The United States of America was founded on the belief that individuals are free to make their own decisions. Handing economic decisions over to the government eliminates a most important part of that freedom. Our work, where and how we live, indeed most important aspects of our lives are all controlled by our economic decisions. We have the right to make those decisions for ourselves. We should defend that right from well-intentioned politicians.

Oh Lord, protect us from those would protect us from ourselves.

*One such joke claims that no good computer operator would ever engage in any sport that requires changing clothes. That eliminates sports such as tennis or jogging. However hiking or mountain climbing are OK and many such employees wear their lug soled boots to work in case a mountain should suddenly spring up in the middle of the computer room.

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