Don’t fear the free market, part 2: Government knowledge is not superior knowledge
The government has done good things, right? Well, how do we know what would have got done if the people paying for those things had not had all that money? Sure, we wouldn’t have as many space ships or nuclear weapons as we do today, but we might have found cures for various diseases, new technologies that consume less energy, and other things people want. Nearly all discoveries and innovations that have helped ordinary people have come from private individuals, usually working without government subsidy. The computer was developed by the state, but no one would have one today except the government had it not been allowed to trickle down to the private sector. The enormous innovations that have improved every aspect of the computer, including lowering its prices, would not have come about to anything like the same extent without the private sector. Modern science is often cited as an outcome of government funding, but a mere glance at history reveals governments prosecuting scientists like Galileo with controversial views and scientists since the beginning of science working without government support. There seems to be a modern belief that the reason for all progress since the beginning of the state system is the state, and that we could not have evolved the good life without it. But that proposition begs the question, assuming that the progress society has made is the right kind of progress, and relies on the counterfactual that there would have been less “progress”, however defined, without the state. Let us challenge those beliefs in this post.
Some statists seem to expect government to protect them from any and all dangers. Never mind that it cannot; it will not even try. Take the issue of child car seats. As Steven Levitt explains, the facts on child car seats were available, but government did what was popular and would feed a special interest—creating a law forcing children under 2 to use car seats—instead of reading them. How many children died for votes?
Another example of the backfiring of the call for government to save the day (the Nanny State) relates to the law governing the use of cell phones when driving. The law said that cell phones could not be used while driving unless using a hands-free device. But as Chabris and Simons explain in the Invisible Gorilla, the problem is not with our hands. Studies found that people talking on the phone while driving were far more likely to have crashes than those who were not, regardless of where their hands were. The problem is that any talking on a phone (as distinct from talking to someone else in the car) is a major distraction. Now, we have a law that does not protect anyone except the people who make hands-free devices, a new special interest group that will fight like stray dogs to keep the law in place.
And protection of big business is the only reason I can conceive why the US government would outlaw the sale of raw milk. (See some amazing stuff about it here.) Government protects corporations far more than it protects you from them. Democrats who call for legal action against companies like Monsanto do not seem to understand how many laws there are behind Monsanto already. If you want government action to take down big corporations, how about getting rid of the intellectual property laws that create monopolies? Intellectual property enables the owner to mark prices up far beyond what they would be were they subjected to competition. Today, we even have corporations owning strains of rice! How ridiculous. This is a perfect example of the bankruptcy of the argument that corporations are too powerful because the government is too weak. Governments could easily break this monopoly if they wanted to. They have a monopoly on the legal use of force. Patenting rice is impossible without the collusion of government.
How many people will die because a “free trade” agreement between India and the EU hobbles Indian firms developing generic drugs? This law, this distortion of the free market masquerading as free trade, will render almost impossible the buying of cheap drugs for diseases such as HIV for those most vulnerable to them. Kevin Carson explains that drug patents are unnecessary to recoup expenses and developing the most effective drugs.
First of all, there has been a dramatic shift away from fundamentally new kinds of blockbuster drugs, because it’s much more cost-effective to put money into tweaking the formulas of drugs whose patents are about to expire just enough to qualify for repatenting them — so-called ‘me, too drugs.’ Second, a great deal of the basic research on which drug development is based is carried out at government expense in publicly funded universities. Around half of the overall cost of drug R&D is taxpayer-funded. And in the United States, under the terms of legislation passed in the 1980s, the patents on drugs developed entirely at taxpayer expense are given away — free of charge — to the drug companies that produce and market them. Third, most of the actual R&D cost for developing drugs comes, not from testing the version of a drug actually marketed, but from securing patent lockdown on all the other major possible variants.
Generic drugs do not get developed because they are illegal, because they are competition. The poor people who need them most do not get them. Intellectual property, Carson concludes, is murder.
I wonder if politicians ever read the legislation they vote on or the reports written for them by bureaucrats, or if they just consult interest groups they are courting to make laws. How could they read all that, anyway? They would need a hundred hours a day of reading to make informed decisions on everything they vote on. Commenting on the renewal of the appalling USA PATRIOT Act, Julian Sanchez of the Cato Institute says, “at most they might get a ten- or fifteen-minute briefing, with no notes and no staff, the idea that they meaningfully understand what is being done much better than the rest of us is actually wishful thinking.”
When the government promises to protect consumers, watch out. There are already laws and market mechanisms to deal with things like collusion and price gouging. If the government or the free market were doing their jobs, we wouldn’t need extra government “protection”. When the government promises it will tackle these things, it uses vague language to widen its scope and take arbitrary actions. Economics professor Gary Galles describes this dangerous situation.
Effective social cooperation can only be built upon clear rules that constrain government arbitrariness as well as abuses by others. But potential government prosecution for violating an essentially undefined law leaves every decision’s legality subject to the whim of a judge or executive-agency functionary, exercised after the fact. No one can know what actions are safe from prosecution. And combining arbitrariness with huge potential punishments is an open invitation to government abuse.
It can then selectively punish businesses, and is unlikely to find any of its campaign contributors guilty. “Why would the president make a public show of toughness using an approach and terms that fail basic standards of logic, fairness, and constitutionality? Because it gives him power without responsibility.” How could oil companies counter the accusation that they are charging too much? How could the government prove that oil companies’ prices are “too high”? The tough stance on the supposed Big Oil robber barons buys votes from citizens who think that gas prices are high because oil companies are gouging them. Oil prices are influenced by many factors, including the wars in Iraq and Libya, the OPEC cartel (governments of oil-producing countries colluding to limit supply and thus raise prices), government restrictions on oil exploration and drilling, conflict between parasitic national governments and indigenous people in the Niger Delta, rising consumption and the expectation of even more, inflation that pushes down the exchange value of the dollar and thus raises the price of imported oil, and not least gas taxes. But when Ben Bernanke and Barack Obama blame others (“speculators” and the evil Arab are often the culprits), consumers eat it up.
We do not need government to protect us from corporations when free markets provide the best incentive to behave responsibly. The example of the Tylenol recall of 1982 is instructive to any business hoping to remain successful over time. Someone had laced some bottles of Tylenol with potassium cyanide, killing seven people. Johnson and Johnson, the parent company of the manufacturer, had a very clear belief system, the main component of which was that customers came first. There was no debate in the office, no need to weigh short-term gain against customers’ dying. Johnson and Johnson spent $100m recalling and replacing all Extra-Strength Tylenol. They have been profitable since then. Where was government? Not only was it superfluous, it never found out who spiked the pills. It is good that we have some kind of organisation that examines food and drugs to keep the public safe, but why does it have to be governmental? There are no medical researchers and consumer watchdogs anymore? Why does there have to be only one, controlled by the fickle hand of government? What if they miss something, accidentally or deliberately?
It is wrong to believe that corporations do literally anything they can to increase their bottom lines. They do what their shareholders want, and shareholders can and do introduce policies, voted on at shareholder meetings, that curb the power of the corporation to, say, pollute the environment. At least as importantly, corporations have to do what their customers want. If customers want the corporation to stop polluting, and boycott the corporation until it does, the corporation will either change or lose business, and maybe go out of business. Consumer activism works. Corporations have got the message already, which is why many of them are far more ethical than the simplistic picture painted by anti-corporate activists. I have friends who believe in the stereotype that big corporations are evil, but they own laptops, fly in planes, use Google 50 times a day, drink Bacardi and Coke and wash with ten different Procter and Gamble products. What, specifically, is evil about any of the huge companies that provide you with the services you live by? Corporations provide what people want, and they create wealth. If people who buy from them think they are evil, they should stop buying. Have a complaint? Tell Consumer Reports and RipoffReport.com. Get the word out. Buy from their competitors. But don’t resort to the violence of the state to take down a corporation whose actions you disagree with. If corporations get away with murder, it is only because unprincipled consumers do not know or do not care.
Thus, if you do have a problem with a company, try a boycott. A boycott is a market mechanism for action against businesses if ever there was one. And there are plenty of success stories. Other forms of activism can accompany boycotts. One might try to blacklist someone who owns, works for or buys from a corporation that we do not like; in other words, do not let them in your store. Segregation in the southern US was exposed as immoral not when the national guard was called in, but before that, when students in Nashville sat quietly at segregated lunch counters where they were not allowed. The violence perpetrated against them by racist bystanders and the state worked in their favour, and they captured enough hearts and minds to win desegregation. Simple acts of civil disobedience can frequently go much further than calling on the state to impose our goals on others by force.
The government has no role in a free market. Economist Dani Rodrik argues “Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments. They need systems of contract enforcement and property-rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalised, and market power is not abused. They need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimise distributional outcomes.” But let us consider what he seems to take as given. Some public investments have been made in infrastructure, but now investors and businesses are large enough that they do not need governments to invest in those things anymore. Do we really need government logistics companies when there are a dozen large and many more small international logistics companies? Contracts and property rights might be better protected by private law. Regulations do not ensure that consumers make informed decisions, that externalities are internalised and that market power is not abused. Consumer information does not come from government: it comes from consumers’ own research, sharing of information through forums like RipoffReport.com and word of mouth. That is how it has always spread, and there is no reason to believe government knowledge of the current state and future direction of a market are superior to those of the people on the ground. Central banks and other fiscal institutions (Freddie and Fannie perhaps?) obviously do not avert financial panics and moderate business cycles; in fact, they probably contributed significantly to the most recent market meltdown (see part 1), and to most of the previous ones as well. Governments create moral hazard by being the lender of last resort to everyone from people who cannot pay their mortgage, who should not have bought a house in the first place, to the biggest banks in the system, which received hundreds of billions in tax dollars (and whose executives still got their bonuses) because they were well connected. And I don’t know what it means to “legitimise distributional outcomes”, but if people were not taxed so much they could create their own safety nets. Then Rodrik says that democracies “are still our best safeguard against arbitrary rule.” Democracy does not protect against arbitrary rule: all government is arbitrary rule. The best way to avoid arbitrary rule by others is to avoid government.
Other economists predicted the current financial downturn (Austrian economists prominent among them), and governments did not. The same governments who think digging deeper into the same hole will get you out of it do not listen to the Austrian school however, the school that predicted not only the 2008 meltdown but the Dotcom and 1929 crashes as well (see here and here). Why would they not listen to them? Because governments do not seek wisdom; they seek shovels.