Free Markets vs Government Intervention: A Freedomnomical Epilogue

Consider this a “bookend” post, following up on some of the sentiments from my series on Jews and Liberalism — particularly the “Jewish Freedom and the Free Market” post of the other day. It comes primarily from the final ‘Parting Thoughts’ chapter of economist John R. Lott, Jr.’s book Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t, with a few comments of my own thrown in, of course….

“Altruism is a noble quality — but in a large economy, it only goes so far. Adam Smith had it right: individuals, by pursuing their own self-interest, enrich society. Smith understood the fundamental principle of economics: when you make something more costly, people will do less of it. In other words, incentives matter. Studying the incentives that underlie our everyday decisions shows us that economic, criminal, and political policies work best when they direct individuals’ natural motivations toward a common good. These are policies that allow people the freedom to profit from their own work, that create meaningful and fair disincentives to committing crimes, and that carefully consider what factors encourage people to participate in our democracy by voting.

In a free market, those who only see the incentives of professionals and corporations to rip off their consumers are only considering one type of incentive. They miss the complex and fascinating process of how markets tend to evolve to solve cheating problems without government intervention. They fail to see not only that reputations matter, but that there are great incentives for the continual evolution of new mechanisms to guarantee the quality of products and services. As technology improves, these mechanisms become ever more efficient and creative.”

Economic Freedom and Corruption - chart3

“It is easy to point to some area of economic dissatisfaction, claim that the market is failing, and demand that the government step in. Whether forcing insurers to give discounts for LoJacks, lobbying for government subsidies for honey producers, or mandating professional licenses to ensure the quality of professionals, advocates of government intervention fail to understand that consumers and producers tend to find solutions themselves when their own money is at stake. Solutions to free-riding problems that seem so simple and obvious today, such as advertising on radio, almost didn’t come along in time before the government stepped in. Because a modern economy is so complex, the wise men tasked with devising regulations frequently create more problems than they solve.”

I have to go on a mini-tangent, here. While I am not averse to a certain amount of government regulation (in some areas) for public safety, and I’m pretty certain Dr. Lott would agree, there are costs to such regulation, as well. Besides the obvious, like administration of regulatory agencies, there are less obvious costs, like higher prices, fewer choices, and less innovation. In fact, the latest & best estimate of the total cost for regulation by the U.S. government is $1.75 trillion per year, as reported recently by the Small Business Administration’s Office of Advocacy. That’s roughly equal to the GDP of Italy! At about $15,000 per household, that’s more than Americans pay in income taxes, which was about $900 billion for 2009, if I remember right! The upturn from the last SBA report (2005: $1.1 trillion/yr) accounts not only for regulatory costs that were previously overlooked but also includes a $445 billion increase in the cost of economic regulation. Sheesh!

Back to our regularly scheduled program…

“There will always be some duplicity in the free market. But there is also an ever-present incentive ingrained in the system for individuals and companies to behave honestly. If someone can make a buck by treating his customers better than someone else, eventually someone will try it. Political markets also have their own mechanisms to limit cheating, resulting in the election of politicians who, by and large, accurately represent their constituents.

The free market isn’t perfect, but that isn’t the right standard by which to judge it. The government is hardly perfect either.

Markets not only increase our wealth, they also increase our freedom. And so long as people have the freedom to act on their own incentives, the U.S. economy will continue to embody the best, most creative, and — I would dare say — the most honest aspects of our society.”

Epilogue to the Epilogue

While looking for a good image to accompany this article, I came across a Heritage Foundation study called “Ethics, Corruption, and Economic Freedom” (2003) that included the above graph. In her conclusion, Senior Policy Analyst Ana Isabel Eiras states the following:

“To fight corruption and informality, it is essential to understand that corruption is a symptom — of overregulation, lack of rule of law, a large public sector — not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur.”

Very interesting…

“Enlightened self-interest” + “the invisible hand” + limited government intervention + (enforced) rule of law = a free-market, capitalist system that promotes & produces more freedom and more wealth for everyone who participates, while inherently reducing corruption. Sounds good to me!

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