Last week’s Economics 101 lesson (week 6, through Hillsdale
College, online for free) was on “Incentive and the
‘Information Problem.’” There were several points worth repeating.
Hillsdale Courses online |
Early on, lecturer Gary Wolfram, asks the question, why can’t
centrally planned systems provide wealth for the masses?
Market Capitalism, Wolfram tells us, solves a number of
problems:
·
Information Problem—how can a central planner
possibly know what all the Americans are going to want for breakfast tomorrow,
or what they’ll want to read seven months from now? Market capitalism answers this
through the price system.
· Incentive Problem—innovation requires risk
taking, and without an incentive to take risk, producers don’t innovate; they
do the safe or easy thing.
One example he gives about the incentive problem, near the
end of the lecture, is a caveman example—because economists like to demonstrate
principles with simple societies. Suppose you’ve got a caveman, and he comes up
with the idea of a stone axe. He has to form the axe head out of stone. He has
to fashion some kind of handle, and figure out how to attach the axe head to
the handle. All this is going to take time—time that he could have been
spending grubbing for roots and berries. That’s his opportunity cost.
Suppose then, some other big ol’ caveman comes and takes it
from him, because there are no property rights. It wasn’t worth the risk of
time and effort, if he couldn’t guarantee that he could keep what he’d made for
his use. Without property rights, there’s no incentive to innovate.
There are two types of systems that fail to protect property
rights. I’ll give you a clue: on the Spherical Model, they are both southern
hemisphere. There’s the anarchy side, like in the caveman example. And there’s
the statist/government control side.
The pleasant alternative is the northern freedom zone. In
economic terms, it’s where you find free markets. And, he agrees with the
Spherical Model, that political freedom and free market systems go together.
Wolfram offers comparative examples between free market
capital systems and centrally planned systems. Think about where you’d rather
be planted, if you were destined to be poor. Always it’s better to be poor in a market-based economy,
rather than an authoritarian ruled system. Think about, if you had to be poor,
but could choose anywhere in the world to be born and live, where would it be.
As he points out, “Nobody says, ‘Send me to North Korea.’ They all say, ‘Send me
somewhere that’s a market economy. Send me to Australia. Send me to the United
States. Send me to Canada….’” We know centrally planned states cannot produce
wealth for the poor. Only market capitalist states can do that. [31:30 into the video]
He referred to studies comparing economic freedom across the
globe, done by the Fraser Institute and the Heritage Foundation—the Index of
Economic Freedom, and compared countries in the to 25% of economic freedom—Hong
Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Chile, Mauritius,
Denmark, and the United States—and the bottom 25% of countries, including Iran,
Turkmenistan, Equatorial Guinea, Democratic Republic of Congo, Burma, Eritrea,
Venezuela, Zimbabwe, Cuba, and North Korea.
The average per capita income of those in the top 25%
countries is $36, 691. The per capita income of the bottom 25% countries is
$5,188. If you’re in those top 25% countries—the ones most like market
capitalism and least like authoritarian centrally planned—you’re seven times
wealthier on average than those countries in the bottom 25%. [34:00]
It’s even clearer when you compare the poorest of one set of
countries to the poorest in another. The poorest 10% in those freer countries
make on average $11, 382 (per capita income). Or more than double the average per capita income of those in
the centrally controlled countries. Worse, the poorest 10% in those controlled
countries make on average $1,209. The poor in market system countries are nearly
ten times wealthier than the poor in controlled economies.
Wolfram says, “It’s not a matter of theory; it’s a matter of
fact. Governments that rely on central planning simply can’t produce wealth for
the masses.” [35:00]
Why is that? Why are centrally controlled
governments/economies such abysmal failures at providing wealth? One of the
problems is the ever-increasing unintended consequences of interference. He
referred to Ludwig von Mises, in his 1927 book Liberalism [a term that refers to freedom the way our founders
thought of it, rather than the way the word has been co-opted by central
controllers since then].
Once government begins to intervene in a system, intervenes
in a market, it’s going to create these unintended consequences…. When it
creates these unintended consequences, what happens is we get further government
intervention, because there’s a political clamor. “Oh, now we need to deal with
this problem.” So the government intervenes again. More political clamor as it
creates more unintended consequences. With Mises arguing that eventually you
end up with central planning. The government continually intervenes, creates
more problems, intervenes again, creates more problems, intervenes again—until
it’s intertwined with our economic system in such a way that markets aren’t
allocating resources anymore; the political system is allocating resources. [35:30]
If we were to look at current events, and try to come up with
some example of this happening, what could it possibly be? Oh yeah, Obamacare.
He gives us the
history, in more detail than I’ve done in the past. (The transcript of
that section more than doubles this blog post length, so I’ll summarize, but,
really, you should listen to the whole 40-minute speech, and especially this
example, from about 36:00 to 44:00.)
· There was a labor shortage during WWII, with
labor resources going to the war effort.
· Government didn’t want the price of labor to
rise, so it set price controls on labor, which guaranteed greater shortages.
· Someone who wanted to attract manufacturing labor
came up with the idea of supplementing wages with employer-based health care
insurance—as additional pay for labor that wouldn’t count as higher wages.
· Employer-based health care insurance separated
the receiver of care from the payment, thus causing a rise in demand for health
care.
· A rise in demand for health care increased costs
of health care.
· In 1954 the IRS ruled that employer-based health
care insurance did not count as income, which was a way for employees to
receive higher payment without paying the exorbitant (91% top margin) income
tax.
· This meant that employer-based health care
insurance became more widely used, raising demand for health care from people
who weren’t paying for it, and thus raising health care costs.
· In 1965 government stepped in to help those who
were retired or not employed, who could no longer afford to pay the
artificially high health care costs without insurance, and government created
Medicare and Medicaid.
· So of course, with more people getting health
care they weren’t paying for, health care costs rose further.
· Eventually government intervenes with the Affordable
Care Act, which forces employers to provide health care coverage, forces
insurance companies to provide insurance for pre-existing conditions, and
forces healthy young people to purchase health care insurance they wouldn’t
otherwise purchase, and forces everyone to purchase a standard of plan the
central planners decide, rather than the individuals making the purchases.
· Results of the interference: higher health care
costs, lower quality of service, bankruptcy for insurers, devastating costs and
fines for people who can’t afford the new standards.
We have this system of health care insurance tied to employment.
We don’t have that connection for car insurance, or homeowner’s insurance. The
only reason health care is tied to employment is government intervention,
followed by unintended consequences, followed by clamor to fix the new
problems, followed by more government intervention, then more unintended consequences,
and on and on.
It looks like it might be a good idea to just get rid of
government. But that’s not the solution either; remember the caveman anarchy
problem? What we need is just enough government to protect us—our lives, liberty,
and property. In economic terms, government is there pretty much just to
protect our property rights: with contract laws, police, armies, courts for
settling disputes.
Wolfram gives this rule of thumb:
So when we look at a law, we ought to decide, does that law
in making it easier for markets to work, or does it make it harder for markets
to work? And fundamentally, is that law expanding our property rights? Is that
law expanding our ability to act according to our own plan? If it is, it’s a
good law. If it’s making it harder for markets to work—if it’s infringing on
our property rights—if it’s making it harder for us to act according to our own
plan, then that law ought not be there.
I think that’s pretty much what the writers of our
Constitution had in mind when they delineated limited government.
No comments:
Post a Comment