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.
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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.