Tuesday, September 03, 2002

A Meditation on Free Markets-I just got done teaching my Tuesday Macroeconomics classes and showed them the strength of a free-market economy by looking at what happens in a planned economy where prices and production levels are set by the central government. If demand is higher than supply at the set price, you have a shortage. In a market economy, that will be a cue to raise prices and crank up supply In a centrally-planned economy, that isn't an option. Then, all kinds of unedifying behaviors start to manifest themselves. The honest citizen will stand in line to get a shot at the product. Less-honest citizens well start selling the good on the black market. People working at the stores will hold goods for friends and family and can become "friends" with the right bribe. None of these responses creates wealth and many lead to a cynical, law-dissing society. Most of my undergrad students were in elementary school when the Berlin Wall came down. Cuba is one of the few centrally planned economies left; even nominally Communist countries such as China and Vietnam are moving towards a market economy. With the seeming success of the western, free-market system, we can forget that a statist system can still reemerge from a democracy. I'm just old enough to remember Nixon putting in wage and price controls in the early 70s; that's not a conservative act as we use the term today, it's a big-government act. Liberals of a certain age will think of Nixon as a conservative, but only in the 19th century sense of status-quoian; many of his policies were statist in nature. Many "conservative" parties around the world will be nearly as statist as their socialist foes. The paternalism of the Christian Democrats in Germany, the PQ in Quebec, the Gaulists in France as well as any number of right-wing governments in Latin America show that governments can be conservative and statist at the same time. When government starts to manage the economy, it takes away the market's ability to adjust to surpluses and shortages. Those adjustments will change the status quo, which will upset both socialists and old-school conservatives. The "creative destruction" of a freely adjusting market will leave some workers out of jobs and see some businesses hurt. The two groups can ban together to subsidize the status quo with various ways to help themselves. Substitute goods can be shackled with new regulations. Barriers to entry can be raised via regulations that discourage small entrants to the market. Direct subsides or price supports can prop up a product at the taxpayer's expense. Friendly business contributors can buy off conservatives, while liberals can be bought off by affected labor unions. It's the statist that likes a static economy. However, if such restrictions to change are against the population as a whole, the position of the rest of us should be to resist such static cling. As I was pointing out to my students this morning, a hypothetical price support for orange juice would be good for the orange growers and orange grove workers in central Florida, but we as tax payers would be picking up the tab. The rest of us would vote for an un-static, or dynamic, economy. Such a dynamist philosophy need not be politically conservative. One can be in favor of free markets and still want a greater degree of redistribution of wealth than I would. A liberal dynamist would be willing to let the markets do their thing and have government step in and help the casualties of the free market as individuals rather than members of a given industry. A conservative dynamist would not step in if a political friend's industry was going through tough times. Both might know that such economic adjustments are like a bad virus, they need to work themselves out and cures are worse than the disease. Free markets allow surpluses and shortages to be corrected in short order, allowing resources to be shifted from sector to sector. The more regulation that is slapped on an industry, the harder it is to make those adjustments and the slower the economy will adjust to new circumstances. If people recognize that a dynamist position is in their best interest and that a statist position on regulation and subsidies is more costly that it's worth, then we can create a pro-market majority. We need some Democrats to help in these fight, for some Republicans will be bought off by concerns in their districts when statism makes sense for them on that issue. While low-tax, low-regulation conservatives are desirable, a higher-tax, low-regulation Democrat would be preferable to a high-tax, high-regulation one. Educating our liberal friends on the blessing of the free market will help. Even if we can't get them to give up "progressive" tax rates, we can get them to keep Washington from micromanaging businesses.

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