Friday, June 5, 2009

Sowell on Costs, Markets, and Governments

When people petition the government for a social program or a subsidy, they are not fools. They are acting completely rationally. How so?

Suppose you have developed a 2 MW wind turbine. It's a very good turbine, but nobody wants to buy it. But you are convinced that the future belongs to wind power. What do you do? Do you give up your dream of wind power for everyone, or do you put together a wind-power movement and lobby the government for "affordable wind power?"

Because it seems obvious to you that if only you can get past the prototype stage and actually get wind turbines out into the market that people will see how beneficial your turbine can be, even if, in the short term, wind power is more costly than conventional power.

Thomas Sowell analyzes how this dilemma applies to housing in his new book, The Housing Boom and Bust. He writes (p.114):

One of the biggest differences between economic decisions in the market and politcal decisions in government is that costs are an inescapable factor in economic decisions, while political decisions can often ignore costs[.]

That's why our wind power advocate is eager to turn to government. He wants to escape from the inescapable factor of cost.

What our wind power advocate also forgets is the Law of Unintended Consequences. There is no telling who may have to pay the costs that he is trying to escape.

In fact, in the housing debacle, the costs of the housing interventions fell most heavily on exactly the people that "affordable housing" policies were meant to help (p.108):

For example, skyrocketing housing prices in particular communities with severe building restrictions hit blacks especially hard, even though many of these communities have been overwhelmingly liberal in their politics... In fact, however, each of these groups, for whom much concern has been expressed, have been precisely the groups disproportionally forced out of these high housing cost communities.

Here is more:

[M]arkets usually leave no choice between changing mistaken notions or paying big-time in lost money or even outright bankruptcy... But there is no such renunciation of pet notions in Washington.

Got a pet notion? Take it to Washington DC.

OK. So what is going on? What should we learn from all this? It is really rather simple.

The market is a social arrangement that forces each individual to adjust their actions to the needs of other people, expressed through buying and selling under the price system.

Mostly, we should get what we want from adjusting our actions to the needs of other people.

Government is a social arrangement where a ruler or ruling group can force other people to adjust their actions to the needs of the rulers.

Sometimes we need force, but not often. And not usually outside the defense against enemies foreign and domestic.

Liberals understand this, just like you and me. They were withering in their criticism of President Bush for his obstinate refusal to face defeat in Iraq. They wanted him to be much more willing to adapt to changing conditions on the ground.

But what they are not willing to do is face the failures of their endless failed government programs.

Some might call this obstinacy. But that misses the point. Obviously, government is a social system that is designed to be persistent. You choose government for a social activity if you want to set it in place and not change it without good cause.

The market is the social system that is designed to change and adapt to changing circumstances.

Our problem that that in many cases we have put government to work on problems where we need adaptability. We get a rigid institution when we really need an adaptable one.

And that is a shame.

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