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Want Change? Let’s Try Truly Free Markets

Neither right nor left supports the "creative destruction" necessary for real economic progress.

by
Rand Simberg

Bio

November 17, 2008 - 12:00 am

For all of the talk about “change!” in this election, the incoming president’s political party, and perhaps the president-elect himself, seems stubbornly resistant to it.

Joseph Schumpeter famously — and admiringly — wrote about the “creative destruction” inherent in the actions of the free market. I refuse to use the word “capitalism” in this context, because it’s really a Marxist term and doesn’t capture the essence of a system in which individuals and corporations freely exchange goods and services without government interference, if indeed it ever did. When so-called “capitalists” who run the finance, real estate, insurance, and now automotive industries come to Washington, hat in hand, for taxpayer dollars, it’s laughably ludicrous to call them supporters of the free market. Moreover, the term “capitalism” doesn’t capture or connote the importance of property rights and the ability to exchange them freely that are at the base of human liberty in the way that the phrase “free market” does.

In Schumpeter’s view — which is supported abundantly by history — as new technological or financial or cultural innovations arise, or as the societal desires and composition change, so change the markets and business models for existing companies. They have a choice of adapting to that change or, if incapable of doing so for either corporate cultural or other reasons, they can die. They can die, that is, if they don’t have courtiers at the royal court. Then, their options are more varied and they don’t require the necessary and painful change to their ways of doing business that might be required to survive in the new circumstances.

In her seminal book, The Future and Its Enemies, Virginia Postrel writes about the real political divide — not left versus right, but what she calls stasists versus dynamists. The former fear change and want to use government power to minimize it, if not eliminate it. The latter accept that improvements in the human condition require change by definition, and understand that the best way to ensure it is to allow individuals the freedom to make choices, with consequences, both good and ill, to be borne by them.

By these definitions, both presidential candidates in this election were largely stasists. Barack Obama wanted, and wants, to avoid the “change” of having people lose their jobs. John McCain wanted homeowners — even homeowners who didn’t really “own” their home by any sensible definition of that word, in that they had no equity in it — to “stay in their homes” and avoid the change of having to move out and rent. Never mind that in many cases they made no down payment. Never mind that in many cases they could probably rent for less than the mortgage they cannot afford. Never mind that in not selling or foreclosing, the day at which the market prices of the homes are determined, and the point at which we can discover the value of the paper that is based on them, is put off further into the future, delaying the bottom of the market and the resolution of the financial crisis. No, they must stay in “their” homes and not have to undergo “change.”

Similarly, the leaders of Congress share this aversion to change, demanding that General Motors — and perhaps the rest of the American auto industry — be bailed out by the taxpayer, in order to avoid the restructuring of the companies and their union contracts vital to any hope for future financial success. They want to preserve a wage, pension, and work-rule structure for unskilled labor that can no longer be justified or afforded in a twenty-first-century world, and have the rest of us pick up the tab.

What they don’t seem to understand is the hidden cost of such conservative policies. In a famous essay, the French economist Frédéric Bastiat wrote about that which is seen and not seen:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

When jobs are preserved at too high a cost, it results in a costly product for which there is no market. If the product is a necessity, with no competition, then people are spending money on it that they could have been spending on other products and services, thus creating additional jobs. If there is competition or people can do without, then the company will continue to bleed red ink. If the taxpayer has to make up the difference, then again, it is money being spent that is not being used to generate wealth, but rather to provide the difference between the wage paid and the market wage as public welfare, though none call it that. Similarly, when we keep people in “their” homes, we are preventing the market from determining the value of those homes, and preventing others from buying them who might now find them affordable at the new market price. All of the new jobs, all of the new wealth, that might be created if those resources were to be freed up, is what Bastiat called “the unseen.” When a worker loses his job, or has his pay or pension reduced, or someone’s house is foreclosed, it is covered in the news. What is not reported on are the jobs that aren’t created and homes that aren’t purchased, because no one can see things that haven’t happened, and hence, there’s no political pressure to allow them to occur.

It pretty much goes without saying that neither Harry Reid nor Nancy Pelosi nor Barack Obama nor John McCain are economists. And if they are, they clearly aren’t the ones that Bastiat calls “good” economists. What they are is stasists, which is really another word for true conservatism — an intrinsic aversion to change (one of the reasons that “conservative” is not necessarily a useful descriptor for those on the so-called right, including libertarians). Who is the conservative — the person who wants the taxpayer to maintain the status quo at the cost of future wealth generation, or the person who favors letting the market work its course and redeploy the economic resources in a more fruitful direction?

There was another politician who abhorred “change,” implementing policies to preserve wages and prices, even jailing people for charging five cents too little for cleaning shirts. In reaching back decades to the failed philosophy of Franklin Roosevelt, which was what made the Great Depression great, extended its duration by seven years, and prevented the creation of an unknowable amount of wealth that might have stood us in good stead in World War II, Barack Obama isn’t offering us “change we can believe in.” He isn’t offering us change at all. He’s simply come up with an economically destructive conservatism and stasism, as old as FDR and Mussolini — or even Karl Marx, if not older.

Government allocation of resources is an idea as old as government itself, back to the dawn of civilization or before. What is new and different and represents real “change” is free and dynamic markets in which individuals make their own decisions how to spend their money, and how much to spend and save. It was the model that the Founders of this nation had in mind when they drafted the Constitution. Unfortunately, for the past eighty years, we’ve slipped far from it while — ironically and sadly and mistakenly — blaming it for our current travails.

Perhaps, instead of what has passed for “capitalism” since the New Deal and the Wagner Act, it’s time to shed the conservatism and give free markets a real try.

Rand Simberg is a recovering aerospace engineer and a consultant in space commercialization, space tourism and Internet security. He offers occasionally biting commentary about infinity and beyond at his weblog, Transterrestrial Musings.
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