In an earlier post, A
Preference for the Market: Because it Works, I argued that we should have a preference (albeit conditional) for the market because it works.
A competitive free market uses available resources in a stewardly fashion to produce only those goods that buyers want as efficiently as possible.
Moreover,
competition in the market provides a powerful incentive for companies to
innovate and produce new and better products--discover the potentialities that
lie hidden in God’s creation. I also noted that command (communist) economies
and even the governments of the mixed economies of the West have shown
themselves to be seriously limited in their ability to manage the economy. In
this post, I hope to set out further why government operation of the economy
does not work.
In fact, government involvement
of the economy suffers from some basic flaws. First, governments have
insufficient information to make the necessary economic decisions. Secondly, both politicians and bureaucrats
have little incentive to act stewardly. Moreover, government ownership of
anything leads to the tragedy of the commons—if the state
(everyone) is responsible, no one is. These three flaws will be discussed in
this post. Moreover, excessive government intervention and regulation tend to
have unintended consequences which may even defeat the original intent. This
latter point will, D.V., be dealt with in future posts.
Lack
of Information
A major reason for the
ineffective, unstewardly operation of a planned economy is the lack of
sufficient information for bureaucrats to make decisions. In a free market, the
prices that are derived through a multitude of transactions provide extremely
important information to producers. As shortages of products develop, prices go
up. Higher prices indicate to businesses that they can make more money from the
specific product and they will produce more. Furthermore, new producers will
find it attractive to enter the market. On the other hand, as goods pile up on
the shelves, prices drop and less is produced; some companies will get out of
the market. Thus, the needs and desires of countless individuals are, through
the price-system, transmitted to current and potential producers of the
necessary goods and services. Prices, freely determined by the market, provide
the necessary signals to direct producers to innovate and produce efficiently.
Similarly, a flexible wage rate--the "price" of labour--will attract
potential employees to the areas where they are needed.
In a communist-type, centrally
planned economy, a super-brain--which has available all the information about a
continually changing economy--would be necessary to give the orders for
production and transportation so that these can be implemented at the right
moment. Even with the current state of networking and computer technology, it
is questionable whether such a super commander can be found. The demise of the communist world has certainly shown that such supermen were not found in practice. Without adequate information, the wrong goods were produced in the wrong
amounts and shipped to the wrong places. Stores were short of desired goods and ordinary citizens wasted long hours waiting in line when goods were available!
This fallibility of state
planners is not surprising since only God is omniscient. Men are sinful and
limited in knowledge. We do not even know what tomorrow will bring (Jas 4:14):
One of the
fatal weaknesses of socialist economic theory is that it supposes that a
government planner or central committee can accurately forecast and determine
the prices, supplies, and consumer demands for tens of thousands of items in a
complex industrial society. Such an assumption attributes virtually godlike
omniscience to the government planners.
Neither, should it be thought
that this "information problem" applies only in a completely
centrally planned economy. In a mixed economy, any government intervention with
the market's prices serves to negate this "signal" function of
prices. Thus, the setting of a maximum price, e.g. rent controls, creates
shortages and deteriorating housing. Similarly, there is never enough of
government housing—if governments provide housing at less than “market
rates”. On the other hand, if
government intervenes in the market by setting minimums, e.g. minimum wages, surpluses
result (unemployed). Certainly, the cost of this intervention needs to be
“counted” when contemplating such actions. If at all possible, alternative
options should be considered.
Even government efforts to assist
businesses through subsidies are fraught with this information problem.
Gwartney and Stroup, for example, argue that the
bureaucrats who make such decisions are fed inaccurate information. Managers of
public or private enterprises will try to convince the planners that their
proposed project will create employment and other major benefits for society,
while if the requested support is not forthcoming, many will lose their jobs
and local economies will collapse. While the planners may well suspect these
claims are exaggerated, they will usually lack the information necessary to
evaluate them carefully. Although business managers are no more prescient than
government planners, in a free, unsubsidized market, when their own money is at
stake--when they are forced to take all the risk--they will have every
incentive to obtain the best information possible. They will, moreover, have no
incentive to provide misleading information to government planners for subsidy
purposes.
This inherent information problem
has no doubt contributed to the woeful record of failures of new businesses
subsidized by governments. In Canada, such efforts. in the name of
regional development, e.g, the Bricklin automobile, the Come-by-Chance
refinery, have been disastrous.
Incentives
to Bad Stewardship
Government operations are
inherently inefficient, i.e. unstewardly--even in a mixed economy--because within government there are
few incentives
to be stewardly. Civil servants have no "bottom line"; they do
not face the continual need to make an adequate profit. They are rewarded with
higher titles and promotions for managing ever larger departments.
Consequently, their primary incentive is to build their own empire-- to expand
the size of government.
Seeking to use resources in a stewardly manner has low priority for them.
Moreover, government operation of economic activity, also provides incentives
towards illegal activity. Shleifer and Vishney, in fact, argue that, in a
socialist system, the bureaucrats intentionally plan shortages in order to
invite bribes from rationed consumers. When goods are scarce, potential customers try
to obtain them by paying bribes and favours to bureaucrats in the relevant
ministry.
Within government there is also
less incentive (than in the private sector) to provide quality, timely service.
Governments permit no competition in most of the services they provide. Like
all monopolists they can get away with shoddy service without worrying about a
competitor who will provide a better, cheaper product. In Canada, for example,
waiting lists for necessary medical tests and operations provided by public institutions
continue to grow, while governments discourage or forbid the use of privately
funded clinics (i.e. the market). The wealthy can, however, avoid the wait by
going to the U.S. and other countries for treatment..
Politicians, just like bureaucrats, also have
little incentive to act stewardly; often their main concern seems to be their
own future re-election. In elections, they are not necessarily rewarded for
good economic policies. Rather, they receive votes for policies which appear
to have the maximum visible short-term benefits. Costs are secondary; they are
not immediately visible. They usually are successfully played down until after
the elections. In fact, governments may intentionally mislead both the
legislature and the electorate about the costs of specific programs in order to
ensure continued support.
The problem lies in the way
spending decisions are made. In the market, 'deciding-paying-enjoying' is all
in made by one person--the purchaser. The person or entity receiving
the benefit also pays the price. Thus, the decision as to what to produce, and
how much, is made by the person best qualified to evaluate whether the benefits
outweigh the cost.
With government expenditures, the comparison of costs and benefits is not made
by the ultimate beneficiary. Politicians and bureaucrats make the decision;
tax-payers pay the price and some or most citizens receive the benefits (but
not necessarily in proportion to what they pay as tax-payers). Michael Novak,
in fact, refers to a “structural irresponsibility” in democratic societies:
All sectors of society desire more, so
politicians promise more. They spend money not their own, money the system does
not have. The structural flaw in all welfare democracies is the desire of every
population to live beyond its means.
Individual
voters are quick to vote for benefits which they do not directly have to pay
for. Moreover, to the extent that services provided by the government are
“free” or below cost, there is an incentive to overuse. Free medical care, for
example, provides no financial incentive for patients to keep doctor’s visits
to the minimum or to avoid unnecessary diagnostic tests.
It is not surprising then, that
governments have had a long history of increasing spending and cutting taxes
just before elections. However, the bill eventually needs to be paid. Taxes
will have to be raised to cover the cost of fulfilling the politicians’
promises. Unfortunately, these high taxes provide another disincentive to good
stewardship. They reduce the motivation of businesses and individuals to work
and reduce economic growth.
Politicians in a democratic
society are, moreover, continually exposed to the pressure of special interest
groups (e.g. labour unions or farm groups). According to Gwartney and Stroup,
politicians "are led as if by an invisible hand to reflect the views of
special interests groups, even though this leads to wasteful policies."
By providing campaign workers and
contributions to politicians willing to support their goals, well-organized
groups can attract more than their fair share of support while the large,
uninformed, disinterested majority pays the price of programs to meet the needs
of the minority--whether they be subsidies to arts groups, cultural groups,
agricultural groups, etc. "While each such program individually imposes
only a small drag on our economy, in the aggregate, they bust the federal
budget, waste resources, and lower the standard of living."
The cost of such pressuring interest groups, thus, goes beyond the immediate
effect on the nation’s budget but may seriously affect a country’s economy.
Shleifer and Vishney, for example, attribute Britain’s economic stagnation
prior to Thatcher’s reforms to union lobbying for “labour market restrictions
and... massive social redistribution schemes under the Labour governments”.
Moreover, the best qualified people to regulate an industry are often
those who have worked in that industry; as bureaucrats, they are likely to have
a bias to their former employers. Now, all special pleadings and regulations
should not necessarily be rejected; they may well require our support to meet
Christian objectives. We need, however, to be aware of this bias towards
special interests in the political system and seek to limit the opportunity for
misguided action as much as possible.
Tragedy of
the Commons
Furthermore, we need to recognize
the “tragedy of the commons” a term that derives from the pastures in British villages that were held in common--everyone could graze their animals on them. This led to overgrazing since no one was responsible to prevent it. Another example is the demise of the American buffalo--everyone, first nations and settlers, killed as many as they could with no thought to sustainability. Holding everything in common through government/state ownership of resources provides
inadequate incentive for good stewardship. As Stapleford notes “It has been
recognized since the time of Aristotle that communal property rights encourage
overuse while private property rights encourage good stewardship”. People tend to take better care of what is their own than what is held in
common. Individual home owners, for example, take pride in their homes and have
the financial incentive to maintain them. Those who rent, by and large, have a
lesser concern for their dwelling-place–as is readily visible in many
subsidized housing projects.
Moreover, as the history of agricultural land
ownership in communist countries has confirmed, private ownership encourages
people to develop their property and use it productively--communes do not. It
is, even, highly likely that the ongoing depressed conditions found on many
native reserves in Canada are, at least in part, due to the lack of transferable
private ownership. On these reserves land is mainly held communally and
controlled collectively by band councils. While the occupants of the land may
have certain “hereditary rights” they have no formal title and the land cannot
be sold. Consequently, they cannot use their land and houses as collateral to
obtain credit. There is, therefore, little motivation to improve their property
or to develop and build individual businesses. Economic development is stifled
and unemployment and idleness abound–a recipe for poverty. Fortunately, a glimmer
of hope exists in the advent of a type of deed, a “Certificate of Possession” which native
bands have begun to develop . These certificates can be used to obtain a
mortgage from a government agency and permit sale of the property–but only to
other who are entitled to live on the reserve.Private
ownership, therefore, most likely generates better stewardship of our various
resources. In practice, if everyone is responsible, no one is.
The effect of inadequate incentive for proper stewardship is also illustrated by the operation of government owned industries in the former communist countries. Nationalized industries did not prevent low wages, did not conspicuously improve working conditions, were often the worst polluters
[15] and did not raise levels of efficiency, material progress and humane attitudes in the work force. On the other hand, the small agricultural plots that were allowed to remain in private hands, “outperformed state agriculture by factors as high as 30 to 1, despite far higher concentrations of resources (machinery, fertilizers, roads, etc.) devoted to state collectives. Even in democratic countries, publicly owned industries subject to political pressure tend to be highly inefficient. In the case of British coal, for example, Parliament refused to accept layoffs from enormously inefficient coal mines. Similarly, Air France failed to cut labour when the government supported strikers and instead fired the manager. In many less democratic countries, “public enterprises are simply used by politicians to gain political support”.
[16] The situation in Greece with its large proportion of state owned industries is a current example illustrated in a previous post
(Government Debt and Deficits Do Matter).
Conclusion
I have previously argued that the
free market ensures that our God-given resources are used in a more stewardly
fashion than in a command economy and goes a long way to meeting the needs of
most of us. On the other hand, government involvement in the economy,
essentially, “does not work”. Rather, it suffers from three basic flaws. First,
governments have insufficient information to make the necessary economic decisions. Secondly, both politicians and bureaucrats
have little incentive to act stewardly; in fact, the incentives they do have
tend to work in the wrong direction. Finally, state ownership of economic
resources and/or operation of economic activities provides inadequate
incentives for proper stewardship The ‘tragedy of the commons” illustrates that
when property is held communally there is less incentive to stewardly
management than under private ownership. Moreover, as we hope to see in the
future, excessive government intervention and regulation tend to have
unintended consequences which may even defeat the original intent.
If we put centrally the glory of God and the
care for what He has created, that includes a careful and purposeful use of all
that has been entrusted to us. Since government ownership of resources and
involvement in economic activity appears almost inherently to fail this test,
it should be limited to the minimum amount necessary to meet other Christian
goals.
Question
Do you
agree? If not, why not? Please leave a comment. Let’s discuss.
Related Posts
John Jefferson Davis, Your Wealth in God's World,
Presbyterian and Reformed Publishing House, 1984
As Michael Novak, The Spirit of Democratic Capitalism, American
Enterprise Institute, Simon & Schuster, New York, 1982.,p.173,
has noted, growing government has created “new interests for a sizable new
class of citizens, who have a stake in its own expanded wealth and power. The
greater the share of wealth and power accumulated by government, the greater
the opportunities for ambitious members of this class.”
Andrei Shleifer
and Robert Vishny, The Grabbing Hand: Government Pathologies and their Cures,
Harvard, Cambridge, 1998, p.110,119
John E.
Stapleford, Bulls, Bears & Golden
Calves: Applying Chrisitan Ethics in Economics, InterVarsity Press, Downers
Grove, Illinois, 2002,p.56.
