By Glenn Harlan Reynolds
Monday, August 17, 2015
Nassim Nicholas Taleb recently tweeted: "The
free-market system lets you notice the flaws and hides its benefits. All other
systems hide the flaws and show the benefits.”
This drew a response: "The most valuable property of
the price mechanism is as a reliable mechanism for delivering bad news."
These two statements explain a lot about why socialist systems fail pretty much
everywhere but get pretty good press, while capitalism has delivered truly
astounding results but is constantly besieged by detractors.
It is simple really: When the "Great Leader"
builds a new stadium, everyone sees the construction. Nobody sees the more
worthwhile projects that didn’t get done instead because the capital was
diverted, through taxation, from less visible but possibly more worthwhile
ventures — a thousand tailor shops, bakeries or physician offices.
At the same time, markets deliver the bad news whether
you want to hear it or not, but delivering the bad news is not a sign of
failure, it is a characteristic of systems that work. When you stub your toe,
the neurons in between your foot and your head don’t try to figure out ways not
to send the news to your brain. If they did, you’d trip a lot more often.
Likewise, in a market, bad decisions show up pretty rapidly: Build a car that
nobody wants, and you’re stuck with a bunch of expensive unsold cars; invest in
new technologies that don’t work, and you lose a lot of money and have nothing
to show for it. These painful consequences mean that people are pretty careful
in their investments, at least so long as they’re investing their own money.
Bureaucrats in government do the opposite, trying to keep their bosses
from discovering their mistakes.
Likewise, the pricing system tells people things that
they can’t know directly. In a command economy, where bureaucrats set
production targets, if someone uses more pig iron than expected, there’s a
shortage. In a market, prices for pig iron go up, which sends two signals: To
pig iron producers, the signal is produce more pig iron. To pig iron consumers,
the signal is don’t use more pig iron than you have to. Both ways, the prices
tell people things that they need to know, without any direct communication
required. This is why market economies do better than command economies, as
historical examples ranging from the old Soviet Union to today’s Venezuela
demonstrate over and over again.
Why is there so much support for government controls?
What’s wrong with markets? In short: insufficient opportunities for graft.
In a command economy, the bureaucrats who set production
quotas and allocate supplies have a lot of power. So do their political bosses.
When supplies get short, people wheedle (i.e., bribe) them to get more. The
market can’t be wheedled.
And, of course, intellectuals, as Whole Foods co-CEO John
Mackey observes, "have always disdained commerce.”
Why? As Mackey
says, “It’s sort of where people stand
in the social hierarchy, and if you live in a more business-oriented society,
like the United States has been, then you have these business people, (whom the
intellectuals) don’t judge to be very intelligent or well-educated, having lots
of money, and they begin to buy political power with it, and they rise in the
social hierarchy. Whereas the really intelligent people, the intellectuals, are
less important. And I don’t think they like that. And I think that’s one of the
main reasons why the intellectuals have usually disdained commerce. They
haven’t seen it, the dynamic, creative force, because they measure themselves
against these people, and they think they’re superior, and yet in the social
hierarchy they’re not seen as more important. And I think that drives them
crazy.”
As Megan McArdle has observed, journalists particularly
suffer from this problem: “Everyone you write about makes more than you. Most
of the people you know make more than you. ... Your house is small, your
furniture is shabby and you can't even really afford to shop at Whole Foods.
Yet you're at the top of your field, working for one of the world's top media
outlets. This can't be so.” Suddenly, systems that reward people through
political influence look better.
Markets make people better off, but they don’t provide
sufficient opportunities for politicians to extract bribes and intellectuals to
feel better about themselves. This explains why they’re unpopular with
politicians and intellectuals. The real question is why anyone else listens to
the self-interested claims of politicians and intellectuals. Maybe because the
subject of what works and what doesn't in economics is mostly written by
journalists?
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