Posted on 08/06/2012 3:02:24 PM PDT by jazusamo
It has long seemed to me that there is far more rationality in sports, and in commentaries on sports, than there is in politics and in commentaries on politics. What has puzzled me is why this is so, when what happens in politics has far more serious effects on people's lives.
To take one common example, there are many people who believe that if the market fails, the government should step in. But, if Robinson Cano strikes out, does anyone suggest that the Yankees should send in a pinch hitter for him on his next time at bat?
Everyone understands that a pinch hitter can also strike out, and is less likely than Cano to get a hit or a home run. But the very possibility that the government can fail when it steps in to substitute for a failing market seldom occurs to many people. Even among some economists, "market failure" is a magic phrase that implies a need for government intervention.
We could argue about the empirical evidence as to when government pinch-hitting is better or worse. But there is seldom even an argument at all in some quarters, where government intervention follows market failure as the night follows the day.
Milton Friedman once pointed out, "A system established largely to prevent bank panics produced the most severe banking panic in American history." Many other examples could be cited where government intervention made a bad situation worse.
But most discussions of the role of government never even reach the point of looking for empirical evidence. Today, for example, there is much gnashing of teeth in the media because Democrats and Republicans can't seem to get together to create a bipartisan plan for government intervention to solve our current economic problems.
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Thanks for both pings today jaz. Both great reads again.
One thing many people fail to realize is that many so-called "market failures" are nothing of the sort. Instead, they demonstrate markets' successful reaction to realities that some people don't like.
The government's reaction to most "market failures" would be analogous to that of a person who reacts to to steam coming from a hot water heater's safety valve by welding the valve shut. Sealing the valve will solve the immediate problem, but as the Mythbusters® brand television program has repeatedly demonstrated, it may cause damage far more severe than ignoring the original problem, much less fixing it properly.
Incidentally, another thing many people fail to consider is that while the price of something will generally fall when it is found to be worth less than expected, its value generally will not. If an object which was believed to have been worth $500 is discovered to really be worth $100, its actual value would have been $100 before the discovery and $100 after. Many people seem to think that if something is believed to be worth $500, events that would reveal its worth as only $100 would in so doing destroy $400 worth of wealth. The reality is that resources will be allocated most efficiently, generating the most wealth, when things are accurately valued. Inaccurate valuations cause inefficient resource allocation, thus reducing wealth generation. Further, the only limit to the amount of money that can be spent trying to maintain an illusion that something is worth more than it actually is, is the amount of money one has to spend. Governments can and do spend truly insane amounts of real wealth in their efforts to avoid having imaginary wealth be recognized as such.
Of course your arguments are correct. The problem is that you are trying to convince people that believe destroying assets (e.g. cash for clunkers) will make them wealthier. You, my friend, have a long uphill battle.
Doc is the man.
There really isn’t such a thing as a “market failure” as you point out. The market, the free market, is the people themselves. Government is political by its very nature. When the people complain government reacts.
The biggest failure among conservatives is our inability to counter the liberal themes of economic downturns. Let the market rise and fall and stability will be found. There is alway pain. Creative destruction is healthy and observed in nature.
Many market “failures” are simply the correction to a previous governmental fix to the natural market. Take housing for example. Why should a specific percentage of Americans be in homes? Why would that very arbitrary number be the concern of government, given that American government exists for the general not the specific welfare?
Bump for later reading
Markets are not perfect. There are times when their behavior can be severely sub-optimal. Market failures are made worse by government policies that are at best misguided, and indeed such policies can often turn minor blips into major disasters, but there are some situations that markets do not always address very well without some government assistance, many of which center around positive or negative externalities.
If a particular action by an individual or company would have adverse effect on others, and if the entity performing such action is not required to compensate the others for such effects, such actions will be done to an extent which is much greater than optimal, since entities will have no reason not to do them. Having the government force entities to compensate others for negative externalities may allow companies to reduce them to optimal levels.
Conversely, if an action by an individual or company would greatly benefit others, but the entity performing such action would not receive much benefit for itself, such actions will be performed to an extent which is much less than optimal, since entities would have no reason to do them. Government rewards for positive externalities may entice companies to increase them, though if such rewards are excessive companies may invest excessive resources in their production.
Further, if there is some action whose benefit is dependent upon other entities doing the same thing, a market may stabilize upon one of two situations: nobody doing the action, or many entities doing it. In some such situations, "the early bird gets the worm, but the second mouse gets the cheese". Having the government invest in research can sometimes help jump-start a technology which would otherwise go nowhere (though of course in practice government does not restrict itself to investments in technologies where such investments will improve the marginal return on future investment sufficiently to make it self-sustaining).
Thanks for a thoughtful reply. I didn’t mean to imply that markets are “perfect”. Nothing is in the course of human interaction. I meant that markets don’t fail because perfection is subjective. I understand externalities and how they can be handled through torts. How do your other two examples fair in historical practice?
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