In Part I of this series, I argued a fundamental reason our government is broken is the political selection process favoring ideological warriors over pragmatic problem solvers. I introduced my “Funnel of Futility” theory: as ideology becomes increasingly important in one’s decision-making process, the more futile working with an ideological opposite becomes. In contrast, as more data-intensive decision-makers interact, the partisan gap narrows, and government becomes more useful and efficient.
In Part II of this series, I argued government has overshot its equilibrium position in the modern U.S. economy, and Americans ought to make every effort to rein it in. That said, I suggested this site does not advocate a wide-ranging dismantling of every government department. As such, I advocated that the scalpel is always preferable to the hack saw when rolling back government overreach.
In Part III of this series, I argued that equality of opportunity does not imply equality of outcomes. I further maintained that this site whole-heartedly and enthusiastically supports institutions that promote and recruit people based on a purely meritocratic system. The more data that an institution uses to measure its people, the better. That said, Reflections of a Rational Republican vehemently opposes government favoritism towards certain groups based on immutable characteristics such as race or sex. Rewarding certain groups who have earned their status, such as veterans, is acceptable since that is based on a person’s actions rather than something that one is either born with or not.
Today, I will introduce the fourth official guiding principle of Reflections of a Rational Republican — free markets are preferable to tightly controlled ones.
Free Markets Are Preferable to Tightly Controlled Ones…
Markets can be scary and chaotic because it is difficult for any one player to predict the final outcome of millions of individual transactions. However, chaotic they may be, markets are the single most efficient mechanism for price discovery in modern societies. Tightly controlled markets tend to be far more inefficient than free ones, because controlling entities like governments have no more information about that market than most individual participants. In the case of individual corporate participants, governments likely have far less information.
When governments impose too many regulations or try to maintain tight control of different industries, prices rise, and competition and quality tend to weaken. A key example is the American utilities industry. While the industry is highly reliable, it hasn’t innovated all that much in years. Furthermore, it has failed to build more clean, efficient nuclear power plants for decades because of the overwhelming regulatory hurdles that stand in the way of progress.
You Get What You Pay For
One major theme of markets is that a buyer gets what he or she pays for. If a buyer is cheap, the quality of the good he or she purchases will be lower certeris paribus than a more expensive good. For instance, when the market for unskilled labor became too expensive in the United States because of Big Labor-induced market friction, corporations outsourced it to China and other emerging economies. Today, companies like Boeing are building manufacturing facilities in right-to-work states like South Carolina so they can remain globally competitive. When government imposes more rules and procedures, these regulations increase the cost of doing business. Rising regulatory costs, in turn, lead to higher prices.
Markets Will Form When an Unmet Demand Exists
A second major theme is that markets will tend to form when demand exceeds supply, particularly when governments try to ban or to maintain tight control over a particular good. For instance, when the United States government instituted prohibition, there was a proliferation of organized crime as the black market rose to satisfy unmet demand. When the Los Angeles Unified School District stopped serving junk food in lieu of more healthy options, the market for school lunches collapsed. Students stopped queuing for meals, principals reported “massive waste, with unopened milk cartons and uneaten entrees being thrown away,” students began bringing their own junk food to school, and some even opted out of lunch entirely “suffering from headaches, stomach pains and even anemia.” It is perhaps no surprise that students have developed a thriving “underground market for chips, candy, fast-food burgers and other taboo fare.”
The bottom line is that the market is not a force of good or evil. It is like water. It will always take the path of least resistance.
Just stopping in Sean to say Merry Christmas and looking forward to having some fun together in the New Year!
Markets are prone to crisis thanks to the fact humans are not rational interest maximizers with good information. Markets can also be manipulated from the inside. But you are right — markets are powerful and indicate demand and reward those who meet demand. I guess the key is to regulate enough so that inside manipulation is less likely, intervene enough to protect those without information (e.g., protections of food, etc.), and work for transparency. I do have a problem with a ‘race to the bottom’ – wages and benefits being cut and the middle class lowering their standard of living in order to compete with third world labor costs. Since you are right about markets and globalization isn’t going to go away I think we have to accept that’s going to happen, but find ways to adjust and perhaps demand transparency in decision making from corporate actors as well as governmental ones.
All fair points. Regulation is sometimes a good thing. Hence the ellipsis at the end of the title…
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