Americans are souring on the idea of free markets, according to some newspaper reports. Gas at more than $4 a gallon, plummeting home values, a volatile stock market, tightening credit and mounting job losses are said to have undermined the consensus, politically dominant for a generation, that the heavier burden of proof falls on those who want the government to intervene to correct the market, rather than on those who believe that the market should be allowed to correct itself.
For capitalism’s defenders, having to face skeptical audiences could prove beneficial. Capitalism, like most ideologies, has received dubious assistance from its most zealous publicists. “The market” becomes the focus of every grievance when people have been encouraged to believe that it is the best system imaginable.
The stronger argument is that capitalism is the best system available. Prices set in markets convey information about “demand” -- how widely and avidly various goods and services are desired -- and “supply” -- how difficult or risky it is to make these goods and services available. These are not fixed properties but are reflections of tastes and technologies, whose constant evolution is reflected in constantly changing prices. As Cass Sunstein, a Harvard law professor who writes frequently on political economy, puts it, “the knowledge of individuals, taken as a whole, is far greater than that of any commission or board, however diligent and expert. The magic of the system of prices and of economic markets is that they incorporate a great deal of diffuse knowledge.”
The diligent experts who administered the federal oil-price-control programs of the 1970s quickly learned this. They took the country’s crude oil supply and tried their best to figure out how much of it should be refined to produce gasoline, diesel fuel and home heating oil. The result? Massive supply disruptions, lines around gas stations and “odd-even” plans that told drivers whose license plates ended in the “wrong” number that they would have to wait until the next day to fill up. Ronald Reagan abolished the price regulations on his eighth day in the White House.
What’s remarkable is that the recent jump in global oil prices has driven up the price of petroleum products but has not resulted in gas lines or Rube Goldberg rationing schemes. Prices, set in markets, are allocating a scarce resource more efficiently and knowledgeably than government planners ever could.
The motives of those who call for new government interventions into the economy have more to do with moral sentiments than economic analysis. They want government to serve the people by thwarting the predations brought on by the “hubris” and an “overt lack of concern” for others among “corporate leaders,” to use the words of Sen. Jim Webb (D-Va.).
One problem with this populist morality play is that it can’t tell us anything useful about specific economic problems. Blaming the oil companies’ greed for high gas prices, for instance, assumes a cause-and-effect relationship that violates a basic rule of science: You can’t use a constant (greed) to explain a variable (gas prices). The only way to make the accusation stick is to say that greed, somehow, is also a variable. The energy industry’s chief executives went through an exceptionally greedy phase earlier this year and crude oil prices skyrocketed. In recent days, however, they’ve been waking up feeling about 15% less greedy, and prices have receded.
The other problem is that “serve the people” is a noble sentiment but an imprecise marching order. The next wave of government regulations that follow from it will be guided by a principle no more exacting than, “Let’s give this a try and hope it works.” The resulting adhocracy is likely to saddle the country with policies it may regret.
Indeed, government policies to correct the market are often, in reality, correcting the last round of government interventions in the market. Fannie Mae and Freddie Mac, for instance, were set up by Congress in 1968 and 1970, respectively, as “government-sponsored enterprises” with a mandate to increase home ownership. Both are corporations owned by shareholders, but, as government-sponsored enterprises, they are exempt from taxes that ordinary corporations must pay, and they do not have to comply with accounting standards that govern other companies. Above all, the implicit but universal understanding in the world’s capital markets that the U.S. government would bail them out if helping home buyers led to some excessive risk-taking has produced Freddie’s and Fannie’s current financial woes.
Last week, the House passed a bill that would greatly increase the level of government intervention in the market. Among other things, it would make the government’s bailout guarantee explicit, authorize the government to lend Freddie and Fannie money and buy their stock, and create a tough regulatory agency to keep an eye on their business practices.
The willingness to give government-sponsored enterprises still more governmentally conferred advantages shows that interventionism does political as well as economic damage. As the political scientist Theodore Lowi demonstrated 40 years ago in “The End of Liberalism,” the American way of intervening in the market is not for Congress to pass laws distinguishing legal from illegal conduct. Rather, lawmakers delegate decision-making powers to regulatory agencies, which are assigned the hopeless task of perpetually tweaking the government’s “standards” to make sure every interest group is “part of one big policy-making family.” The result, Lowi says, is “a government that is unlimited in scope but formless in action.” It “replaces planning with bargaining” and subjects its citizens to “policy without law.”
This infinitely malleable regime puts entrepreneurs who excel only at making their customers happy and their investors rich at a disadvantage, relative to those adept at forging and using political connections. The point is not that the principles of laissez faire are sacred. Rather, it is that the economy and the government work better when capitalists stick to capitalism and legislators stick to legislating. The next era of reforming capitalism will only avoid the mistakes of previous ones if we insist that legislators make capitalists adhere to clear rules rather than murky ones they are required to renegotiate endlessly.