Free Markets are Efficient Distributors, Not Our Savior

I think the recent U.S. Government economic bailout package was misguided and essentially socialist. As I wrote in my last post, I think the market would achieve a more sustainable strength if left alone to do what markets do. Here is some additional background thinking on why that has become my position.I know many of you agree with my end conclusion (bailout bad, free market good, at least in the current situation). I’m curious to know if your reasoning is similar to mine or much different. For those who disagree, I’d like to better understand where it is that our opinions begin to split.

I want maid service; you want maid service. I want a nice car; you want a nice car. I’d like a custom suit; who wouldn’t?

We can’t all have everything we want. There is not enough to go around. That’s scarcity, and it’s a fact of life.

Everyone knows we get into trouble when we ignore the facts of life or think we can sneak around them. Unfortunately, that’s where we are right now with our economy: we have gotten into trouble.

We tried for too long to overcome scarcity with credit. For years, both you and I could have nice cars, even though we couldn’t afford them. We were easily able to get a loan. Or heck, we could even charge it on a credit card. With a 28% APR, even if one of us falls way behind on payments or goes bankrupt, the bank issuing the card still makes out OK.

The so-called rescue plan now in action props up this faulty economic paradigm, this inaccurate way of understanding the world.

Wild paths for planets were invented to keep the geocentric view of the cosmos alive in the face of pesky facts. Keeping our current economic paradigm alive requires treating the facts in a way just as ridiculous.

As early astronomers observed the movements of the planets, it became more and more difficult to sustain the paradigm that the Earth was the center of the cosmos. Pesky little facts. They always ruin things; it’s always easiest to conceal and ignore them. (That’s how we wound up with ridiculous maps of planets doing loop-the-loops, like Jupiter in the image to the right.)

For instance, there is this fact that not everyone can have everything. What we face right now is not a crisis, it’s a consequence. Still, it’s so easy to sweep that fact under the rug and pretend that our present way of looking at the economic world is tenable. In our current paradigm, there is no such thing as bad debt. There is still only subprime debt.

This paradigm is nonsense. It disregards the fact that resources are in fact scarce, and not everyone can have everything they want. Our current paradigm believes that everyone can have what they want, and in fact has every right to expect credit so that they can buy what they want.

Not only does this violate the scarcity part of Economics 101, it also violates the part about prices.

If everyone can purchase $100,000 cars, auto manufacturers can keep making $100,000 cars. The paradigm we live under (which is still hanging on for dear life) holds that, thanks to the wonders of credit, we can all afford $100,000 cars (and SUVs and pickups, of course). There is no reason to make or focus on more affordable cars. If price is not a barrier, what incentive is there to focus on high value at low price?

You can see that our current way of doing things messes up in two ways: First, by ignoring scarcity, and second, by making prices less relevant than they really are.

Gasoline right now is a shining example of how this works. When it comes to oil, it’s impossible to ignore the fact that it is scarce. Even when that scarcity is exaggerated by OPEC (when they limit production and shipping), all they are really doing is spreading scarcity out over a longer period of time. Yet, even with a scarce resource (and, really, all resources are scarce), prices can go down. That’s because demand can fluctuate even as supply is predictable.

In a nutshell, if we were still dealing with $4.50/gallon gas, this recession would be worse than it is. But everyone is scaling back, and that means fewer miles are being travelled. Fewer miles being traveled means lower demand for gas. Lower demand for gas means a lower price on gas.  Earlier this year, I thought Tom Friedman presented a great idea: Why shouldn’t the government set a “price floor” on gas, guaranteeing that it will always cost $4/gallon or more? If the “real price” ever dipped below $4, the difference would go toward developing alternative energy.

Problem is, that suggestion rests on the assumption that people’s ability to afford $4 gas won’t substantially change. It is now obvious that that is a bad assumption. Prices are meaningful, and should generally be left as free as possible.

There is such a thing as bad debt. Bad debt is debt taken on to pay for something that is overpriced specifically because the law of scarcity has been ignored. (Think houses. We can’t all own houses, scarcity says. So many people kept saying different.)

No sensible person “believes” in free markets in the sense of a zealous adoration of them. What people like me mean when we say we “believe” in free markets is that we think that free markets constitute the most efficient way of distributing scarce resources.

When you work, you either make resources more useful and valuable, or you help distribute those resources. (You may do both.) That helps everyone out, and you get paid for it. Then, you turn around and pay for something else, thus giving another person an incentive to produce it for you.

Do free markets have cracks? Heck yeah. That’s why we don’t “believe believe” in them. We just think that, as economics goes, they’re the best way we have. Governments are extremely slow moving; the decisions of a centralized socialist government are ridiculously inefficient in distributing scarce resources when compared to the efficiency of countless smaller, private transactions in a free market.

So, right now, when we say the federal government’s bailout plan is “socialist,” this is why we mean it as a bad thing. It is not because we love free markets in and of themselves. Free markets not warm and huggable things. Instead, we mean it as a criticism because we love our neighbors and our world, and we know that free markets are the most efficient way of meeting the bulk of humanity’s needs.