La-La Land Economics

March 23, 2003

Recently, the professor of my economics class discussed the “flaws of markets,” claiming, “markets are only more efficient than state run intervention when they approach perfect competition.”  She then addressed public choice theory, the idea that government bureaucracies are inefficient because bureaucrats tend to care mainly about their budget and job security rather than the function they are supposed to perform.  She dismissed the idea as “la-la land” and claimed that bureaucracies could be efficient as long as bureaucrats acted in the “best interests of the country.”

An uncritical classmate might reach the following conclusions from my class: markets are more efficient than government if competitive markets exist, but government can be more efficient at distribution of resources as long as politicians have the country’s best interest at heart.  Since conditions for competitive markets (which are characterized by perfect information, no profits, free entry and exit out of the market, and no power by individual companies to set prices) rarely exist, government obviously has a major role to play in “optimizing” the markets.  My classmate would certainly not be alone in such a conclusion, as this is the predominant view of economics today among both economists and non-economists alike.  Non-conformists who claim that laissez-faire capitalism is inherently superior to inefficient bureaucracies are obviously living in the “la-la land” of perfectly competitive markets and universally corrupt politicians.

A more inquisitive classmate might have several unanswered questions about this view of capitalism.  Both markets and governments seem to distribute wealth, but where does this “wealth” come from?  We know what mechanism the markets use for allocating resources (supply and demand) -- but what mechanism does government use?  If a corrupt politician cares only about his job or budget, how does the honest politician define the “good of the nation?”  Finally, what do the honest and corrupt businessmen care about?  The answers to these unanswered questions are crucial to understanding the true nature of capitalism.

Because most economists today rely on the Marxist definition of wealth, it is not surprising that they have a Marxist view of wealth production as well.  To them, wealth is a natural resource either found in nature or produced by “homogeneous human labour.”  However, no man can survive by passively waiting for wealth to come to him or random “labor” without thought or planning of its ends. Oil may lie in the ground, but it takes a conscious and skillful effort to extract it.  Forests must be cut down, land must be tilled, and the required technology invented before it can be used.  In all its forms, wealth must be created by the intelligent effort of entrepreneurs and innovators, before it can be distributed to anyone.  Why does the entrepreneur engage in productive enterprise?  He does not work to benefit the “social good” but because he knows that he must either steal or earn his living, and he chooses the life of a producer over that of a thieving moocher.

Markets allocate wealth according to the value created by individual producers. Politicians, no matter how noble their intentions, have no objective basis for forcefully redistributing wealth.  Consider a case in which a judge has to decide whether a merger between two companies creates a monopoly or not.  Does a company have to control 50, 60, or 80 percent of the market to be a “monopoly?”  What about Amtrak, which has not made a profit in over 30 years of operation?  Does the “social good” of the having trains which conveniently fetch politicians to Washington DC and back outweigh the cost of running an unprofitable operation? What would a “good” and a “corrupt” politician decide?  Without a market to determine which ventures are profitable or not, no “efficient” decision is possible.  As Ayn Rand explained, “Economic power is exercised by means of a positive, by offering men a reward, an incentive, a payment, a value; political power is exercised by means of a negative, by the threat of punishment, injury, imprisonment, destruction. The businessman's tool is values; the bureaucrat's tool is fear.”

Thus, we come to the question of the nature of a good businessman and politician.  A good businessman is a self-interested creator of wealth, who seeks to profit not society, but himself.  A good politician is a policeman who seeks to not redistribute others people’s wealth, but to make sure that no party steals what belongs to another.  Theories to the contrary usually ignore the basic nature of capitalism and enter the realm of “la-la land economics.”