Faith Based Economics

In times of economic turbulence, should we trust the free market to straighten things out? Or should we depend on the government to fix the economy? Who should we have faith in?

There are really only two choices in the matter. We must choose between  government solutions or market solutions. There is no third way.

However we choose, it must be understood that our fate will be decided by living, breathing, fallible, individual human beings. There are no abstract decision makers with perfect knowledge and no bias. Regardless of ideological leanings, some man or woman will have to make important decisions about the use of scarce resources.

If government is chosen to solve economic problems, citizens must give up their right to direct economic activities. They cede decision making power to elected officials and government workers. Based on the belief system held by individuals working for the government, the funds will be utilized to try to improve the economy.

Some people in the government will say that the money should be spent on roads and bridges. Others think that investing in education will be the most profitable. The military will want to spend the money on weapons. The IRS will argue for more tax collectors. Big corporations will lobby to have some of the money spent on subsidies. Banks will want bailouts.  Economists will recommend that the government run deficits and borrow money in the name of the citizens. The federal reserve will be urged to print money. All of this will be done in the name of boosting aggregate demand.

After hearing all of the arguments and contemplating the options, real live people will have to make their choices. How will the citizens’ money be spent?

Do you have faith in those people? Do you think that the money will be spent wisely? Will those powerful individuals act in the best interest of their fellow citizens?

When government spends money, it can be very tricky to determine if the money was well spent. The government must reckon with opportunity cost. If they spend a million bucks on education, they can’t spend it on medical benefits. How do they know if they made the right choice? What results would indicate to them that chose correctly?

Business people are able to resort to a profit and loss statement. If customers are willing to pay more for an item than it costs to produce it, that’s a good sign. It means that the resources that went into producing the product were allocated wisely. People value the final product more highly than they value the raw materials that went into it.

Without the ability to calculate profits and losses, government managers are flying blind. Even the most brilliant and honest people in the world are unable to effectively carry out such a task.

Profits and losses can only be calculated accurately when transactions are voluntary. In order to know if resource allocations are truly meeting the demands of the buyers, the buyers must be allowed a free hand in choosing what to spend money on.

This is the crux of the argument for putting faith in the free market. Instead of giving money to the government and letting the government direct the economy, people decide for themselves what to spend on. If business people want to get rich, they have to produce stuff that people want. Under this system, resources are dedicated to the most urgent demands of individuals.

People will get exactly what they want. Not what others think is best for them.  Not what scientists and sociologist determine they should have. Not what corporations are able to get subsidies for producing. Under the free market system, we are forced to accept humans for what they are, not what we want them to be.

In times of crises, the free market system quickly and ruthlessly shifts resources away from projects that don’t fulfill the desires of the market. In the recent meltdown, the clients of big Wall St. firms were indicating that they no longer needed or wanted the investment services of those particular companies. Accounts were closed, money was withdrawn, and the financial system was about to be completely rearranged.

Everybody who invested their money in the old order of things would have suffered massive losses. Losses hurt but they are an essential part of the market system. They indicate that resources are not being utilized correctly. Without the aid of a printing press, private actors can only suffer losses for so long. Eventually, lines of business that do not conform to the true demands of consumers will be abandoned completely.

The adjustment period, or recession, during which resources are shifted to new  lines of business can be quite painful. Its like packing up your old family house and moving somewhere new. Its a lot of work. Its sad. The future is unsure. But if you chose a good place to move to, the future is bright once you arrive.

Generally, the government manages a crises much differently. Again, they have no profit and loss statement. They can throw money at a problem without having to deal with going broke. Politicians are elected based on short term election results. If the economy appears to be doing poorly on their watch, they may be voted out of office. Lobbyists from failing industries are in their offices everyday offering them money and benefits for playing ball.

When the big adjustment comes, government tends to preserve the status quo. They don’t have the incentives or the necessary tools to adjust the economy to new conditions. Instead of letting old companies that no longer meet the demands of the economy go down, they bail them out. Companies that would have run out of resources are propped up. Things appear to have been saved, but the reality is that a long, slow, squandering of resources is under way.

As stated before, there are only two economic systems that we can choose. We either let the government officials decide what will be produced or we let the people decide.

If we let the government decide, there is no way to know if they will produce what we really want or not. Government officials are human just like everybody else. They are no less prone to making bad decisions. They are no less susceptible to being bribed.

The market on the other hand, will produce whatever the hell it is that people want. When they stop wanting it, resources will be shifted quickly into new lines of production. Recessions will end promptly, although painfully. Most importantly, there is only one road to wealth: serve thy neighbor.

So, who do you have faith in?

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