My friend suggested a topic for me to address in one of my posts, “Which to trust, the government or the market?” To which I replied, “To do what?”

After further questioning I learned that the idea arose pursuant to a discussion he had with his son. Seems the young man has lost his way, herding with the multitudes in support of government-sponsored health care services. So the question for discussion became, “Which to trust to provide certain goods and services, the government or the market.” My friend, older and experienced, holds the view that the market is the appropriate choice for most goods and services.

Since the United States has now an executive who considers himself a pragmatist, it seems prudent to consider the historical record of government achievement at delivering goods and services to see what works. Pointing to the colossal failure (or “noble experiment” if you prefer) of the Soviet Union it should be pretty obvious that central planning and the provision of goods and services through the socialist model does not do well in meeting its objectives nor does it last as an institution. There are other laboratory experiments in the real world where a “control” was present. Consider: the two Berlins, North vs. South Korea, and Hong Kong vs. India in the post-colonial period. In each case the degree of political involvement in the respective economies determined the success or failure of each economy.

There is a choice to make: a political framework that allows economic participants the freedom to succeed or fail or, a political system that interferes with the economy, guaranteeing failure within some uncertain future. In the case of the Soviet Union the collapse took about 70 years. There are many other countries with varying mixes of state intervention in the economy, each gradually succumbing to the lethal effects over time, just as minute doses of certain poisons will kill a victim eventually as they accumulate in the body and weaken general health over an extended period.

The nature of man’s institutions determines how they ought to function, just as the nature of man determines how he needs to function in order to survive and prosper. Thus, proper governments are instituted among men to protect rights, and free markets are instituted among men to facilitate trade and the creation of wealth. Government uses coercion to achieve its ends, the market uses persuasion. Government must be managed bureaucratically, while the market is managed by the profit motive. Services provided properly by government are restricted, while the array of economic goods and services provided by the market is for all practical purposes, unlimited.

One of the fundamental problems for government when it intervenes in economic matters is the “knowledge” problem acknowledged by economists. Simply put, there is no way for government employees or politicians to solve the problem of deciding what gets produced, what resources are used and who gets the goods. In the unhampered market economy it is the price system that communicates that knowledge over a disparate population of individuals pursuing their self-interest. This simple concept serves to explain why government intervention will frustrate that communication and, at a minimum, create distortions. At some point of interference it is possible to paralyze the market players, who may have goods and services to provide but cannot get government approval to produce.

So, in the end the question of what institution to trust depends on what is the good or service being considered and how long you want the economy to survive. If you want the economy to thrive and the citizens to flourish then the government should stick to protecting rights, providing a legal framework in which economic participants may pursue any endeavor that does not infringe on the rights of their fellows. When, as invariably it happens, there are those in the minority who would use force to attempt to live off others, the government’s role is to see that justice is served and that these perpetrators get just punishment for transgression.

Markets impose a discipline where men are free to succeed but must also suffer the consequences of failure. The even smaller minority who experience temporary economic failures may have to rely on the charity of others if they have not provided enough for such emergencies through savings, or are unable to work. But, true charity is extended voluntarily and not through the distribution of loot taken from others by force.

You should trust (but verify) the government only in an administrative role, which requires only bureaucratic management. If it is possible to make a profit in delivering some good or service, then you should trust the free markets to deliver those goods and services. To commit a society to some mixed recipe of providing economic goods through both government and semi-free markets is to issue a death sentence for that society. The only significant question at issue is how long it will take for the decay to result in total collapse.

©Copyright 2009 Edward Podritske