Friday, 22 June 2012

I Find Your Lack Of Faith Disturbing: Musing on the Invisible Hand

     A few months ago, a friend of mine told me of a question on an exam he took in an economics course. I'm paraphrasing, but it was something like "Government  intervention can only harm the efficiency of the market: True or false?"  The "correct" answer was "true". Well, I found this troubling for a couple of reasons, most obviously because the underlying ideology (that government is bad for the economy) is so absurdly false.
     It's obviously false if you stop to think about it in any detail because there are forms of government interference without which most of our modern economy would be completely impossible. We have laws, police and courts not only to enforce the property rights that libertarians value so much, but also to enforce the contracts that make up the economy in the first place. Government also flagantly intervenes in the market by creating artificial forms of rights, such as intellectual property, that dramatically transform the economic landscape. And perhaps most pervasively, there is money. Money, a system of currency that enormously facilitates transactions by providing a simple, uniform unit of value, is a service created and provided by government, and it is almost impossible to describe how much that single piece of government intervention enhances the efficiency of the market.

     Okay, so maybe those kinds of government interventions in the economy are necessary, the laissez-faire ideologue might concede. But they're just to ensure the basic requirements of free trade. OTHER kinds of intervention, like taxes and regulations on who can do what with their property, those are always bad. Free markets have to be free, and any time you interfere with that freedom, you lose the benefit of the free market which always axiomatically produces the most efficient possible allocation of resources.

     Hey, I'm totally into that Invisible Hand thing. Free markets are, generally, the best way of finding prices for things, and they tend to produce efficient solutions to allocation problems. Markets adapt to changes in costs of production, availability of substitute goods, and all those unpredictable vicissitudes of  the real world. Price of oil goes up? Well, watch as ripples through the markets spread, and prices of everything else adjust to an optimum distribution given the new cost of energy. Oh look, the rising price of oil has made it economical to invest in that new form of solar energy! Solar electricity becomes cheaper, ripples spread through the market, and a new equilibrium forms.

    So when free market ideologues complain about how the government shouldn't interfere with the free market by imposing taxes on this vice or subsidizing that public good, for fear that it will distort the pure functioning of the Invisible Hand, I am baffled. The Invisible Hand isn't some fickle faerie who will only work its magic if we leave out the right kind of milk and cookies, and will run away and leave us helpless if we offend it. It's a powerful statistical principle, almost on the order of a Law Of Nature. Markets will be free, regardless of how hard we might try to constrain them, because markets are made up of independent individuals, some of whom exercise a great deal of creativity to find a way to exploit them. The Invisible Hand is far, far more powerful than conservatives give it credit for.

     Now, you can argue about whether or not a particular government policy is a good idea. If the government decides to impose a tax on pollution, for example, to try to internalize that externality (to use economist-speak), you can argue about whether or not the tax is the right amount or the best way to address the problem or even whether there's a problem at all. There's lots of valid reasons to favour or oppose any given government policy. But whenever someone starts talking about how it will interfere with the efficiency of the market, I wanna reach out and force-choke them.

1 comment:

  1. Force choke them... I'd recomed using a cricket bat on them. Well put. Dave