These Two Foundations Of Economic Success Are Under Attack

Posted: Nov 04, 2019 10:58 AM
These Two Foundations Of Economic Success Are Under Attack

Source: Luciano Del Castillo/ANSA via AP

Surprisingly, free market advocates and even fewer economists understand why free markets thrive. There are two primary foundations that cause free markets to thrive – and both of them are under attack from the left. Our prosperity and everything that comes with prosperity are at stake.

Prior to graduate school I was taught that centrally-planned economies were superior and were destined to provide the masses with a better standard of living. It made a lot of sense to me: Put the economy’s brightest and most knowledgeable experts in charge of the economy’s most important resources, processes, and decisions. Capitalist economies (which teachers never referred to as free market economies) appeared destined to allow chaos and encourage waste. People who were allowed to pursue only their own interests would surely not be of service to others. 

For example, I wondered how millions of U.S. farmers, most of whom lacked Ivy League educations, could be entrusted with deciding how to feed our nation. How could farmers - acting independently and driven by self-interest - hope to match the production of the Soviet Union’s planned economy? The leading economics textbook of that era boldly predicted that the Soviet economy would overtake the U.S. economy. But wisdom is justified by her children. Soon the Soviet Union proved unable to feed its citizens while the U.S. exported surplus food despite using fewer and fewer workers.

I took eight doctoral-level economics courses on my path to a PhD in Finance. Several of those courses provided clarity as to how an economy in a highly simplified scenario can optimize production and allocation based on existing productive capabilities and technology. But none of them dealt effectively with why economies grow and how they respond to changes in technology, consumer preferences and available resources. It was many years later that I found the answers when I learned about Austrian Economics in general and the work of Hayek and von Mises in particular.

The two foundations to a successful economy are as follows:

1. Market prices to communicate change in real time. It is impossible for any bureaucrat or committee of bureaucrats to make consistently wise decisions in a modern economy without being able to observe market prices in real-time. Even the answers to the simplest questions in a modern economy are unfathomable without access to market prices. Paper or plastic? We can have no clue as to the answer without market prices. If you do not realize this please read “I Pencil” by Leonard Read. It is easily located for free on the web and only takes perhaps fifteen minutes to read.

2. Self-interest to spur innovation and growth. My father was an engineer in a factory. He once told me that when a new piece of equipment arrived at the factory he would place the laziest worker on the new machine. My father would then observe how that worker, motivated by self-interest to work as little as possible, would find the quickest and easiest way to get the job done. My dad would then train other workers how to use the machine the same way. My dad used this technique because he was rewarded for improving the profitability of the factory. Years later he was hired to help open new factories in a communist-bloc country. He struggled with finding ways to motivate the engineers and laborers to be productive when there were no rewards for improved production. Of course socialists do not destroy self-interest – they pervert it. In socialist economies people are rewarded to game the government and its policies.

Free markets self-organize an economy. In their roles as producers, people strive to satisfy consumers as efficiently as possible. In their roles as consumers, people strive to satisfy their desires using as few resources as possible. Market prices provide the information. Self-interest provides the energy. 

Here’s the problem: the new socialist movement in this country seeks to distort prices and pervert self-interest in a single blow in policies such as equal pay for (supposedly) equal work. Apparently a male catalog model should earn the same as a female fashion supermodel. Socialists want to control everything. These opponents of freedom claim that extreme socialism has failed in the past because they lacked the right leadership. Liberal political elites believe that they can be the leaders that will get socialism to work right this time. They are clueless about what makes an economy thrive.