Mr. Summers is writing his Ph.D. thesis in mathematics at the State University of New York at Stony Brook.
One of the notions commonly held by critics of the free enterprise system is that the more complex an economy becomes, the more government intervention is needed. If this assertion, which sounds perfectly natural to many people, is in fact true, then economic freedom in America is a relic of a simpler past. Let us examine this notion by considering what it means for an economy to be "complicated."
Let us begin by considering a free enterprise system. In such an economy capital is privately owned and the government restricts itself to protecting people from humanly initiated force and fraud. In this atmosphere of laissez faire, capitalists compete with one another for the consumer’s dollar. A businessman cannot stand still for long in such a situation because the competition is always innovating. Innovation! This is the key to success in a free enterprise economy. The men who come up with and implement better ideas are the men who will show profits on their capital investments. Thus, every day entrepreneurs complicate things by marketing new products and modifications of old products. Who decides which entrepreneurs will succeed and which will fail? Who decrees that capital will constantly flow toward the men with better ideas? The consumers! They are the ones who, acting in their own interests, determine the capitalist’s fate by purchasing his products or passing them by.
Thus do competing businessmen complicate the consumer’s life by marketing an ever-increasing variety of products. It may take a little longer to walk through a modern shopping center than an old time general store, but the consumer definitely benefits from the increased assortment of goods from which to freely choose. In fact, the free market is, if anything, more valuable to today’s consumer than to his forebears. After all, the greater the selection from which to choose, the more valuable does freedom of choice become.
Progress and Change
In their eagerness to market new products, capitalists have not only complicated consumers’ lives, but they have also complicated their own. They have increasingly turned to technology, specialization, division of labor, and trade to produce their goods. The complex economic relationships that arise are naturally best worked out by the people directly involved. They have the best understanding of their own problems, and they have the greatest incentive for efficiency. It is, after all, their capital that is at stake.
The complications that arise in a free enterprise system result from entrepreneurs’ desire to better serve consumers and thereby earn a return on their time, effort, and capital investment. These complications are thus, directly or indirectly, beneficial to the buying public.
There are, however, politico-economic complications that prove detrimental to the consuming public. They appear when an economy moves away from laissez faire, as the American economy has done. These complications are, in fact, the very same government interventions that are supposed to "cure" an economy of its complexity!
As an example of how government interventions complicate rather than simplify economic affairs, let us consider a man in the construction business. In addition to all his other concerns, he must contend with such interventions as building codes, zoning ordinances, eminent domain, inflation (due to legal tender laws and Federal deficits), wage and price controls, rent controls, credit regulations, investment regulations, hiring "guidelines," laws that prohibit the hiring of nonunion workers (and the resulting strikes, slowdowns, featherbedding, increased labor costs, and sudden shortages of materials), minimum wage laws, overtime laws, licensing laws, blue laws, numerous taxes and quasi taxes (income taxes, profits taxes, property taxes, sales taxes, social security taxes, unemployment compensation taxes, workmen’s compensation insurance premiums, disability insurance premiums, etc.), the mountain of paper work that the government requires of all businessmen and so on and on. All these complications hinder the businessman and thus create costs that must eventually be borne by the buying public.
Not only do government interventions create obstacles that the businessman must try to overcome, but they further complicate his plans by being in a constant state of flux. In making his calculations, the businessman must try to predict which way the laws will turn. Unfortunately, this is often very difficult, if not impossible, for not only must the entrepreneur deal with legislatively enacted (amended, repealed) laws, but he must also contend with arbitrary ad hoc administrative edicts. He never knows when the President (governor, mayor) will complicate his plans with a surprise executive order such as a sudden imposition (modification, removal) of wage and price controls.
Economic complications do not call for more government intervention. Rather, they call for increased freedom in which to work out the complex relationships that naturally arise in an advanced economy.
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The Freedom To Fail
Because failure is repugnant to a welfare oriented society, we see continued efforts made to put a floor under everything.
This includes a spreading attempt to bolster up faltering business firms or even whole areas or industries by government grants, loans, subsidies, defense contracts, and the like.
Ironically, the greatest danger to our economic system today lies not in a direct attack on profits, but in a well meaning effort to insure everyone against failure. To put it bluntly, this means subsidizing inefficiency; it is the antithesis of the effective operation of the profit motive.
We are in danger of losing one of our greatest freedoms: the freedom to fail. Profit and loss are two sides of the same coin; take away one side and you take away the whole coin. Our greatest economic asset is the right to invest private capital in the hope of making a profit, but at the risk of losing our shirt.
GEORGE CLINE SMITH
