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The Fallacy of Economics by Coercion
In laying out his seventh and final economic fallacy, FEE president Lawrence Reed in 1981 put it all together by identifying the “fallacy of economics by coercion.” Indeed, it would seem naturally to follow the sixth fallacy, “the fallacy of the short run,” in that adherents to economics by coercion believe that instead of waiting for the “slow and cumbersome” market to deal with an economic problem, government can simply order a “solution.” Reed writes:
Two hundred years after Adam Smith, some economists still have not learned to apply basic principles of human nature. These economists speak of “increasing output” but prescribe the stick rather than the carrot to get the job done.
Humans are social beings who progress if they cooperate with one another. Cooperation implies a climate of freedom for each individual human being to peacefully pursue his own self- interest without fear of reprisal. Put a human in a zoo or in a strait jacket and his creative energies dissipate.
Why did Thomas Edison invent the light bulb? It was not because some planner ordered him to!
Why don’t slaves produce great works of art, Swiss watches, or jet airplanes? It’s rather obvious, isn’t it?
Take a look around the world today and you see the point I am driving at. Compare North Korea with South Korea, Red China with Taiwan or Hong Kong, or East Germany with West Germany.
One would think, with such overwhelming evidence against the record of coercion, that coercion would have few adherents. Yet there are many economists here and abroad who cry for nationalization of industry, wage and price controls, confiscatory taxation, and even outright abolition of private property. One prominent former U.S. senator declared that “what this country needs is an army, navy, and air force in the economy.”
There’s an old adage which is enjoying new publicity of late. It reads, “If you encourage something, you get more of it; if you discourage something, you get less of it.” The good economist realizes that if you want the baker to bake a bigger pie, you don’t beat him up and steal his flour.
Unfortunately, the government has responded to the present economic crisis (which government caused in the first place) by applying raw force to “get the economy moving again.” For example, earlier this year, bank executives whose institutions had received federal “bailout” money were dragged before congressional committees whose members demanded to know why the banks were not lending as they had done before the crisis.
The theme of the show trials was this: We gave you money, so you had better lend – or else! Now, even if one ignores the fact that these executives were benefiting from receiving money that was taken by coercion from taxpayers, we are left with the stark realization that members of Congress really don’t care if banks lend to firms that actually can pay back the loans. In other words, the very behavior that brought about the crisis in the first place – a mass of bad loans which were tied to mortgage securities which lost value – is ignored. Congress demands that banks loan money, period.
How soon members of Congress forget that economics by coercion was a major cause of this crisis. Banks and lending agencies found themselves forced by the Community Reinvestment Act to loan money to people who did not qualify for conventional mortgages – and the “subprime” market that came from this practice ultimately blew up, bringing down banks, brokerage houses, and whole sections of the economy.
Unfortunately, as the economy goes further into the tank, the politicians are demanding that government employ even more coercion (as though government agents needed encouragement to seize property and brutalize other people). We are going to find out the hard way that economics by coercion is always doomed to failure because the laws of economics are more powerful than any set of laws that can come from the halls of government.
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I follow the logic but have a problem that I hope someone can help me resolve. You seem to be asserting that this whole failure was mandated by our government. (Which is actually believable, either by design or stupidity.) Do I have it right that subprime lending got a lot riskier after Wall Street figured out how to dissipate the risk?
If the answer to that question is yes, then it seems to me your argument isn\’t holding a lot of water. I reject anything coercive or compulsory from the gov\’t, but it seems to me this failure is happening because of excess, not because the CRA said home ownership was a good thing and encouraged (\"coerced\") banks to be a little less risk averse (\"prejudiced\") when it came to making loans to minorities and lower-income families.
I don\’t see how banks hoarding taxpayer cash is acceptable, and the government is not in the business of underwriting home and auto loans. The credit market is still icy, so what\’s a government to do? No one said *who* they had to lend it to, just that the money needs to be lent. What\’s wrong with that?
(Hello socialism!)
25 February 2009 at 6:25 pm