Tibor Machan is a professor at the Argyros School of Business and Economics at Chapman University.
Those of us who are convinced beyond a reasonable doubt that the free market is a better forum than its alternatives for making sensible economic decisions face a persistent difficulty. This is well illustrated in the following passage from a prominent author, Robert Gilpin, the Eisenhower Professor of Public and International Affairs (Emeritus) at Princeton University:
The market oriented position [on international trade] rests on the assumption that investors are rational and will not invest in risky ventures if they know that they will not be bailed out. Therefore, elimination of moral hazards also eliminates the problem of serious international financial crises. Although this conclusion may be correct, no such approach has ever been tried, and there is no empirical evidence to support such a daring policy experiment. Indeed, available evidence leads this writer to conclude that investors are not consistently rational, that they do get caught up in what [is] called “euphorias,” and that, when the speculative bubble bursts, many innocent people get hurt.
This causes most governments to be unwilling to risk leaving financial matters entirely “up to the market,” indeed, many governments have even installed mechanisms at the domestic level to protect their citizens from financial instability.*
Gilpin makes these remarks after considering Milton Friedman’s skepticism about the policies of the International Monetary Fund (IMF), which often places cushions beneath governments as they make risky financial decisions. Friedman suggests that without those cushions the discipline in the international marketplace would be greater and fewer problems would reach crisis proportions.
It is true that an underlying assumption of much economic analysis, including the sort Milton Friedman has produced over the last several decades, is that investors, indeed people in general, are rational. By this is meant that they have enough information needed to reach decisions, and proceed then to do so, concerning what is an efficient, prudent allocation of resources. In short, Friedman and those who agree with him think the marketplace is always a better bet for producing sensible economic outcomes than its government-sponsored alternatives.
There is something, however, in Gilpin’s criticism that investors and, we may assume, people in general (whom some investors work for) are not “consistently rational, that they get caught up with . . . ‘euphorias.’” If this were all that Gilpin meant, his observation would be unexceptionable. Now and then, it is true, people in governments might reach better economic decisions than those in the marketplace.
However, Gilpin goes on, in a way sadly typical of most defenders of statism in economic affairs, to bestow on governments qualities there is no reason to assume they possess. As he puts it, “This [the fact that investors aren't consistently rational] causes most governments to be unwilling to risk leaving financial matters entirely ‘up to the market,’ indeed, many governments have even installed mechanisms at the domestic level to protect their citizens from financial instability.” Clearly Gilpin is treating governments as if they had some magical way of escaping the occasional irrationality that investors are capable of. Or to put it differently, while investors are not consistently rational, Gilpin seems to accept rather blithely that governments are.
Notice, also, what kind of presumptuousness, indeed, arrogance, this leads to in Gilpin’s own discussion: He tells us that because of investors’ lack of consistent rationality, governments are unwilling to risk “leaving financial matters entirely ‘up to the market.’” In other words, people in government, who are every bit as susceptible as other people to “euphorias” and other kinds of irrationality—and, if public choice theory has taught us anything, are more susceptible to certain types by far—take it on themselves to assume the role of coercive nannies.
Market Equals Non-Interference
To put it plainly, “leaving things up to the market” means not interfering with what people do with their own resources. Encouraging international financial policies in line with this approach means not setting up, as the IMF and World Bank do routinely, various means by which it is possible for governments to escape the consequences of irresponsible economic decisions.
Putting this all in somewhat different terms, Gilpin supports the common government policy of substituting for the risk of occasional economic failures the near-certainty of repeated political failures. For one thing, bureaucrats do not face, as investors do, the discipline of possible bankruptcy. If they blunder in matters of public finance, there is always the good old taxpayer who can be forced to mend the problem. And there is no danger of being sued since government agents enjoy sovereign immunity, which prevents holding accountable those who are merely carrying out the “public will.”
Investors do not have these options, so it is less likely that they will behave irrationally. All in all, if there is to be a choice between whom to trust more in economic matters—those operating in the marketplace or those regimenting market agents—trusting the former is far more rational, even if not a guarantee against all problems.
It is interesting, by the way, that Gilpin admits that the free-market approach has not been tried, yet does not bother to ask why that is so. Trying it would require governments to relinquish a great deal of power, and they are unlikely to do that. No wonder the market has not been tried in full. If the slaves had depended on their masters to give freedom for all a try, very few slaves would have been freed, and we’d report that few masters embarked on “such a daring policy experiment.”
It is sad, indeed, that folks like Professor Gilpin are deemed the best and brightest among the academics who address these matters. Until those who champion liberty over regimentation by meddlesome governments get wider and more prestigious forums for their views, Gilpin & Co. will be calling the tunes and liberty will be fighting an uphill battle.
*Global Political Economy (Princeton, N.J.: Princeton University Press, 2001), p. 272.