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Wednesday, December 5, 2012

New Problems Need New Solutions

As a libertarian I’m often accused of merely replacing faith in government intervention with blind faith in “the free market.” I can’t speak for all libertarians, but my confidence in the free market comes not from any faith in an institutional black box, but from a deep respect for the energy and resourcefulness of ordinary people.

But everything depends, of course, on the “rules of the game.” 

The Rules

Those rules tell us how we should and shouldn’t behave toward one another. When they permit or encourage one person to initiate physical force against another, that person’s energy and resourcefulness can do a great deal of harm, no matter how well-meaning she might be. The hard and ruthless will tend to dominate the soft and the kind. 
When the rules forbid anyone from initiating physical violence against another—but allow her the freedom to do just about anything else—that same energy and resourcefulness drives a process that has generated unprecedented wealth and creativity, as this diagram from The Economist shows.
(Note: See also Rosenberg & Birdzell and Deirdre McCloskey on the origins of market-based wealth.)
We may not like everything that emerges from that process, and we are free to criticize; but in a free society, criticism entails tolerance of outcomes that aren’t the result of aggression or fraud. What a dull, lifeless world it would be if only things we like, right now today, were permitted! Not much would change or grow—including ourselves.
Excessive use of government intervention—i.e. state-sanctioned violence against voluntary actions and agreements—can stifle productive human resourcefulness and energy.

An Example

The other day a reporter interviewed me for a story on the challenges of government-funded mass transit. I framed the problem in terms of the fact that people in government are cognitively and politically constrained by past solutions. When politicos and entrenched interests talk about how to enable large numbers of people to move around a city at a reasonable cost, there seem to be only two alternatives they will take seriously: subsidized roadways or subsidized rail transit. Most federal transport funding goes to highways, and rail transit—despite its seventeenth-century origins—is regarded as a cutting-edge alternative.
The reporter and I agreed that these big, federally-funded projects seem to fail financially wherever they are tried (in this case, Detroit’s “People Mover,” which in fact moves very few people). I suggested there are solutions that don’t rely on top-down mandates and state largesse, but rather on the bottom up energy and resourcefulness of ordinary people. 
He then asked me how it would be possible to stimulate ordinary people to solve transport problems in big cities. I replied that government doesn’t need to stimulate anyone. What it takes are the right rules of the game. 
Some markets are relatively free from government stimulus. For example, no one worries much about how private individuals will address the volatile demand for basketball shoes. The technology and performance of today’s “Nike Lebron 10 Pressure” would have astonished Michael Jordan back in 1992.
People in markets are to varying degrees bold and competitive. Those aren’t adjectives that describe government plans at either the federal or local level. And though the market process is rarely neat and clean, it is enormously creative. Trial and error, profit and loss, can be very messy processes, but they are the essence of economic development.
So if you want to find a way to get cheap mass transit (for both demanders and suppliers), let people move! That is, let profit-seeking people, working within rules that forbid special privileges (like allowing only a small cadre of taxi companies to profit from moving people from place to place) experiment and compete to find new solutions to new problems, whether in mass transit, basketball shoes, education, healthcare, or anywhere else.
Today in New York, jitneys prowl the streets for passengers, but operate at the edge of the law. Their clients are mostly low-income wage earners who live far from municipal subways and busses and for whom regular use of monopolistically regulated taxis is out of the question. Economist Dan Klein has written insightfully about how more widespread use of jitneys could address a number of mass-transit problems.

Radical and Constructive

To find a solution to a problem it’s necessary first to correctly identify the problem. Big highways and rail transport are actually old, one-size-fits-all solutions in search of problems. Economics teaches us that the more complex the social order is, the less likely that politically-imposed solutions will work. Getting politicos to think outside old ways while battling back entrenched municipal and legally-protected private interests is hard. But it is necessary.
The reality is that, for transportation and many other activities, local governments will probably be involved in one way or another whether we like it or not. So small, less-destructive changes within dominant political thinking such as bus rapid transit in Chicago and Curtiba, Brazil, may be a slight improvement—small pinholes in the old mental box.
A more radical and constructive approach would be for the government to ignore privileged interests entirely. That would encourage entrepreneurs—ordinary people with extraordinary ideas—to find profitable (i.e. high-demand, low-cost) ways to transport large numbers of people to where they want to go. Local government would then need to make changes in regulations and legislation that will give those entrepreneurs a fighting chance. Economic development typically consists of marginal improvements that accumulate over time and set the stage for explosive growth. Who knows what an expanded jitney services will evolve into down the road? Nobody knows—and that’s the point. 
Harnessing the creative energy and resourcefulness of ordinary people. That—and not “blind faith”—is the essence of the market.

Find a Portuguese translation of this article here.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.