De Rugy: Are you down on the American economic system? Think about cooperation. | News, Sports, Jobs


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Veronique de Rugy

I was recently reminded of a profound truth about the free market and the prices at its core. Unfortunately, this truth is often overlooked by both critics of the market economy and economists like me. This simple truth is that the prize system works thanks and only because of a number of institutions that encourage collaboration between us.

As an economist, I’m used to arguing that free markets, while imperfect, are a better alternative than government intervention. It goes something like this:

The free market pricing system, along with the competition of sellers for customers and consumers for good deals, plays a vital role in gathering and processing the information about our economy that is scattered among millions of buyers and sellers. The resulting prices are a measure of how much people value goods and services.

In a well-functioning competitive market, this argument goes on, these critical price “reports” show us the most advantageous ways to utilize finished goods and services, intermediate products, raw materials and—importantly—human time and talent, and guide entrepreneurs to produce what we want most, as efficiently as possible. From an economic point of view, prices convey information about scarcities and about wealth-creating incremental substitutions.

It’s an overwhelming system in which, as French political scientist Frederic Bastiat reminded us decades ago, “Paris is fed daily,” although no one plans to.

Enter Samuel Gregg and his wonderful new book, The Next American Economy. Gregg’s pro-free market case goes beyond the classic economic argument.

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He writes: “The plea for free markets involves rooting such an economy in what some of its most influential founders believed to be America’s political destiny; that is, a modern merchant republic.” He adds: “Politically, this ideal embodies the idea of ​​a self-governing state in which the governed are regularly consulted; where the use of state power is constrained by strong commitments to constitutionalism, the rule of law and private property rights; and these citizens consciously adopt the specific habits and disciplines required to maintain such a republic.”

Yes! I like to think I’m a big advocate for the markets, but if I omit those last points, I’m sabotaging my own case. For one thing, terms like “competitive markets” give the impression of a heartless process. But the most important aspect of this competitive process is collaboration.

In fact, massive collaboration is happening every day across the globe. For example, think of the shirt you are wearing. It may be made of cotton from Texas and yarn from Canada, sewn together in Vietnam, and shipped to you in a vehicle assembled in Japan.

Imagine the trust built into such a cooperative system. That, as Gregg explains, is partly the product of the existence of property rights: exclusive authority to direct how a resource is used. Will you sell your time to Apple or to John Deere? Will you spend your income on a Toyota or on a Harley? Underlying all of them is the rule of law, which gives everyone security in their property rights. The law must be clear, known and stable.

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No serious free marketer believes markets are perfect. We are not utopians. Unfortunately, perfect markets and perfect competition are often the starting point of economic textbooks. This rosy starting point leads many to conclude that when conditions are less than perfect, the best course of action for a correction is government intervention. It is wrong.

Not only is government itself imperfect, as anyone can plainly see, but the market is a process of finding and fixing faults. A market imperfection is an opportunity for entrepreneurs to capitalize on it. As Arnold Kling recently wrote, “Markets fail. Harness markets.” That’s because, Kling adds, “entrepreneurial innovation and creative destruction tend to solve economic problems, including market failures.”

That’s not to say government doesn’t play a role other than protecting property rights. But it does mean that reliance on government intervention should be tempered by an acknowledgment of government’s own shortcomings, including a tendency to favor one group of people over another and an inability to adapt when policies fail or governments change circumstances change.

The bottom line is that the “free market” is shorthand for a combination of institutions that enable people to work together, tolerate one another, live in peace, and thrive. As Gregg reminds us, all of these elements are integral to what George Washington envisioned for the new nation he led, describing it as “a great, a respectable, and a trading nation.”

Veronique de Rugy is the George Gibbs Chair in Political Economy and a Senior Research Fellow at the Mercatus Center at George Mason University.



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