Why do people, markets and politicians rely on intervention?

12 de May de 2009 at 1:47 am | Posted in crise! | 1 Comment

The financial crisis emerged last year was felt like a global after-party torpor. As the joy and the happiness trigged by excesses that go down to apathy, what seemed to us an ever-increasing state of prosperity disappeared in the air, showing an unimaginable fragile structure and causing worldwide lethargy. After years of massive consumption and production, we learn now that perhaps we were not that wealth, and, perhaps, excesses have been made in the process. We have borrowed too much, we have spent too much, and we have relied too much in our capacity to do so. Astonished, the world tried to find who to cast aspersions on: banks, bonds, stock markets, greed. Although there are many conflicting perspectives of the crisis` causes, there seems to be a congruent prescription: government.

The solution pointed out in the form of bailout was rapidly assumed by politicians, markets and societies. And the bailout popularity was so big that even presidents-to-be engaged on its defence as electors were demanding quick governmental measures to refrain the crisis. This fact shows per se that the speech of liberalization and deregulation so proclaimed in previous years was not as rooted in our political and economic environment as anti-globalisation militants had imagined it to be. In the beginning of the XXI century, governmental conduction of economic issues was believed as the right path to inefficiency. Now, strangely, it is believed that the State is the only force that can help us getting on prosperity tracks again. But – is this the way or is this just an easy way? Moreover, why is it that, when facing an economic crisis, we still turn ourselves to government help?

Recently, we have seen some economists saying that, in times of crisis, the regularities of economics or the economics rules do not apply and hence governmental intervention in those cases are not only efficient, as necessary [1]. Notwithstanding, I believe Donald Boudreaux, the economics professor from George Mason University, has the best explanation for this popular reliance on government intervention – according to him, people are so used to the good functioning of the market, that they only seem to actually perceive that there is a market when things go wrong [2]. Nobody is really interested in all the complex actions and processes that have to happen in order to someone walk into a restaurant and order some food. Although many things must be worked right by a myriad of economic players for this simple action take its course – financial systems, farmers, fertilizers, energy, irrigation and transportations companies, storehouses, manufactories, retailers, restaurants, renters, cookers, waitresses – if a single player fails, say, the financial system, and if the customer has now to pay more for the same old meal he is used to, he will realize that there is a market indeed, and will blame the market for his misfortune.

As Donald said, when there is no gas at the pump station, we feel that a sacred right of ours is being violated. We should have our gas anywhere and in any quantities we desire. That is how things should work, and when they do not work that way, then something must be wrong and something must be done about it. That is the common thought that leads most people to support government intervention when things appear not to follow according to the plan. Indeed, it is a naïve belief: government will play his role as any other economic player, and is subjected to flaws as any other player. The difference is that, unlike other economics players, governments can make mistakes indefinitely. Farmers and retailers are subject to bankruptcy, and, persisting in failures, will eventually get off the market. But governments do not. They cannot be pushed away from markets as all the other players. Hence the naïveté of relying in governmental solutions every time something goes wrong.

But if Boudreaux’s theory seems plausible to explain why society blame markets and recur to governments to solve problems, it still does not answer why markets themselves share the same strong reliance that governments can operate on their problems better than they could do. A recent NY times article called ‘Firms That Got Bailout Money Keep Lobbying’ [3], offered a good explanation. In the piece, the authors David D. Kirkpatrick and Charlie Savage had an interesting insight: in time of crisis, receiving governmental help is a comparative advantage for the firms. Indeed, if a company is facing bankruptcy or an unintended incorporation and control by a bigger business concurrent, it seems quite reasonable, that, if government – with practically unlimited resources – offers a hand, the company in question will want to be the one holding it.

Driving this picture to market as a whole, it is not hard to realize why corporations engage in lobbying. If your business concurrent is getting external help, this means he has a comparative advantage over you – that is to say, you should be pursuing that help too. These incentives work in a way where, when a crisis comes, the entire affected market is going to demand help from government. The situation, as the authors commented shows a “growing dilemma facing private companies, which increasingly deal with the federal government not only as rule-maker but also as shareholder, lender and trading partner. Pressing federal policy makers risks the appearance of recycling public money to advance a private agenda, while staying on the sidelines could put a company at a comparative disadvantage.” If we ponder that this kind of comparative advantage is derived from the strength of a company’s political power rather than its efficiency and economic health, then we have a big problem for that market – inefficiency can be rewarded as efficiency, punished. The easy solution of having government intervention can bring up a dependent sector, which will always be pursuing governmental help, money and facilitations in order to run their business.

But what are the reasons for government to interfere? What makes government believe that, despite all previous liberalisation and pro-market claims, solving the crisis is not only a role, but a duty? The American presidential campaign was emblematic in this regard. Feeling popular pressures, both candidates have stopped their campaigns to vote and pass the bailout in Congress. Feeling popular and corporation pressures, the candidates could not have been done differently from that. If for corporations receiving help is a comparative advantage, for politicians giving it is a political one.

In fact, in time of crisis, speeches for free markets are self-silenced even by Republicans, who are mostly prone to diminish state intervention in economic issues. And it could not be different now. After the first signs of recession and the declarations of financial collapse of major banks and institutions, society, governments and industries, not only in America, but worldwide, pointed the bailout plan as the ultimate solution for the financial crisis. In a situation like this, not taking responsibility for solving the crisis is always a political loss. Society urges, and hence politicians are prone to solve it – especially if, in the process, helping certain corporations can also increase their campaign funding and help their re-elections later on. As the Public Choice Theory say, politicians are also self-interested agents. A bailout is a major source of perpetuating political influence and political power over special interests of economic groups. And, if they get to spend tax-payers money in the process, it is mostly okay – after all, the decision is democratic, and supported by a vast majority.

We see, then, that societies, markets and governments have their own reasons to point out intervention as the proper solution to deal with an economic crisis. But in times where corporations are striving to get some money from the big governmental pot, it is useful to recall words of German philosopher Franz Oppenheimer [4]. Oppenheimer said that when sustenance is required, men are impelled to act on two opposed ways: they can get their needs through their own labor, which is work. Or, they can get them by the forced appropriation of the work of others: robbery. The first is called by Oppenheimer the “economic means”; and the second constitutes what he calls the “political means”. In order words, transporting Oppenheimer’s concepts to the phenomena developed from the current financial crisis, what is happening today is that the political means have overcome the economic means as the solution to the sustenance problem that many corporations are now passing through. The risk is that, in this trade off, choosing the political means might cause a loss of economic means, i.e, the market, the freedom that those companies have enjoyed, and that are, to most of them, the core of its own existence.

Instead of vastly – and rapidly – embrace political means, we should rely in the ability of markets to solve their own problems, and be impelled to choose economics over politics. If we rely on economic means to get food, gas, iphones, and clothing, why should we not keep relying on them when our sustenance seems to become threatened? The market is always around and works almost all the time with such smoothness that we barely notice it existence. But we have to keep in mind that markets are per se a trial and error discovery process – it works in a discovery procedure, as F. Hayek [5], Nobel laureate, call it. And as a dynamic process, when something is changing in a market economy, it is not just a crisis – it might be a necessary adaptation to another alternative, a most efficient alternative. This dynamics may scare us. Yet, it is the only mean of acquiring sustenance in a peaceful, cooperative and sustainable way.

[1] Paul Krugman – Pubished by NY Times: “When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.”. At: http://www.nytimes.com/2008/11/14/opinion/14krugman.html
[2] David Boudreaux. At: http://www.ordemlivre.org/node/473
[3] David D. Kirkpatrick and Charlie Savage. At: http://www.nytimes.com/2009/01/24/busi ness/24lobby.html?r=1&scp=5&sq=b ailou t%20money%20lobby&st=cse
[4] Franz Oppenheimer. The State. At: http://www.franz-oppenheimer.de/state0.htm
[5] F. Hayek. Competition as a discovery process. At: http://mises.org/journals/qja e/pdf/qjae5_3_3.pdf


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  1. Thanks for the info. With all the bad stock market information we get online with low rate websites, it is good to read something from someone who knows what they are talking about.

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