Government vs. Markets

Here is Don Boudreaux's October 1999 column in the Freeman.

DB is on target.

More often than not, Government's attempts to "fix" markets makes things worse.
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Politicians and bureaucrats are prone to overemphasize problems with the world and to propose command-and-control “solutions.” Economists, sad to say, have aided and abetted that mindset with a series of suspect theories of how markets are doomed to perform inadequately.

Thankfully, not all economists have played this game. Many of the better ones have done outstanding research showing that free markets consistently deliver maximum value.

For example, while most economists 50 years ago were convinced that only vigorous antitrust enforcement could keep industries from becoming monopolized, far fewer economists today hold such a belief. One reason for this change is that a handful of researchers during the mid-century wisely re-examined the theoretical grounds supporting antitrust. (Aaron Director, Milton Friedman’s brother-in-law, deserves special recognition for conveying to countless law students a deep understanding of how free markets keep unregulated industries from becoming monopolized.) But another reason is that—guided by these better theories—other researchers found persuasive evidence that the market doggedly resists monopolization. Faced with solid evidence of the robustness of unregulated markets, most economists grew appropriately skeptical of claims that markets are prone to monopolization. The perceived need for antitrust enforcement declined.
New Justification for Government Activism

But government’s thirst for power is unquenchable, as is the willingness of some economists to provide intellectual cover for regulatory activism. Evidence of how such activism is bolstered by new theories is the current antitrust case against Microsoft. Critical to this case is the government’s charge that consumers continue to purchase Microsoft software only because they are “locked in” to these products.

The allegation is that most consumers want to purchase software from other suppliers, but Microsoft’s very dominance locks these consumers into its products, now and forever. After all, the story goes, because a great majority of other computers currently use Microsoft’s Windows operating system, it doesn’t pay for you to buy another software-maker’s less-expensive or technically superior operating system. If you did, your computer couldn’t communicate with all those many others that use Windows.

The market, therefore, locks consumers into products and suppliers that by right ought to lose their market shares to firms offering superior deals. Naturally, the story concludes with the assertion that such inefficient “lock-in” is a widespread threat in markets and that only government can spring consumers from these traps.

This “lock-in” theory is dead wrong.

Anyone who cares to look will discover the incredible entrepreneurial dynamism that has long characterized our market economy. If the “inefficient lock-in” tale were true, we would all still be listening to AM radio, for no one would have built an FM transmitter when virtually no one owned an FM receiver. And no one would have bought an FM receiver when virtually no one broadcast FM signals. Likewise for color televisions. And for CD players. (I recall a conversation during the early 1980s with a fellow graduate student who insisted that compact-disc recordings would never catch on because too many people owned vinyl LPs. I hope he isn’t now an investment adviser.) In each of these cases, the market smoothly performed the complex task of coordinating the switch by millions of people from a less desirable to a more desirable product standard.

Not surprisingly, there’s no evidence that the market dynamism that assured substantial progress for consumers in the past isn’t working now in the computer industry. In a thoroughly researched new book, economists Stan Liebowitz and Stephen Margolis document not only how the market has never been inefficiently locked into old technologies or products, but also that Microsoft owes its current success to its consistency in offering quality deals to consumers.[1]
Stuck with Government

Ironically, those who demand that government police against inefficient lock-in are oblivious to the fact that it is government, not the market, that locks people into bad situations. Once created, government power seldom disappears. Statutes, regulations, and bureaucracies remain cemented in place long after their original justifications have evaporated. In short, government—not the market—is the principal source of inefficient lock-in.

Consider, for example, one of America’s most regrettable government programs: Social Security. Aside from those with naked political or material stakes in this deluxe boondoggle, no one today argues that it works. That argument would be ludicrous—as was shown recently by Professors Richard McKenzie and Dwight Lee, who calculated that a 38-year-old worker today, earning no more than $40,000 annually, must live to be 143 years old before getting as good a return as he would by investing. And a worker of the same age earning at least $68,400 per year has to pray for true earthly immortality, for only if he or she lives forever will Social Security pay off.[2]

Social Security has long been known to be disastrous for young people. No sensible person would today voluntarily join this system. But join they must. The reason is that Social Security—by its very existence, by the fact that it transfers wealth from the many to the few—has created its own hardcore constituency who benefits directly from its forced continuation. Because of the gargantuan political clout of today’s Social Security recipients, Americans are locked into this nefarious scheme.

Of course, there are good people working now to help liberate Americans from the Social Security trap. These efforts, though, ultimately require politicians to release citizens from Social Security. Perhaps it will happen. I’m hopeful.

But no significant scale-back in government power can occur until large numbers of people are educated and mobilized to support the change. In contrast, inferior products and programs supplied by the market are assuredly and quickly doomed. No political consensus is necessary to free consumers from unresponsive suppliers. All it takes in the market is a creative idea, entrepreneurial gumption, and consumers who recognize superior bargains.

If government is to launch a campaign against programs, products, and institutions that are protected from competition—“locked in”—it had best look in the mirror.