Sunday, June 20, 2010

Progressives don’t realize how much they don’t know

Published in The Tennessean, Sunday, June 20, 2010

Progressives don’t realize how much they don’t know

by Richard J. Grant

On ancient maps it was common to fill in unexplored or feared regions at the edges of the world with pictures of serpents or the warning, “Here be dragons.” Today it remains unwise to venture into such territory unprepared either to survive or to accept the consequences.

With greater knowledge and technology, we travel casually beyond the ancient frontiers. But we still fear dragons, the unknown.

We also attract trouble when we believe we know more than we really do. That is why we put limits on children. That is also why we put limits on governments.

Why do countries with high levels of government control tend also to be countries with high levels of poverty? Government officials cannot possibly possess the knowledge necessary to create and direct resources to their most important and productive uses. The socialists’ belief that it was possible to centrally plan prosperity is what Professor Friedrich Hayek labeled, “the fatal conceit.”

Government in America is growing, not because of its past successes, but because of progressives’ conceit. They do not know how much they do not know. That gives them the confidence of the child, raised on Disney films, who skips happily into the jungle to play with Bambi. They imagine that if we just let government write the script, then we will always have a happy ending.

When life doesn't follow that script, we often hear charges of “market failure.” But not often enough do we recognize the ubiquity of government failure.

“The Market” is often imagined as some kind of unified collective entity, as some sort of counterpart to government. But that is a misunderstanding. Markets are really just an activity: the exchanges of goods, services, and information between individuals. Even exchanges between companies are conducted by individuals on behalf of other individuals with whom they have agreed to associate.

It is in these exchanges and associations that real information and market knowledge are produced. By their actions in production and exchange, individuals reveal information about their preferences and true abilities. They also generate information about the availability of, and need for, various resources. This information is most useful when the transactions are least hampered by third parties, such as bandits and governments.

This is where governments can play a useful role. Productive exchanges will continue to occur only when the traders (and third parties) respect one another's rights to the property that they trade. Governments can help protect those property rights. When governments fail at this task, then governments fail.

Countries prosper when their governments help to define, extend, and protect property rights. Most of our social problems are due to a failure or inability to assign clarity to property rights. Who is liable for the consequences of one person’s actions? Who has a claim to our income and wealth? Who owns the seabed or has a right to the resources (whether fish or oil) in the Gulf of Mexico?

Clearer answers to these questions would help us now as we watch the damage to property from oil gushing into the Gulf from a botched drilling operation. Accidents happen, but they are less likely where property rights and rules of liability are clearest, and where infractions are detectable. Basic laws against theft, fraud, and aggression provide our first and most powerful line of defense. Modest, rational regulations can reduce the costs of enforcement of our property rights.

But current levels of regulation go way beyond reason. Intrusive regulation tends to blind us to external reality and to the likely consequences of our actions. How did BP perceive its need to make provision for potential liabilities from its operations in the Gulf? We might ask the same question about the de facto custodian of the territory in which the oil well was drilled, the US Government.

Did the custodian not require BP to purchase adequate insurance? High insurance premiums warn us of dragons.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010