The Most Perverse Fetish of All: Government Intervention
Subsidizing a company may lead to it gaining a favorable competitive advantage over its competitors, laying the way for a monopoly. The solution to this problem? Subsidize all the competitors too!
Sounds silly? It should. Nevertheless, such was the argument given by an IE member of faculty – an economics professor. What may have been merely a passing remark about the basic functionality of subsidies, the statement is also representative of the attitudes of most modern mainstream economists.
Markets are not perfect. Even the most stringent proponents of free markets accept the existence of externalities and information asymmetries, amongst others. In mainstream economics these examples of “market failure” have one solution: government intervention. This blissfully simple solution to complex problems has become the mantra in the majority universities across the world.
Intuitively it all makes sense. Governments are not profit maximizing, so they can focus completely on the welfare of their citizens. They are thus the perfect solution to market failure. As with most claims made by mainstream economists though, this argument does not consider anything but the initial problem and its intuitive solution. The underlying assumptions of such policies, as well as the associated reverberations on firms and households, are not taken into account.
First of all, there is no guarantee that government intervention will be efficient at all. History is plagued with examples of governments attempting to intervene in markets and not only failing to fix the problem, but actually making the problems even worse.
One must merely look at some of the examples over the past decades: The War on Drugs has targeted primarily Hispanic and Black communities in the United States, sending a disproportionate number of young minorities into prison for victimless crimes; EU meat-industry subsidies are leading to the overproduction of meat, driving its price down and polluting the environment; and price ceilings on rental apartments have destroyed any chance young people had of living in central Stockholm. The list could not be made exhaustive even if attempted.
Government failure happens time and time again, often with far graver consequences than a market inefficiency might have produced instead. If “market failure” is considered its own chapter in mainstream economics then, should “government failure” not be discussed to the same extent?
But even assuming a government that could do no wrong, intervention is still more often than not unnecessary. Looking back at the privatization of the 1990s goes to show just how much getting rid of government can improve an economy; and how much time and money was wasted on getting the government involved in the first place. Today, more and more examples are appearing of the free market solving its own problems without any meddling from the state.
In Finland, the state monopoly on trains and railways, VR, was completely gazumped when the long-distance bus industry was opened up for competition, and private companies came in to offer cheaper, higher quality transportation services than what trains could offer (an industry that is quoted as the prime example of a natural monopoly). Similarly, the pollution of water areas has been better solved by selling the water areas to private individuals, who will file lawsuits against any corporation that is polluting the water they own.
Proponents of government intervention should take a strong look in the mirror. Their calls for never ending meddling in the economy comes in one of two forms: ignorance or deception. Neither option is a good one.
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