I was reading the New York Times this morning on my coffee break, and I came across this blog post by the incomparable David Leonhardt. Now, I don’t always have to agree with what Dave has to say, but he is always a good read and usually informative. However, one line in this blog caught my attention:
When it comes to economics, we know that a market economy with a significant government role is the only proven model of success.
I had to do a double take when I first read this. Actually, I did a triple take. I had to read it again to make sure I read it correctly. Then I read it just one more time. Leonhardt makes a rather sweeping sentence: we know the economy can only be successful with significant government involvement. With all due respect, if Mr. Leonhardt had remembered either his Econ 101 or taken a look at the historical record, he would not have made such a statement.
The basic economic theory states that, when there is an outside influence on the market (such as government interference), the market fails to allocate resources efficiently, thus leading to lower prosperity. So, theoretically, he has no standing.
What about historically? Let’s start at the basics. The Medieval period. A market economy with significant government and guild interference. Not really the best of times was it? Lots of poverty. With the exception of nobles and guild masters, most people didn’t live too well.
Let’s jump ahead to the 18th and 19th centuries. Mercantilism runs rampant. The definition of a significant government involvement. Who gets rich here? No one. All countires try to export and not import. So who buys? No one. Granted, life is better than during the 14th Century, but still not that great.
But in 1776, a wise man saw the dangers of Mercantilism and advocated a new system that would become, over time, Capitalism. That man was Adam Smith. Since then, the standard of living of people in countries where the government intervened minimally has grown exponentially. The historical record is quite clear on this.
And let’s look at some recent government involvement in the markets: historically low interest rates (as dictated by the Federal Reserve) which helped fuel the housing bubble. Trillions in stimulus funds and unemployment is still over 9%. Free trade across the world hindered by Congressional bickering. A default crisis that causes major worries throughout Europe. Government bailouts in the 80’s that set a precedent for failure in the auto market.
My point is you cannot make a sweeping statement like Mr. Leonhardt did. Or, if you are, at least make sure the facts are on your side.