Many people are talking about Wall Street. I have not seen the movie. Don’t plan on seeing it either, there are better ones out there. The best scene in the first Wall Street movie may have been Charlie Sheen’s in the back of the limo. From what we have learned about Charlie over the years, that limo scene wasn’t much of a stretch for him!
The line that Gekko utters, “Greed is good”, has been misconstrued and extrapolated to apply to all business. Some people even try and make the limp, intellectual leap characterising the Chicago School of free market economics as a bunch of greedy bastards trampling on the proletariat.
Nothing could be further from the truth. Here, in an old 1979 video, Milton Friedman takes Phil Donahue to task on the concept of greed. Donohue clearly doesn’t understand classical economic concepts.
Economics is not about greed, but it certainly is about “self interest”. There is a subtle difference. Virtually every thing we do in life is about our own self interest-even altruistic acts we perform. There is also an opportunity cost to every decision and action we make. Adam Smith first defined this concept in the 1700’s. The beauty of the Chicago School is it defined these theories mathematically.
The Chicago School gives us a bedrock of strong mathematical and intellectual framwork to build. Other schools of economics, Keynesian, Tobin, Marx, are all mathematically fuzzy. Intellectually they do not work when attempted with actual human beings.
Friedman’s points on the Donahue show are especially salient today. Who can decide better for you? A faceless government bureaucrat, or you? As soon as you cede decision making to the government bureaucrat, you give up increments of your freedom. That is the crux of the debate Americans are having today.
Critics will point to the “common good”. However, Robert Coase and others proved that when property rights are clearly allocated, whatever bargain you derive with another person, is the best bargain for all society. This is a core concept of the Chicago School.
Each of us interacting and transacting daily without government interference is far more efficient for society as a whole than a centrally planned directive that forces us to behave in a certain manner.
The only system that replicates the theories of the Chicago School is the free market capitalistic system. This translates into a system where there is less government-no matter which party is in power. The invisible hand will moderate a market, and also root out greed.
Critics say that the market functionality broke in 2008. Bunk. The root of the problems were within the government. Cheap money by the Federal Reserve, and an unlimited backstop provided by Fannie Mae and Freddie Mac allowed a market to spiral out of control. There was no way to put the market in check, since the government rules, regulations and actions eliminated the invisible hand.
There are certainly problems with the Chicago School. Totally unfettered and free markets can be messy. There are winners and losers. There is an element of risk. But the problems of free markets pale in comparison to the problems and inefficiencies of centrally planned economies, totalitarian systems and the crony capitalism that comes with big government.
If you are an avid reader of Freakonomics, surely you understand that people respond to incentives. Incentives are more transparent in a free market system than they are in a centrally planned system. If you want to change people’s behaviour, simply change the incentives. It’s a simple concept that many people don’t trust.
Reagan used to say, “Governments attitude is if it moves tax it, if it keeps moving regulate it, if it stops moving subsidise it.”! Clearly, he understood the differences between free market economics and other systems.
There are many instances where one can see the difference. Targeted tax cuts versus a simple tax cut for everyone. Virtually no one can squeeze through the standards set for the targeted cut, so politicians can say they voted for tax cuts when they really didn’t.
Other policies, like energy saving ones are the same way. Obama wants everyone to get green. I decided to try and take advantage of the incentive and change the windows of my home to more energy efficient ones. When I ordered the energy efficient windows, the contractor told me they didn’t meet the “Obama standard”. He went on to say that virtually no window made met the standard! So, people were not getting the tax credit. No tax credit, no new green windows and more energy is consumed. The centrally planned standard actually causes less economic output, and has a detrimental effect on society.
If Obama were to use Chicago school thinking, he would have set the policy up differently. First, he would have put a high tax on all windows that were not energy efficient. This shifts preferences away from these windows. Next, he would have allowed a tax write off for any new window that was more energy efficient. Then let consumers determine their need based on their income and preferences. Manufacturers would innovate to meet those needs and preferences. Green windows would sell, and the country would use less energy. Simple.
Another misconception is that free market economics abandons the thought of a government. On the contrary, free market economics wants a government in place to guarantee the property rights of the people that play in the marketplace.
It is very hard for people to wrap their head around this free market concept. The observed randomness of free markets unnerves them. Many folks begin to make value judgments which skews their understanding. But at the end of the day, those free markets are more efficient and better for society. They are incredibly organised and fluid. Unfettered free markets guarantee that products and services will be delivered to the masses at the lowest price. The best thing about them is that anyone can participate. The free market doesn’t care who you are, or where you came from. Very different than the government.