Why the unmanaged economy works

Worldview Item of the Day

The Economist has a great article up about why the American economy works without overbearing government regulation: the dynamism of a system where people and businesses are allowed to succeed and fail in unending repetition based on opportunity.

The reason the American economy works is the same reason that living beings work. The human body, as an example, is constantly rebuilding itself by killing off malfunctioning cells and structures and replacing them with new cells and structures. In the economy, the failure of businesses creates opportunities for new business or for the growth of businesses in other areas than the ones that have failed.The current economic crisis is not a failure of the well-founded and well-proven American economic system to do what it does, but a failure of the regulation of financial systems that have tangential connection to the rest of the economy, as the Economist article notes. The financial sector and mortgage lending are not American capitalism any more than Social Security or unemployment benefits are, and the parts of the economy that are business continue to thrive in spite of what is happening to the crisis makers.

Business will continue to thrive, unless the federal government kills it. The irony of the government response to the current economic troubles is how much of that response is targeted at parts of the economy that are doing just fine without government interference. An example is the promised increased on the taxes of people who make more than $250,000 per year, which includes millions of small business owners who are sole proprietors or s-corporation owners.

While the current administration is trying to kill this system, it is not dead yet, and there is still hope to reverse even what has already been done. Election Day, 2010 is 15 months away, and in one election, we all possess the capacity to make our government into anything we want it to be. We can ensure that the economy that is already working keeps working. We just have to care.


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8 Responses to Why the unmanaged economy works

  1. Seagull says:

    I have two problems with your post:

    1. Bad analogy. I take it you never, ever go to a doctor. Further, you must assume that any sickness you come down with is your own fault. I’m not defending the bailouts, merely pointing out that your analogy has serious limitations which ultimately doom your point. Systems sometimes get out of whack. It is the government’s job (which they admitedly fail at on a routine basis) to look out for the public good. Markets on the scale that you’re talking about do not self regulate as they are purported to do and they do not make ethical decisions. A market is a mindless system which sometimes needs to be regulated.

    Let me give you an example. The underlying motive of capitalism is profit. Profit is the scorecard by which business knows whether it is “winning” or not. The logical (and extreme) conclusion of a completely unregulated market is monopoly. As any company gets big enough, it can muscle out and buy up it’s competitors. Further, because of the intense relaxation of regulations, there are no restrictions on the diversity of markets or products a company can seek to play in/with. Without regulation, then, we could have a world economy effectively run by, say, Disney Corp. Even if sufficient competition exists to midigate a true monopoly (one business controlling a sector), a very limited number of major players creates an effective monopoly. As with the game of Monopoly, sometimes the board needs to be reset so that we can all enjoy the game again. And let’s not pretend that everyone with wealth has earned it; many have not.

    So, just like your body can go out of balance and require a doctor to put you back on the right track, markets, too, are not always self-regulating.

    2. This bullshit about the tax on people making $250,000 or more is just so much whining and posturing. Even with the modest increase to the tax in this bracket — from 35% to 39% — this tax is still historically low. It’s true that S-Corp owners take it in the pants because business income must be declared on the owner’s personal income tax. S-Corps are definitely not the way to go if you are doing anything other than personal consulting or have a very small family business. However, there are other types of corporate classifications that can help midigate this situation. Further, all businesses must pay taxes and at about the same rate (39% at the upper reaches). Taxes on business is absolutely just considering that they have been granted significant levels of human rights while being shielded from many of the responsibilities people have.

    These taxes are not crippling the economy, they are not crippling small business or destroying jobs. That is simply not true. Inflation has a similar or bigger impact on your relative buying power and I don’t think it keeps anyone from going to work or starting their own business, so let this dog lay on the porch. It certainly won’t hunt.

  2. dlhitzeman says:


    Ironically, I do not go to the doctor, nor have I seen one regularly for probably close to a decade, so perhaps my analogy reflects that idea to a certain degree.

    However, you reference to the economy being a mindless system reflects to me exactly the analogy that I was trying to communicate: there is no central force in the body that tells it to do what it does (I suppose, unless you point to the DNA, which is not like a government at all); hence, each part of the body regulates itself. The system is imperfect, both in the body and in the economy, but that is the system I was talking about.

    Sure, you can point to the example of monopoly, but the reality of history says that monopolies rarely survive long because people get tired of them, whether they are corporations or governments. It seems to me that this is another example of the same self-regulation principle in action.

    As for the taxes question, I call your bullshit and raise you one. Taxes inherently cripple free market economies because they take productivity out of production and invest that productivity into things that rarely have any real return. Further, the federal tax equation ignores that it is not just the federal government that taxes, and increases in federal rates rarely happen alone. The effective tax rate on people who earn more than $250,000 is much higher than the current federal tax rate, especially when all levels of fees and licenses are applied.

    Finally, anyone who thinks that the government will not continue to increase taxes on everyone after if first breaks the ice with the first increase is deluding himself. All one has to do is look at states like New Jersey, Maryland, Massachusetts, or California to see how the never-ending tax hike process works. Interestingly, businesses are bailing out of all of those states in droves and those states are imploding economically.

    Also, for the record, my view is completely in keeping with my view that the optimal system is no regulation, but I suspect that we have deep disagreements on that front.


  3. Seagull says:

    We do have deep disagreements, I’m sure, so I’ll confine my comment to two points. First, your claim that monopolies rarely last long because people get tired of them begs the question. How do people get rid of monopolies? They do so either through violent means (which, I would hope, we’d like to avoid and, therefore, create a system to midigate that possibility) or non-violently. In this country, the government is supposed to reflect the will of the people (and there’s a whole other conversation to have about whether it does or not. I suspect we both think is does not though likely for different reasons). In our country, government action has been the historical remedy to monopoly, an example of which is Teddy Roosevelt’s (and later, Taft’s) trust busting.

    Second, you make a good point about the cumulative nature of taxation. You are right that it isn’t only federal taxes that count. You are also right that government is just as prone to abuse as markets. That’s why I ultimately disagree with you. It isn’t an issue of business or free market — good; government — bad. Both need regulation and that regulation will not happen by itself in either case.

    (By the way, just like the idea(l) of our government structure, the idea(l) of a free market is a great concept. However, in practice, both are susceptible to the influence of what I call “bad actors” — basically, people whose motives are not about what’s right for the group, but only what they can take out of the system now.)

  4. dlhitzeman says:

    I’m not sure that your example of trust busting proves that the government’s intervention in large scale economy is necessary because we don’t know if some other force would have prevented the monopolies from establishing their irrevocable stranglehold on the economy at the time–the government intervened before the outcome could be proven one way or another. I agree that the government should be an expression of the people’s will, though I wonder if trust busting was part of that expression. Further, I wonder, circumstantially, how much of that intervention led to the climate that allowed for the circumstances of the depression that followed.

    Perhaps part of the debate here is really about the scale of the economy we are talking about. In my original post, I did not make that distinction (probably erroneously) and we are not making that distinction here either. A lot of my ideas about economy work far better at far smaller levels, and I have to concede that multi-billion dollar, transnational corporations do require a different view. Part of my original point is that, with GM and the banks, we already had a mechanism in place to handle that kind of thing that we did not let work on its own.

    I still think that markets self-regulate simply because they involve people, and those markets self-regulate whether or not there is government involvement for the same reason that cooperation develops even when there is no government to enforce it.

  5. Seagull says:

    “A lot of my ideas about economy work far better at far smaller levels, and I have to concede that multi-billion dollar, transnational corporations do require a different view.”

    Precisely so. It sounds like you’re putting forth a free market defense based on the philosophy of Adam Smith. Smith’s views are premised on a small market scale where everyone involved is directly impacted — for better or worse — by the actions of the market. Many modern economists falsely extend these principles to larger markets where the premises fall away without note.

    On a small scale, I may be forced to act ethically. I set prices by what the market will bear and when I anger the market, it can respond not only by not buying my goods, but also by not providing me with goods. Similarly, I make sure not to pollute the water because it is my drinking water too. I make sure that I don’t over use natural resources because it is my environment that is directly effected. However, when I can establish my business in a foreign land and work on a global level (or even just another sufficiently broad scope) then my incentives to act as I should diminish. What do I care if I pollute your drinking water if I only need your resources and not necessarily your market.

    On a small scale the natural incentives of the system remain strong. On a large scale, they stretch to breaking.

  6. dlhitzeman says:

    The nature of your large scale argument is exactly why I argue against continuing to support the large scale (although I concede that, with certain kinds of industries, it’s hard to imagine any other scale). Returning to my original analogy, then, I am willing to accept that, periodically, the government must act do deal with something like large scale excess in the same way that doctors deal with disease: by trying to eliminate it (trust busting).

    The problem with the current government intervention, with those ideas in mind, is twofold: First, the government already had mechanisms in place to deal with the problems created by the issues presented by the current economy, but those mechanisms have not been allowed to function to eliminate the diseases that cause the problem. Second, the government’s ham-handed approach to intervention affects not just the large scale businesses that were failing because they were greedy and dumb, but also the small scale businesses that are, in many cases, doing quite well.

    As a result, these greedy, dumb large scale businesses have been protected from the consequence of causing sickness–elimination–and are now being strengthened so that they can make us all sick again, while the small scale businesses that represent the bulk of the healthy economy are being left to deal with the scars of this sickness long after it has passed.

  7. dlhitzeman says:

    For a more complete collection of writings similar to my view on the economy, check out the Front Porch Republic. I found this recent post especially interesting.

  8. Seagull says:

    This is another interesting case where we seem to agree until the details come into it. I think I’m in pretty much complete agreement with your comment from 6/10/09 at 1802, yet still find myself disagreeing with your post.

    I don’t think there’s any need to argue further, but I am intrigued with the phenomenon of just where our paths diverge.

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