Economic Success Depends On Constant Failure

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The entireworld now recognizes that private enterprise is the only road toeconomic prosperity. Yet the administration in Washington seesmore government intrusions into the private sector as the bestroute to political popularity. President Clinton is staking hispresidency on the belief that undermining the prosperity thateveryone wants, and that only the private enterprise system candeliver, is politically clever. And he may be right.

The market economy is such apowerful engine in the production of wealth because it excels atletting people know when the resources they are using in oneactivity would be more productively used in another activity.That market communication not only provides importantinformation, it comes in a form that no one can ignore, economicfailure. Economic failure is to the economy what physical pain isto the body. No one enjoys pain, but without it the body wouldlack the information needed to maintain its health.

Those who experience unemploymentfeel pain, but because of that pain they are likely to obtain newemployment in which they provide more value to consumers. Mostunemployed workers now find new jobs within a few weeks. Theevidence from Europe shows clearly that extending unemploymentcompensation increases the average length of unemployment and reducesthe productivity of the economy.

Business failures are painful.But the only way an economy can take full advantage of the newtechnologies that are sweeping the globe is for some business tofail and make way for others to expand. A major reason forJapan’s rapid economic growth is a business failure rate that ishigher than that of the United States. Attempts to target someAmerican firms and industries for special government assistancewould reduce economic growth.

As agricultural technology hasimproved, we have been able to produce more food and fiber withfewer workers and less land, making it possible to produce moreof other products consumers want. The result has been painfulbankruptcies for millions of farmers. In 1940, for example, therewere 6.1 million farms in the United States. In 1989 there wereonly 2.2 million. The movement off the farm was painful for many,but it resulted in far greater wealth for the entire economy.

As consumers we all receive thegeneral benefits of economic success because there are always afew suffering the concentrated pain of economic failure.Unfortunately, the characteristic that makes the marketplace sosuccessful economically makes it extremely vulnerablepolitically. Because it provides general benefits by imposingconcentrated costs, the private enterprise system finds itself inan unrelenting battle against special‐​interest politicalinfluence.

An industry and its workers,threatened with economic failure, can reap immediate andconcentrated benefits from government action in the form ofextended unemployment compensation, subsidies, loan guarantees,tax breaks, mandates, and import restrictions. Already organizedthrough its unions and professional organizations, an industrygroup can easily communicate its demands in ways that politiciansignore at their peril.

The benefits an interest groupthus receives are more than offset by the costs of a lessproductive economy. But those costs, though large in theaggregate, are spread so thinly over the entire population thatthey go unnoticed politically. Most people are not even aware ofthe slightly higher prices they pay or the slightly reducedchoices they have when market competition is rendered lessintense by special‐​interest legislation. So when considering aproposal that will protect a few against economic failure at theexpense of the many, politicians can be expected to hear from thefew but not from the many. As opposed to the marketplace, thepolitical process reduces the general wealth of the economy byconcealing failure rather than revealing it. Governing programsfinanced in the name of reducing economic failure do nothing morethan reduce the visible failure to the politically privileged byincreasing the invisible failure suffered by those not soprivileged.

If President Clinton is serious about change, and about reducing the influence of special lobbys, he is on the wrong track. He is proposing to expand the role of government in the economy, all in the name of helping those who are facing one form of economic failure or another. No matter how well‐​intended those programs, or how deserving the expected recipients, the programs will invariably be taken over by organized interests that will use them to shift the cost of failure from themselves to others. That may be politically shrewd, but it’s more of the same old special‐​interest politics that candidate Clinton promised to change. Real change would be to put the general interest ahead of special interests by reducing futile government attempts to reduce economic failure and unleashing the full productive force of the marketplace.

Dwight R. Lee is a professor of economics at the University of Georgia. Richard B. McKenzie is a professor of economics at the University of California, Irvine. They are authors of Failure and Progress: The Bright Side of the Dismal Science (Cato Institute, 1993.)