Mickey Hepner
The Edmond Sun
EDMOND — With all the turmoil in financial markets, it is popular to deride the use of markets. However, just because an idea is popular does not make it correct. In fact markets to this day, are powerful tools for good in our society.
Every economic system that ever existed had to answer two key questions: 1) What goods and services should firms produce? 2) Which consumers get to have those goods and services?
In government-planned economies the government decides what is made, and who receives the products. In market economies, those decisions are made by individual buyers and sellers acting in their own selfish interest. It is this “selfish interest” part that turns so many off markets. It seems so greedy, so unseemly and so wrong.
But it turns out to be so right.
Because people tend to know more about what makes them happy than the government ever could, people tend to make better decisions about their own lives than the government could. Consumers know what type of shoes they want, what type of car they want, what type of food they want. Imagine, if the government made all of those decisions for you, as they do in socialist nations. But markets don’t require a government to make those decisions — we the people make them instead.
Yes, people sometimes make mistakes and want the wrong things. Still though, when people make mistakes they are likely to make smaller and less persistent mistakes than the government would. In other words, the freedom from markets makes our lives better and happier.
Now don’t get me wrong, free markets certainly have flaws. By their very nature markets consider only the welfare of buyers and sellers, and therefore ignore everyone else. When you buy a pair of shoes only the happiness of the buyer or seller is affected by the transaction. While in most cases this causes no problems, in some cases (e.g. pollution) the consequences can be severe. It is in these severe cases when government needs to step in.
What is often misunderstood though is that the role of government is not to take the place of the market, but to help it work better. For example, when we injure a finger a doctor does not amputate that finger. The first option is to heal the finger. Similarly, when a market isn’t working properly, the government should not take over the market, but instead help it work better.
In the case of pollution the government imposes regulations, fines and taxes on polluting firms in order to consider the cost to society. When it comes to financial markets, the most important role of the government is to prevent a panic so the financial markets can continue to operate. We have learned from the past that a panicky financial industry is disastrous for the overall economy. After all, the Great Depression was caused by panic in the financial industry.
After the Great Depression the government instituted several reforms designed to instill trust in the financial system and prevent future panics. The FDIC for example enhances trust in consumer deposits — there is no need to run to your bank to demand your money. Similarly the SEC enhances trust in corporate financial reports. And the banking reforms that separated banking and investment firms were designed to instill and enhance the trust in America’s banks. While we have had many recessions since the Great Depression, these financial industry reforms have kept us from falling into another Depression.
Today though, we face another financial panic. Financial institutions have become so fearful of the toxic assets on their balance sheets that they are unwilling to lend money to anyone — much like we saw in previous financial crises. Thus, the beginning of the way out of this crisis is to restore confidence and get credit flowing again.
This is why the economic rescue plan was necessary to the health of the nation. It was not about Wall Street, nor was it about Main Street. It was about your street and my street. It was about the couple a few doors down that has seen their retirement savings decrease by 40 percent this year. It is about the nice couple that wants to move in across the street but cannot get a mortgage despite having good credit. It is about your next door neighbors who would not be able to get the loans they need to send their children to college. It is about all of us.
The government has an important role to play in rescuing us from this crisis. But we must always remember just how much we benefit from markets. So we should ignore the urge, and the urgings, to discard our market system in favor of a more government-planned approach. Please though, let’s not end markets — let’s just fix them.
MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.
