The Road to Freedom (17 page)

What about the so-called monopolistic health insurance companies and the need to regulate the price of coverage? Insurance companies are not monopolies; they face fierce competition. If Aetna doesn't offer what consumers want, charges prices that are uncompetitively high, or has lousy service, another insurer will welcome their business. (That is, unless the government regulations have already wiped out the private markets, as has happened in some places.)

A favorite “public good” of President Obama is high-speed rail. It will supposedly revolutionize the transit system and benefit everyone but people won't pay for it privately—so it requires federal subsidies. Actually, people don't want to pay for it because it isn't particularly useful and thus is not a public good. The projects that the government plans to subsidize include a $715 million project to build a hundred miles of track between the small towns of Borden and Corcoran, California, and a “high-speed” train from Iowa City that will take longer to get to Chicago than the bus does today.
²⁰

Let's say there
is
a source of market failure, though. That isn't enough by itself. The market also has to be
failing
in practice. There are many, many cases in which there is a source of market failure but the market works just fine, because people solve the problems themselves, without any government action at all. I've already discussed a few private-sector mechanisms that solve market failures, such as private warranties. But even more obvious is that people avoid many market failures just by being decent.

Honest businesspeople want to prosper honestly, not by cheating consumers or using predatory business tactics, even if they could get away with these things. Decent people refrain all the time from creating burdensome externalities on others (that is why you listen to the Bee Gees in your car with the windows rolled up). And most Americans do their part to provide public goods privately when they give to charity.
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Americans have a whole system for dealing privately with market failures so they don't have to rely so much on the government. It's called “social capital,” the subject of the next section of this chapter.

Still, some market failures persist. Does this mean the government should definitely act? No, not unless the state can actually solve the problem, and solve it cost effectively.

Many market failures are irremediable by government at a reasonable price. The externality of traffic noise bothers me in my office while I'm trying to work. Can the government fix this? Not without measures in which the costs would dramatically outweigh the benefits.

The same goes for the tangled web of new economic regulations created over the past few years. Remember the Consumer Protection Act of 2010 (also known as “Dodd-Frank”), which weighed in at 848 pages of legislation intended to prevent market failures like those that created the recent financial crisis? It was enacted ostensibly to sort out information asymmetries between informed financiers and the uninformed public. But it flunks the test of government intervention. According to the evidence so far, the law won't prevent another crisis and the regulations will cost more than they save.
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Figure 6.1
. Should the government intervene in the private market
?

All together, these justifications set a high bar for government involvement in the private economy.
Figure 6.1
shows the conditions that have to be met before government should act.

The point of
Figure 6.1
is that a great deal of what the government does
sounds
sensible, but it is not. In providing a minimum safety net or addressing market failures, the government wastes resources or tries to do things it cannot achieve cost effectively.

Even worse, much government activity doesn't even try to solve market failures or provide a safety net. In the modern
adlibocracy
, what passes for governing philosophy is little more than a bromide such as, “The government should do nice things for people.” Today, the government's spending binge is largely directed toward rewarding political friends (like public-sector unions), social engineering (see ObamaCare's mandates or the housing policies that led to the current crisis), and good old-fashioned pork (look almost anywhere in the economic stimulus spending).

In the end, much of government that purports to enhance people's lives actually makes things worse for citizens and keeps them sliding toward a system they don't want. And ultimately, it helps explain why eight in ten are dissatisfied with the democratically elected government.

IF THE GOVERNMENT
does its job—which is to say, refrains from acting in most cases—many market failures will go unsolved by the public sector. Principled politicians will have to tell citizens that they know things aren't perfect, but it isn't prudent for the government to step in, because it can't solve the problem—at least not in a way that uses tax dollars cost effectively.

This does not mean people can't promote other solutions, though. A dangerous progressive fallacy is that if the government doesn't solve a market failure, it will always remain unsolved. Without publicly funded trains, for instance, transportation will be inadequate. Without stringent laws, honest people will become criminals. Without money for public broadcasting, people will have no access to high-quality radio, and so on. This is ridiculous.

To resolve many actual market failures, people don't need the government at all. They need well-functioning markets, of course.
But they also need voluntary action and a healthy culture in which people do things for each other without being forced or bribed by the state. People need what scholars call “social capital,” which is the trust and social cohesiveness that promote voluntary activity to meet challenges in civil society.

Trust and cohesion in healthy neighborhoods and communities make life easier, more pleasant, less bureaucratic, and more efficient.
²³
In high-trust societies, it is easier to conduct business and requires fewer resources in policing and the adjudication of disputes. There is less cheating, corruption, and crime. And where there are a lot of civic institutions, people help each other for mutual benefit.

More specifically, where social capital is plentiful, people are more likely to refrain from making excess noise or letting their property deteriorate (circumventing externalities). Many minor business deals between friends require nothing but a handshake, and people don't take advantage of each other (avoiding an information asymmetry problem). If a person sees something suspicious at a neighbor's house, he goes to check on it (a public good). In all these cases, individuals are better suited than governments to solve the market failure at hand, but they require a climate of trust and voluntary action.
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Social capital is what encourages someone to refrain from exploiting an information asymmetry by giving back the change if a cashier gives her too much. It induces her to give to charities that provide public goods for people she won't ever meet. It holds her back from creating externalities in traffic with obnoxious driving. Every day, social capital solves small and large market failures that government can't and shouldn't address.

It is easy to see how important social capital is to people's lives. Yet strangely, until recently there were few good measures of
this important quality of life issue. In response to this, researchers at several universities and foundations around the United States undertook in 2000 to measure social capital with a survey. They asked tens of thousands of citizens about their levels of trust, charity, and community involvement. Dozens of American communities were represented, from rural areas to big cities.

The results were fairly predictable: In small communities where people know their neighbors, social capital is high. In big, anonymous cities, social capital is low. For example, on an index of social trust, big cities like Chicago, Boston, and Los Angeles are near the bottom with a score of 81. The two top communities are Bismarck, North Dakota (131) and rural South Dakota (150).
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How do people experience these differences in everyday life today? Try driving in Chicago after a few weeks in North Dakota, and compare how others treat you. Where are you more likely to get mugged—Irene, South Dakota, or downtown Los Angeles? And if you move into a new home in downtown Boston, your neighbors might not welcome you with a fresh-baked pie. In modern America, big cities are great if you want a good restaurant or to see the opera. They're lousy for social capital.
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IN THE 1830S
, what impressed Alexis de Tocqueville most about America was the astonishingly high levels of social capital. Probably the most famous passage in Tocqueville's classic
Democracy in America
addresses this point:

Americans of all ages, all conditions, and all dispositions constantly form associations. . . . The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to
diffuse books, to send missionaries to the antipodes; in this manner they found hospitals, prisons, and schools. If it is proposed to inculcate some truth or to foster some feeling by the encouragement of a great example, they form a society. Wherever at the head of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.
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This was, in Tocqueville's mind, the secret to American success. In the eyes of a twenty-first-century social scientist, Tocqueville was simply observing the fact that social capital solved market failures that government couldn't address, given America's sparse population and ungovernable frontier. It would have been impossible to tax the population sufficiently to fund government hospitals and schools in, say, 1830s rural Nebraska. America was successful because a new nation of social entrepreneurs took these tasks upon themselves. In the process, they built strong communities of trust, reliant on themselves and not on the government. This is the legacy of freedom and limited government that Americans still say they love.

The links between social capital and America's success have been evident to social scientists for many years. In one study in the 1950s, the American political scientist Edward Banfield spent a year in a small, poor town in southern Italy.
²⁸
His vivid observations formed the basis for his book
The Moral Basis of a Backward Society
, in which he laid out the evidence that the town was impoverished because the people did not recognize or reward meritorious behavior, had little sense of fair play, and no sense of charity toward one another.
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He noted, for instance, that the local orphanage in the town was run by nuns in a crumbling medieval
monastery. No one in the town gave a lira for its support, and not even unemployed stone masons volunteered to help in its upkeep—even though all the orphans came from the town itself.

Banfield forcefully made his point by comparing the Italian town with a comparably sized—but prosperous—little town in Utah. On one random day, the local newspaper in the Utah town contained mentions of dozens of voluntary charitable projects and activities. The local church had just raised $1,393.11 in pennies for a children's hospital 350 miles away; there was a Red Cross membership drive going on; a circus was being held to raise money for a new dormitory at the local junior college; there were meetings all over town of the Parent Teacher Association (PTA).

There are many market failures that social capital cannot solve—either that the government can and should address (for example, the public good of military power) or that may simply go unsolved (such as externalities from differences in religious practices). But social capital is an important component of a healthy nation.

Unfortunately, some experts believe social capital is generally in decline in America. Harvard political scientist Robert Putnam wrote a bestselling book in 2000 entitled
Bowling Alone
, in which he argued that people's trust in each other and tendency to participate voluntarily in their communities has plummeted in recent decades. Not all experts agree, but clearly Putnam's claim resonates with millions of Americans who have seen evidence around them of eroding social networks and falling trust in their communities.

Quite reasonably, Putnam laid the blame for falling social capital on phenomena such as television and urbanization. But there is more to it. The rise of statism described in the last chapter is also a key reason for the slide away from the self-governing ideals that Tocqueville found so striking. The voluntary sector falls as the public sector grows and takes over more functions
in people's lives. More of life is identified as a competency of the government, and thus not the responsibility of individuals.