"The Private Sector Isn't Perfect"

Stephen Bainbridge (ProfessorBainbridge.com) actually says that in this post. Well, "So what?" you may say: No system for organizing human activity is perfect, except in such dream-worlds as anarcho-capitalism (where market forces defeat bullies by the sheer force of theory), Objectivism (which talks a good game about reality but seems unable to grasp it), and socialism (which promises free lunches and destroys incentives).

What Bainbridge goes on to say is almost right, however:

. . . but we've known since Adam Smith that economic incentives work. . . .

We also know that the modern public corporation is the greatest engine of prosperity the world has ever seen.[*] In The Company: A Short History of a Revolutionary Idea, John Micklethwait and Adrian Wooldridge demonstrate that the corporation is "the basis of the prosperity of the West and the best hope for the future of the rest of the world."

The capital, product, and labor markets give corporate managers directors incentives to produce goods and services efficiently. What defenders of government regulation often overlook is that regulators are also actors with their own self-interested motivations. The trouble is that the incentives to which regulators and legislators respond are often contrary to the public interest. The incentives of legislators and regulators are driven by rent-seeking and interest group politics, which have no necessary correlation to corporate profit-maximization. Accordingly, government preparation for and response to disasters is likely to be driven by the political concerns of the governmental actors rather than the public good.

In sum, it may be time to try Adam Smith's invisible hand by outsourcing disaster relief.

But the best way to outsource disaster relief isn't to have government use our tax dollars to hire private disaster-relief specialists. No, the best way to "outsource" disaster relief is this:

• Leave tax dollars in the hands of the private sector.

• Tell the private sector that when it comes to disasters it's your responsibility to plan prudently -- and to bear the consequences of your planning.
  

• Get government out of the insurance business and let the private sector respond (without restraint) to consumers' demands for disaster insurance.
  

The best way to ensure that people make prudent decisions is to let them knowing that they're responsible for themselves, require them to "play" with their own money, and allow them to spend their money where they think it will do them the most good.

Though it's meant to bash the Bush administration, this headline (from Slate) captures the essence of the problem:

$41 Billion, and Not a Penny of Foresight
Why is the New Orleans recovery going so badly? Just look at the DHS budget.

As if government could ever take taxpayers' money away from them and then spend it better than taxpayers could.** So Bush spends the money on the war (according to the Bush-bashers). Well, Clinton would have spent the money on his pet projects. That's what happens when politicians get into your wallet. They decide what's most important to you.

The private sector (i.e., free-market capitalism) is less perfect than everything, except all of the alternatives to it.

P.S. Ignoramuses and die-hard statists will say that free-market capitalism leaves everyone on his or her own. (Oh, how I hate the awkwardness that results from gender-correct writing.) In fact, free-market capitalism is the best vehicle for large-scale cooperation that has ever emerged from human endeavor. Free-market capitalism, among many other things, allows for insurance against risk and provides the wherewithal to combat the elements (e.g., plywood for boarding up windows, concrete for deep footings). What it doesn't do is offer the illusion that "someone else" will protect you from all harm and immediately make you whole when you come to harm.

Related post: Katrina's Aftermath: Who's to Blame?
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* Apologists for the state like to say that public corporations couldn't exist without the state's blessing. Balderdash! Insurance markets would do the job of protecting shareholders quite nicely, thank you.

** I argue in "But Wouldn't Warlords Take Over?" that government should take taxpayers' money in order to provide for criminal justice and national defense. But that's for the prudential reason suggested by the title of the post, not because government can necessarily provide such services more efficiently than free-market capitalism.