In September of 2004, I attended a conference on economic development in the Donetsk region of Ukraine. A Ukrainian academician proudly presented the major achievement of his institute – a twenty year plan for developing the market economy in the region. After his presentation, I asked: “Why does the market economy need a twenty year plan?” The angry academician replied: “How can it develop without a plan? It would be a chaos.”
“I don’t think so,” I said, “the market will regulate itself. No one planned for Microsoft or Apple.”
“I am sure that you are wrong,” said the academician, “some people in the White House definitely thought that through.”
I recalled that exchange recently when I heard President Obama say:
“If you’ve got a business, you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”
I realized once again that the idea of the invisible hand may be not so agreeable, even for people with high intellect and good education. Indeed, the idea of market self-regulation is very complicated theoretically and is yet to be proven with the rigidity of the laws of physics.
Many of those who appreciate the idea do so as a result of personal experience. The Obama administration has a dearth of such people. The fact that there are far fewer persons with entrepreneurial experience in the current administration than in any previous one may explain the administration’s obvious distrust of the market economy and strong belief in government regulation.
In a recent TV interview, the White House adviser David Plouffe said: “We wouldn’t have an automotive industry if he [Mitt Romney] had been president. President Obama secured that.“ Plouffe was talking not about any particular plant, not even about General Motors, but about the industry created by Henry Ford, Alfred Sloan, and other entrepreneurial geniuses and the thousands of talented engineers and highly trained workers that work in it. To think that the existence of that industry is secured not by all those people, but by a few bureaucrats, who have never created anything in their life, is delusional.
Unfortunately, this delusional economic philosophy underlies the basic premise of the Obama’s administration that without guidance by the government, the private sector is unable and unwilling to do things, which are good for the American people. That is why Obama decided to spend $90 billion to develop “new” sources of energy. The money was not spent on fusion or on long term fundamental research, but on technologies that can be developed by private companies, without governmental assistance, if the companies decide that there is a demand for them.
And here comes the second part of Obama’s economic philosophy: we cannot count on demand since the people don’t know what is good for them and can be easily deceived by evil corporations. The only benevolent force to protect people not only from those corporations but also from themselves is a federal government.
Those two parts add up to the old economic philosophy of central planning, when the government determines what people need and then manages the whole national economy for producing those products. The result is well known from the Soviet experiment. Most products produced by that economy were not desired by anyone, their quality was substandard, and even they couldn’t be manufactured in sufficient quantity. The country, which put the first man into the space, could not feed its people or give them adequate housing and health care. The environment of one sixth of the world territory was devastated.
On the contrary, in the United States, where government traditionally played a minimal role in the economy, people enjoy an exceedingly high standard of living, good health and high longevity. They have enough food and clothing, breathe fresh air and drink clean water. The American private economy not only provides for its own people, but feeds million in other countries where the governments decided to run the economies.
Obama and Plouffe may still wonder how America managed to do all this for almost three centuries without their help. Together with the Ukrainian academician, they may ask how without such guidance our country hasn’t plunged into complete chaos, and instead became the richest country in the world.
Maybe the idea of market self-regulation is complicated, but some simple considerations may help. People proved to be smarter than government experts in deciding what is best for them. They cannot be so easily lured into buying what is wrong for them and will eventually drive out of business those who do not serve them well. This is not the case with the government. A governmental agency that issues harmful regulations cannot be closed by irate consumers and the bureaucrats responsible for them will seldomly be fired.
Self-regulation does not guarantee against business cycles, but assures long term growth and the capacity for self recovery. Even at the bottom of each recession we are usually better off than we were a decade earlier and we return to the positive growth of the past once again. Vladimir Putin, who had the insolence to criticize the volatility of the American economy, should remember that Russia still has a long way to catch with the U.S. as a result of its experimentation with central planning. Those who criticize capitalism for allegedly not allowing the majority of the population to benefit from its prosperity should realize that the American poverty line is higher than the median income in China, which is considered by many now as an exemplary economy.
Ronald Reagan once said: “The government is not a solution, but a problem.” We may add to that: “Capitalism is not a problem, but a solution.”
Not for Obama, though. He campaigned for president by accusing Romney of being … the ideal capitalist. Indeed, Mitt Romney is rich and successful. But only people who have no understanding of the invisible hand do not appreciate the fact that private equity companies like Bain are much more effective tools of market regulation, than central planners, and create much more public wealth than the Ukrainian academician or the Obama administration.
In going after Romney’s business record and promoting his own policy of governmental regulation, Obama goes after the very system of private enterprise, after the goose, which lays the golden eggs.
Yuri Yarim-Agaev is President of Transcom Financial and Distinguished Visiting Fellow at the Hoover Institution.