Thursday, April 29, 2010

This I Believe: Part 1

This post is the first in a series where I try to lay out what I believe and why. 

The project, This I Believe, inspired me as did the really complex issues being debated today. What do I believe? And why?

The This I Believe project collects essays that capture the core beliefs that guide peoples' daily lives. As an earlier post noted, writing allows one to step back, consider the world at large, and formally draft a position that captures what we believe and why. 

"Faulkner said, "I don't know what I think until I read what I said." That's not just a joke. You learn what you think by codifying your thinking in some way. Codifying one's thinking is an important step in inventing oneself. The most difficult way to do it is by thinking about thinking  - it helps to speak or write your thoughts. Writing is the most profound way of codifying your thoughts, the best way of learning from yourself who you are and what you believe."

Given the highly divisive nature of today's political environment and the big issues facing the country, our state (CA), and our communities, I wanted to take some time to think through what I believe to be true and to develop a set of first principles that can help navigate "big" decisions.

What do I think of the government's healthcare plan, the financial regulation bill, deficit spending?  How should I think about these issues and what first principles may help to develop a position?  Too often it seems that peoples' positions are driven more by their party affiliation and the personalities of the politicians involved than by the merits of a given bill or policy.

I hope that this post will be the first in a series of posts that lay out my thoughts.

This I Believe, free markets are the most efficient and equitable organizing principle for economic activity. Moreover, government monopolies, command and control resource allocation, and top-down/centralized decision making limit our freedom and destroy value in society.  I believe that pro-business policies -subsidies, quotas, bailouts, no bid contracts - are equally damning and increase costs for the many to the benefit of the few. I believe that each major party suffers from a related flaw - the Democratic party believes that government can allocate resources more effectively than the people who fund it, while the Republican party protects specific businesses and industries at the cost of the consumer, think of sugar quotas/farm subsidies.

To help me develop a position, I am rereading Milton Friedman's Free to Choose, a book that he co-wrote with his wife, Rose, and a project that explores the relationship between economic freedom and personal freedom.  

The central tenet of his book is that political freedom is only possible with economic freedom. People must be free to choose to pursue where they work, for what wages, what they buy....independent of coercion - he argues that free markets provide a mechanism for voluntary cooperation amongst people. The freedom to exchange goods and services is the most efficient system for exchange we know and is vital to maintain political freedom. For when people are not able to act in their own interests they must be commanded to - we will only do what is not in our interests, and only we can know what are interests are, if we are forced to do so.  

This can be subtle - does the CA state government know how best to spend our tax payer money as it relates to education, for example?  If we let schools compete for the dollars per student our government spends we would receive far better value.  We are not free to choose how we invest our tax dollars in our the education of our children - rather we live subject to a state monopoly and we can only choose alternative education choices if we wish to forgo the tax dollars we have already contributed to education.

Friedman writes, "In addition to what government spends directly, it exercises extensive control over the deals that people can make in the private market. It prevents you from buying sugar in the cheapest market; it forces you to pay twice the world price for sugar. It forces enterprises to meet all sorts of requirements about wages, hours, antipollution standards, and so on and on. Many of these may be good, but they are government dictation of how the resources shall be used."

If we believe that individuals are best able to define what they want, where they are willing to work, what they want to do - then it then follows that government policies that limit such freedom are sub-optimal and will stifle individual freedom.

Government policies suffer from the good intentions and yet have unforeseen consequences that are frightening - for example, using tax payer money to guarantee mortgages and to extend credit made it possible and profitable for banks to underwrite mortgages and then offload the risk to Fannie Mae and Freddie Mac.  A great idea, everyone should own a house, became the root of mis-priced financial risk.  It must be better to let markets compete to supply credit and to price risk based on a voluntary exchange between lender and creditor.

Silicon Valley is perhaps the best example of free markets in this country - groups of individuals, free of any government subsidies, direction, or policy, are able to come together, free of labor laws that limit hiring or firing, and pursue their individual utility.  The ideas and the allocation of resources are highly decentralized and the net result is an incredible wealth and productivity machine.  No one orders that we invest in search engines, new chemical entities, iPhone apps - and yet the market somehow magically delivers innovation and value year after year.  And yet, on many other "needs" we believe that centralized planners can choose on our behalf what we need and how to deliver it to us - postal service, schools, health care, who we can hire, who we cannot hire... 

Decentralized decision making must then trump centralized decision making - complex allocation decisions need to be left to markets where individuals are free to choose.  The role of the policy maker then must be to design markets that maximize decentralized allocation and to work hard to limit any interference, be it government or business, that limits such freedom and decentralization.  Quotas, subsidies, mandates, protected markets, monopolies etc. distort the markets and serve to cheat us all to the benefit of a few.  While it is tempting to believe that a group of smart people can design complex systems that will be optimal - history suggests that is not possible.

As residents of Silicon Valley - we are beneficiaries of the freedom to choose in action.  

We need to urge all political actors to recognize their limitations in making decisions that we should make for ourselves and to open competition in all economic activities to drive the most equitable allocation of our resources.

As much as I admire Barack Obama - I fear the unintended consequences of good intentions whereby a small group of people seek to allocate resources and solve complex issues on our behalf. 

Twitter Handle: pricew

For anyone who subscribes to this feed - my twitter handle is pricew.

Thanks for following.