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1851 Center for Constitutional Law

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Tax competition helps everyone except bad governments

Ohio businessman talks Ohio taxes

Failures must be allowed to fail

Failures must be allowed to fail if our system is to work

First published May 6, 2004

By Michael J. Maurer

Two weeks ago, I posed a question in response to two opinion columns about school funding by Worthington resident Marc Schare and Dublin City Schools Treasurer Chris Mohr: What makes the free market work?

The first person to provide a one-word answer, along with a brief explanation as to why, would win $50 night out at a restaurant chosen by ThisWeek Fare Game writer Gary Seman.

Response was excellent. Schare gave it a good-faith go; Mohr, alas, did not. Given the title of the column, “Mohr’s mistake: What makes business tick?”, my Zen side was hoping he would enter and win. (Of course, I was hoping Bill Phillis or Andy Douglas would, but long and sad experience says that wouldn’t be possible.)

If it were a matter of majority vote, “competition” would win handily. Nearly everyone who tried chose this word, and many of their explanations were eloquent.

Unfortunately, “competition,” although a good word, a true word, is not the right word.

A municipal development director called and quoted James Rhodes: “‘Profit’ is not a dirty word,” she said. She is right and he was right. But profit is not the right word, either.

One of my favorite entrants was a reader who, at 10:33 p.m. the day the column appeared, sent one e-mail stating, “supply and demand” (more than one word, but you can see his point); a second e-mail also at 10:33 p.m. stating “regulation” (sort of the antithesis of the free market, but it shows he read my hint that Republicans were likely to get the wrong answer); and a third e-mail at 10:34 p.m., stating “competition.”

Charles Stockman was the only entrant who came up with another good word, “customers,” and provided a truly excellent explanation as to why. His entry, I think, included the best overall description of the free market system.

Most responses were from people who seemed to be pro-market and anti-regulation, but not everyone. One man chose competition, but was convinced the root of our financial difficulty was undertaxing of corporations. Making corporations the focal point of tax collections might be a good policy choice, but I’m not sure who it is he thinks pays corporate taxes in the end.

Thankfully, no one tried “greed,” although I have to think many believe it to be true.

Indeed, no one got precisely the answer I sought. Nonetheless, the person who came closest was John Seiling, who wrote, “Risk. Without risk, there can be no free market.”

That’s good. Exercising the prerogative of sole judge, I declare Seiling the winner. He’ll be enjoying dinner at Strada World Cuisine.

Competition, customers, profit, innovation, all these words and others were offered, and one could add property and even liberty itself and still be speaking the truth. Yet, risk is the better of all of them.

But risk of what? Property, of course, but more precisely, the market gives us risk of gain of property, and risk of loss of it. By itself, “risk” carries the negative connotation, of loss, or the correct word, failure, and that is why Seiling wins.

If you say “competition,” most people, judging by the answers, focus on success, on gain, on “winning” the competition.

This is what Mohr does, and this is his error. His approach, which tracks the Democrat Party view, is, find smart people, give them the resources they need and expect good results.

If the results are unsatisfactory, if you fail, then, under Mohr’s approach, you can do only one thing: Give more resources. After all, smart people would only do the smart thing, right?

By doing so, however, you preclude the great virtue of failure: It goes away.

When you don’t allow failures to fail, that is, to go away, when you keep pumping more resources into the thing, you preclude the possibility that someone could do better with those same resources in an alternative use. It is less a question that what you’re doing is “bad,” than it is a question that you do not allow anyone else to do better.

In his book Basic Economics, economist Thomas Sowell puts it this way: “Efficient allocation of scarce resources which have alternative uses means that some must lose their ability to use those resources, in order that others can gain the ability to use them.”

This does not say that the “losers” are bad people or the “winners” are good people, as Mohr and others seem to think; it says only that the “winners” do better with less.

The proper question is never, Could we do better with more resources? Instead, the question is always, Can someone else come up with better or equal results at the same or lower cost?

Lest anyone think this is a partisan exercise, Republicans are just as bad and in fact make the same mistake: They, too, think their plan is best. Few things are more common than the failed businessman who says, “I would have succeeded if only I had more revenue, and lower expenses.”

Who can argue with that logic? In this sense, Mohr is right: Schools are like a business. The difference is, the failed businessman goes away and someone else takes his place.

Even the successful businessman is apt to think he has the one true answer and to forget, if he ever knew, that his answer was merely the alternative that prevailed at a given moment. It’s unpleasant to think that someone “better,” that is, with a better choice, is always going to come along. Yet, that is what progress is all about.

None of this is to deny that planning is, if not essential, then at least wise, regardless of whether you are the government or a private business. Planning makes you more likely to succeed by moving you, usually, from a higher level of risk to a lower level of risk.

But the secret to the free market is that human advancement is complex and unpredictable, and creativity is, by definition, undeterminable by experts. You cannot plan your way to the greatest prosperity when planning forecloses other, better alternatives.

The reason we produce more wealth than any other system is that we stay out of the way of success. We do not tie up our resources in only one or a handful of activities, chosen by only the “best people” for the job, as Mohr would have it.

The results of this freedom are greater than any one of us can imagine, even the smartest and most worthy among us.

The price, however, is sometimes harsh: Inevitably, good and deserving people fail.

But the beauty of America is that there is always tomorrow. Our failures lead, ineluctably, to our successes.

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