Lessons From The Dismal Science

Commentary, Role of Government, Frontier Centre

Most people see economics as an abstract topic for eggheads, the "dismal science." The dictionary, however, defines it as "the science of the useful application of the wealth or material resources of a country."

The world recently lost two great minds in the field.

Julian Simon was known widely as the "optimistic" economist. An outsider in a profession dominated by gloom-and-doom sayers, he maintained the human condition was one of constant improvement. His most influential book, The Ultimate Resource, was a metaphor for the superiority of the capitalist or market system. It held that "skilled, spirited and hopeful people" benefit everyone by exerting their wills and imaginations to benefit themselves.

Simon pooh-poohed the myth of global warming and was unconcerned about world population growth. He believed there were no limits to growth that human ingenuity could not overcome. In 1990 he won a famous bet with Paul Ehrlich, a more conventional ecologist, that natural resource prices would fall in the decade after 1980. They did.

So, if the evidence backs the case for competitive markets, why do our politicians cling to failed monopoly methods of providing healthcare and education?

The answer came from another economist who passed away last month.

Mancur Olson observed that in any human society parochial cartels and lobbies tend to accumulate over time until they sap their nation’s economic vitality. In his 1982 book The Rise and Decline of Nations, he outlined the problem. Interest groups promote monopolies, special protections and subsidies that directly benefit their members. As these economic distortions accumulate, resources increasingly flow to a specialized provider class that knows how to work the system and extend it. Wealth redistribution pushes aside wealth creation and economic decline sets in. He maintained that only strong reforms and leadership can prevent the rot.

His most famous insight was that narrow, self-serving groups have an advantage over the unorganized community. By lobbying for more money, special tariffs and continued monopolies (privileges for themselves) the few members of an interest group receive concentrated benefits at the expense of the many. Since the costs per citizen are spread widely through the unorganized community, no one bothers to oppose creeping interest-group privileges.

This dynamic of concentrated benefits and diffused costs largely explains the historically rapid increase in government spending that nearly drove Canada into the economic abyss.

Broadly speaking, twentieth-century economics has been divided between two differing philosophies. One, which still lingers in tenured obscurity at universities, maintains that a small elite in government can best direct our economic life. This system, known as central planning, collapsed into poverty and mediocrity wherever it was tried. Remember the Soviet Bloc?

The other philosophy holds that social well-being is maximized through voluntary cooperation and the free exchange of goods and services in an open and decentralized market environment. This system, competitive market capitalism, has produced unprecedented prosperity wherever it has been allowed to prevail.

It is no coincidence that the goods and services provided in a centrally planned manner by our governments, specifically healthcare, education and municipal services, are plagued by shortages, declining quality and rising costs. Conversely we find the opposite, falling real prices, increasing choices and rising quality, wherever the competitive marketplace provides goods and services — everything from soup to nuts to long-distance telephone services.

Many of our politicians miss the obvious lesson in these contrasting results. They continue to pour more resources into our centrally planned school and healthcare systems, with no discernible effect on performance.

Too bad Simon and Olson are gone. Too bad we didn’t listen to them years ago. But a more prosperous world awaits those who follow their advice.