The Only Failure We Have to Fear Is the Fear of Failure; D. R. Lee and R. McKenzie

186 The Only Failure We Have to Fear Is the Fear of Failure by Dwight R. Lee and Richard B. McKenzie S ocialismhas been, by any measure of eco nomicsuccess,a total failure.The hope of socialismwas that it would promotewealth and distributeit fairlyby transferringpoweraway from capitalistsinterestedonlyin profitsand give more control to political representatives con cerned with economicgrowth and socialjustice. That hope has been dashed. Socialismhas suc ceededonlyinprovidingspecialprivilegesto a few by imposinggrindingpovertyon everyoneelse. With socialism a sinking ship, the goal in countryafter countrythat has been impoverished bythelegacyofKarlMarxisto achievethewealth creatingpower of capitalism.The most dramatic examples of the rejection of socialism and the moveto embracecapitalismhavecomefromEast ern Europe and the SovietUnion,countriesthat have experienced the poverty of socialismfirst hand.Butcountriesin Africa,SouthAmerica,and otherpartsoftheworldthathavebeenbeguiledby the false promisesof socialismalso are anxiousto trade socialismfor capitalism.

Whilethe embraceof the marketeconomyhas been widespread,it has been cautious.Everyone wantsthe wealthcreatedby capitalism,but at the same time the marketplaceis seen as harsh, cal loused,and unfair.Isn't the marketplacelittered with the victimsof those who have suffered the failuresofbankruptcy,unemployment,andpoverDwight R. Lee is the Ramsey Professor of Economics at the University ofGeorgia, Athens. Richard B. McKenzie is the Hearin/Hess Professor of Economics at the Uni versity of Mississippi, Oxford. ty at the mercilesshands of market competition? Isn'tthere somewayto acceptthe wealththat cap italismofferswithout havingto endure the con stantfailuresit imposes?Thecallshavebeenfor a marketeconomywitha humanface,or for a third way between the productivityof capitalismand the compassionof socialism.There is no end of proposalsto reform the marketplacein order to protectits innocentvictims.

It would,ofcourse,be niceto unbundlethe eco nomic package known as capitalismor the free market,andkeepthe sweetwhilerejectingthe bit ter.It alsowouldbe niceif everyonehadan above averageI.Q. and income.Unfortunately,the only way to avoid the failuresthat resultfrom capital ism is to pass up the wealthcreatedby capitalism. Failuresin the marketplaceservean indispens able function in the·production of wealth: they provideinformationon the mostproductiveuseof resourcesandthemotivationto respondappropri atelyto that information.Failuresare part of the steering mechanism that directs an economy toward prosperity. Attempting to improve the marketplace by preventing economic failure is equivalentto attemptingto improvean automo bile by removingthe steeringwheel. It is no sur prisethat socialisticeconomiesthat wereapplaud ed initially for eliminating unemployment, bankruptcies,and economicfailureof everyvari ety have themselvesbeen colossaleconomicfail ures. By allowingeconomicfailuresin the small, and convertingthesefailuresinto usefulinforma tion,market economieshave producedeconomic success in the large. In economics, overall success depends on a constant supply of small failures.

Thus, the general economic failure that is most feared in all societies stems, paradoxically, from the fear of economic failure. The best antidote for this fear is an understanding that economic failure is a necessary ingredient in the market process that leads to higher overall living standards. UnderstandingFailure While economic failure is a positive force in the market economy, it is commonly converted into a destructive force in the political process. Every economy is a political economy and, for the very reason that economic failure promotes wealth in the marketplace, it promotes political responses that can undermine market productivi ty. A public understanding of the importance of economic failure is the best way to moderate harmful political responses to that failure. The lack of understanding of the essential role of eco nomic failure is the biggest political obstacle to achieving free market prosperity in formerly socialistcountries. The same lack of understanding prevents the market process from Yieldingthe full measure of its potential wealth in those political economies that are predominantly capitalistic.

It is easy to see the failures imposed by market forces as isolated occurrences rather than as an integral part of a wealthcreating process. When viewed in isolation, it is natural to see economic failure as unnecessarily harsh and unfair, and con clude that government can protect people against these failures without harming economic produc tivity. But government cannot protect everyone against failure. The best government can do is to protect a privileged few against failure by di minishing the opportunity for success of everyone else. Obviously such special int~rest protection is neither efficient nor fair. Ironically, for the very reasons that the market economy is both more efficient and fair than alter nati~e economic systems, it appears to be unfair to the superficial observer. Conversely, for the very reasons that the political process is typically less efficient and fair than the market process, it appears to be fair to the superficial observer.

Unfortunately, harmful political policies are often fueled by superficial impressions. The efficiency of the market process derives 187 from the fact that it holds people accountable for the costs of their actions. This accountability is imposed in waysthat are difficultto ignore, such as bankruptcy, unemployment, and other forms of economic failure. Although this market account ability conveys·long-run benefits to all by promot ing productivity, each economic interest group prefers special protections against the accountabil ity ofthe market whilebenefiting from the account ability the market is imposing on others. The fun damental fairness of the marketplace is that it does not allow such free-riding on the contributions of others. In the marketplace we all have to contribute to the general well-beingby accepting the failure as well as the successthat comes our way. However, because the benefits from market accountability are general, they are easily ignored and taken for granted. Because the costs and fail ures of market accountability are concentrated, they easily dominate the public's perception of the market and create the impression of unfairness.

Indeed, the failures inflicted by the market appear all the more unfair against the backdrop of eco nomic success made possible by those failures. The inefficiency of the political process results from the fact that it provides opportunities for people to acquire benefits without being held accountable for the costs. Political action com monly concentrates benefits on a well-organized few whilespreading the coststhinly over the gener al public. As opposed to the fairness of the market process, the political process encourages some to free-ride on the contributions of others. Because political benefits are concentrated, however, they are easily noticed, greatly appreciated, and readily associated with particular policies and politicians. Because the costs are diluted over so many, they are easilyignored. The impression conveyed is that the political process motivates generosity and mit igates the unfairness of the marketplace. The larger the number receiving political benefits, and the more poorly the market operates because of the greater burden of government, the more it is that fairness seems to demand extending political ben efits to yet additional recipients.

The impression that failure in the marketplace is unfair, and government action to moderate that failure is fair, is accentuated by special interest politics. No matter how well a group is organized politically, it isn't likely to be successful in obtain ing special interest subsidies, protections, and 188 THE FREEMAN • MAY 1991 other exemptions from the discipline of market competition by arguing that its members want to benefit at the expense of the general public. A far more effective technique is for a special interest to claim that they, and the public interest, are being threatened with bankruptcy, job losses, and dislocations by unfair market forces. Whether it is farmers facing foreclosure, steelworkers facing indefinite layoffs, or the Chrysler Corporation facing bankruptcy, their chances of appealing to public compassion and obtaining political protec tions against market pressures are increased with a persuasive argument that those pressures are unfair.

Of course, with public compassion being fanned by interest groups using economic failure as a pre tense for capturing special privileges, the result is > unlikely to be very compassionate. Certainly there are people who for reasons beyond their control are left behind in the marketplace, and who deserve our sympathy and help. Unfortunately those who need help the most are the ones whom political action in the name of compassion helps the least. Pointing to the problem of poverty has long been the most effective way of disparaging the market economy and persuading the public that in the absence of government programs the marketplace would be littered with the poor and the impoverished. What has been almost com pletely ignored is the government's impotence in helping the poor. Indeed there is reason to believe that by lowering the productivity of the market place, government transfer programs have reduced the income of the poor. By concentrating attention on economic failure in the marketplace to justify the expansion of political control over economic decisions, the influence of special inter est groups has grown and the scope of economic failure has been enlarged.

Unless economic failures are understood as integral to the successful performance of market economies, they will be seized upon by political interests as justification for expanding government action that stifles general economic productivity for the shortrun advantage of the politically influ ential few. As long as the economic failures that impose the guiding discipline in market economies are widely perceived as unnecessary and unfair, a threat remains to the prosperity of existing capital istic economies, and a roadblock stands in the path of economic progress in those economies that are trying to escape the blight of socialism. D The Only Route to Personal Security I f the less productive members of a society tru.Iy seeksecurity,let t.hem rally to the defense of the freedom of choice and freedom of action of those who work for a living and who are personally productive. Let them voluntarily deal with one another in a marketplace kept free of compulsion. Such voluntary trading directs the instruments of production and the means of economic secu rity into the hands of those most capable of serving all mankind. It promotes mutual respect for life and property. It stimulates every individual to develop his own talents to their maximum productivity. It encourages saving instead of squandering. The free market, and not its displacement by governmental con trols, is the only route to the kind of personal security which makes for harmo nious social relationships.

-PAUL L. POIROT IDEAS ON LIBERTY $ The Locker ROODlIs Private Property by Donald G. Smith I n the past few months we have all read a lot of words on the subject of female reporters in men's locker rooms. I am familiar with the con tention of the reporters that they have a job to do and should have the same rights as men. I have also heard the complaints from players' wives that they don't like their husbands to disrobe in the presence of other females. There have been statements that a locker room is a man's world and should remain so. Others claim that a reporter is a reporter and that gender shouldn't matter. There have also been suggestions to alleviate the problem: put a screen across the middle of the room; keep everybody out for 20 minutes; build a special interviewing room; or do all of the inter viewing outside. It seems to me that we have been wasting a lot of time and newspaper space on concerns that aren't very important. We have-intentionally, perhaps-avoided the one overriding issue that should settle things for all time. I refer to the right of a business owner to admit anyone to the premis es that he or she chooses. This is another way of saying propertyrights.