Market Worship

Two fundamental forces drive the pace of economic change. The first is technological innovation, particularly in handling and dis seminating information. Computers get more powerful, smaller, and cheaper. The Internet expands the reach of customers in ways that are just beginning to be explored. And in tra ditional markets such as retailing, the applica tion of information technology pushes prices down and pressures those who do not keep pace. The second fundamental force driving change is the increasing accessibility of glob al markets. The increase in international opportunity means new markets for products and workers and greater economies of scale. We like the wealth and opportunity that 4 come from technological change and global ization. Alas, there is no free lunch. Innova tion displaces established firms. A factory opens in Malaysia and one in the United States closes. Financial markets in Asia swirl with rumor and speculation affecting our markets as well. Russia teeters on the edge, it seems, of chaos.

Who is in charge here? The desire to take control, to improve the system via some "third way" is always tempting. Chaos and uncertainty are never pleasant. The natural response is to try and hold back the forces of innovation or reduce the sway of global mar kets. After all, are these not the cause of the confusion? "Market Worship" In a recent piece in the Washington Post, economics writer Robert Kuttner blames the chaos on a naive worship of free markets. He blames speculators-for the problems of Asia. He blames the United States for encouraging capitalism in Russia then failing to help out when capitalism fails. Kuttner is not alone. Numerous commentators see the current state of world markets as an indictment of capital ism and free markets. Yet much of the chaos comes from previous government attempts to meddle with the sys tem or control it. In Asia, government tinker ing with capital markets is endemic. Special interests get favors, and markets react. Specu lation is not the cause of Asia's economic problems; it's the result. Government policy cannot stand in a vacuum; speculation is the market's judgement of the wisdom of the policymakers.

In Russia, policymakers have partially dis mantled socialism without putting property rights in place to allow markets to work. You cannot buy and sell land freely. Banks cannot enforce mortgages, so home equity cannot be converted into capital for new businesses. The tax code is capricious. Too many people still work in government-controlled firms where wages are determined by politics rather than market forces. Many of the current problems in Asia and elsewhere come from the government's inex 0rable urge to cushion the hardship that results from bad economic decisions. We see the same problems in the United States. We implicitly bailed out banks that made bad investments in Mexico. And we had the Fed eral Reserve pressuring private investment banks to bailout the Long-Term Capital hedge fund lest it fail. These maneuvers only encourage future investors to take more risk unwarranted by potential returns.

Security Through Protectionism? But what about the changes in the market place that are due not to poor public policy but to the market forces of innovation and global competition? As we get wealthier, it is natural that we think of ways to reduce risk and uncertainty. One way is to limit the role of global competition via protectionism in its many forms. Or to soften the blows of com petition, we can support businesses that fail in the marketplace. Should the government intervene to reduce the chaos that comes with competition? The simple answer is that competition and free markets make us rich, which surely beats the alternative. But wealth creation is not the only reason for allowing free markets to work their magic. Free markets maximize the menu of opportunities available to us as individuals. Whenever I speak to high school students or 5 college freshmen, I like to ask them whether they want the same careers as their parents.

Inevitably, only a few want to pursue the careers of either of their parents. The next generation has its own skills and dreams. The incredibly vibrant marketplace that we live in today allows it to live out those dreams. Dealing with the menu of opportunity pre sented by free markets is a challenge. It means preparing for those opportunities by investing in knowledge and skills. It means embracing some opportunities and forgoing others. It means living with the consequences of our decisions. The marketplace is not kind to all people at all times. But coping with the challenge of opportunity is what allows us to feel fully alive. There are two ways to cope with the uncer tainty that comes along with economic oppor tunity. One is to lobby the government for special treatment to insulate your industry, your job, your lifestyle from market forces. Whenever this is an option, men and women divert energy and resources from the world's business and instead devote their skills to influencing government. This diminishes the human enterprise. Using government to pro tect one industry always means punishing another.

It is far better to prepare for the economic adventure that lies before us by investing in skills and knowledge that can be used in the increasingly competitive marketplace. Coping with the market's challenge enhances the lives we lead and, through our efforts, the lives of others. -RUSSELL ROBERTS Director, Management Center Olin School of Business Washington University, St. Louis roberts@mai1.olin.wust1.edu • Government Why the War on PovertyFailed by James L. Payne W ell, it's now official: the war on poverty was a costly, tragic mistake. Ordinary people have suspected that for decades, of course, but we had to wait for the New York Times to decide this news was fit to print which it finally did on February 9, 1998. In a front-page story on poverty in rural Kentucky, Michael Janofsky detailed the failure of this effort in the one region that was supposed to be the centerpiece of reform. "Federal and state agencies have plowed billions of dollars into Appalachia," he wrote, yet the area "looks much as it did 30 years ago, when President Lyndon B. Johnson declared a war on poverty, taking special aim at the rural decay."!