Y2K and Entrepreneurial Error; M. Skousen

What's interesting about the debate is that freemarket advocates are found on both sides. North and other naysayers focus on the propensity of market players to make entre preneurial errors and engage in shortsighted ness. Browne and other optimists stress the entrepreneurs' ability to solve problems, espe cially when so much is at stake. (Some busi nesses could go bankrupt if they don't address the Y2K problem.) In short, the market works. My concern is that the "market always works" camp comprises true believers who blindly think the market can solve all probDr. Skousen (http://www.mskousen.com;mskousen @aol.com) is an economist at Rollins College, Department ofEconomics, Winter Park, FL 32789, a Forbescolumnist,and editor ofForecasts& Strategies. 55 lems almost automatically. They seem to fit into the rational equilibrium-always school of economics where entrepreneurial misjudg ment, imperfect knowledge, and uncertainty play little or no role.

Markets Are Not Perfect The Austrian economists teach otherwise. Israel Kirzner, noted for his studies on entre preneurship, attacks the model of perfect effi ciency as "wholly unsatisfying." He adds that "It is most embarrassing to have to grapple with the grossly inefficient world we know with economic tools that assume away the essence of the problem with which we wish to deal."2 The market is characterized by profit and loss, success and failure, certainty and uncer tainty. There is always room for improvement, and the entrepreneur's role is to eliminate errors and inefficiencies. Thus, it should come as no surprise that many businesses and finan cial institutions are making significant head way in fixing their computer programs to avert the Y2K problem. On the other hand, it would be folly to ignore that many businesses have budgeted insufficient time and money to fix or replace their computers. Evidence is growing that most firms, especially small businesses, are 56 THE FREEMAN/IDEASON LIBERTY • MARCH 1999 not doing enough. Many major corporations and government agencies, both here and abroad, admit that they only have time to fix critical systems. The rest will fail on January 1, 2000.

Freemarket advocates sometimes place too much faith in the market's ability to solve problems and ignore ubiquitous error in an entrepreneurial economy. Think about all the ways people make mistakes every day in the marketplace: Investors buy the wrong stock. Businessmen declare bankruptcy. Marriages break up. Consumers over-spend and over-eat, especially during the holidays. Kids fail to do homework. Drivers have accidents. Ships sink. Builders don't meet deadlines. Econo mists make false predictions. Entrepreneurs cut corners, deceive customers, and embezzle funds. Economic failure, stupidity, and incompetence are common to human nature. As Ludwig von Mises noted, "To make mis takes in pursuing one's ends is a widespread human weakness."3 The decision by computer programmers in the early 1950s to use two digits instead of four is a classic example of individual short sightedness. To save space, they cut corners, and now, a generation later, the whole world is paying a heavy price for their blunder.

Cluster of Errors In most cases, entrepreneurial error is ran dom, unpredictable, and self-correcting. As Murray Rothbard stated, "As a rule only some businessmen suffer losses at anyone time; the bulk either break even or earn profits."4 There are, however, cases of widespread error-mistakes that affect virtually every part of an industry or economy. Rothbard, in standard Austrian school fashion, explained depressions in terms of "a sudden general cluster of business errors."5 Of course, the Austrians attribute those errors and the business cycle in general to monetary inflation by government. Yet can't error with far-reaching harm occur in the market without government being responsible? Austrian economists don't nor mally discuss this possibility, but it undoubt edly exists. Market decision-makers have made shortsighted blunders that have had uni versal consequences. Examples of such error include asbestos in construction, pesticides in agriculture, and air and water pollution in manufacturing. The Y2K computer glitch is a particularly tough challenge because it is uni versal and time-sensitive. In most cases, the deadline cannot be postponed.

The Market's Self-Correcting Mechanism Fortunately, the market has a built-in mech anism to minimize mistakes and entrepreneur ial error. The market penalizes mistakes and rewards correct behavior. Business leaders know that computer problems can destroy their business; fixing the Y2K bug will avoid losses and may even be profitable. They are willing to pay the price. As Kirzner has said, "Pure profit opportunities exist whenever error occurS."6At the same time, the market will severely penalize businesses that have ignored the Y2K problem or have procrastinated. Followers of free markets should take note: markets may be self-correcting, but they are not all-seeing. D 1. Murray N. Rothbard, Man, Economy and State (Los Angeles: Nash Publishing, 1970),p. 746. 2. Israel M. Kirzner, "Economics and Error" in Perception, Opportunity, and Profit (Chicago: University of Chicago Press, 1979),p. 135.

3. Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957),p. 268. Mises adds that "Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. Ifhe misses it, he is not 'irrational'; he is a poor marksman." 4. Murray N. Rothbard, America's Great Depression, 4th ed. (New York: Richardson & Snyder, 1983 [1963]),p. 16. 5. Ibid. 6. Kirzner, pp. 132-33.