Yet Smaller Minority View

Why do proponents of freedom and free markets often sound wacky, closed-minded, ideological, and unreasonable? Why did free market ideas get their turn as public policy only after absolutely everything else had been tried and failed, and are on their way out at the first sign of economic disturbance? I suspect the answer to the first question might help with the second one.

I recently encountered a short essay by George Mason University professor Dr. Walter E Williams on the auto industry bailout. Professor Williams is a free market economist whom I greatly respect but his essay illustrates my concern. I was sad to see how most people, not sold on the free market ideas, could easily see him as ideological, disconnected from reality and, worse yet, irrelevant to the real economic issues of the day. He is neither. The problem with the small minority of true believers in individual freedom and free markets is that their approach to communicating their ideas leaves most people scratching their heads and wondering what planet those free market weirdos come from.

I take several paragraphs of Dr. Williams’ essay to illustrate why I think free market proponents sound like the members of a wacky cult to a vast majority of the people. (You can read Prof. Williams' complete essay here )

Let's not allow Congress and members of the bailout parade panic us into allowing them to do things, as was done in the 1930s, that would convert a mild economic downturn into a true calamity. Right now the Big Three auto companies, and their unions, are asking Congress for a $25 billion bailout to avoid bankruptcy. Let's think about that a bit.

I agree with the call of Prof. Williams. It just doesn’t seem that this call is really effective at having many people consider his viewpoint. Majority of people don’t understand nor, consequently, buy the idea that the federal government helped usher in the Great Depression of the 1930s. But by being controversial instead of informational in the opening paragraph the author would tend to turn away readers who he might wish to persuade.

What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.

In theory this is always true. In practice many things influence the outcome, so it is sometimes true. In Detroit, history (empirical evidence) shows, it is frequently not true. When GM closed factories and laid off 30,000 workers in Flint, Michigan in the 1980s (subject of Michael Moore’s first film Roger and Me ) other industrial companies did not come and take over the closed GM plants or employ the laid off workers. The same is largely true of Detroit where many more American car companies have abandoned facilities. Fifteen years ago when I first moved to Detroit I was shocked by the sight of long abandoned factories and yards. The same ones still lie vacant today. Drive south on Interstate 75 and merge onto I-94 West near downtown Detroit to see the skeleton of the old Fisher Body Plant (photos/history) on Piquette Street dominating your view. Or see the photo essay The Industrial Ruins of Detroit. There is plenty of evidence that the buildings, assembly lines, and tools have lost their value, fallen into disuse in the last four decades and have never found productive purchasers and uses.

Here is how Walter P. Chrysler biographer Vincent Curcio put it in his 2000 book Chrysler: The Life and Times of An Automotive Genius:

It took Detroit a long, long time to recover from the disaster of 1933…

Investment in the city dried up for a long, long time. The skeletons of huge uncompleted buildings haunted the cityscape for decades, and large tracts of land intended for housing lie empty and weed-covered even now, sixty-five years later. Detroit became a gigantic and failed place…

With so much and so vivid evidence in plain sight, the theory that assets of bankrupt enterprises go to more productive uses sounds like a fairy tale to the lay observer.

Two vital marketplace signals are the profits that come with success and the losses that come with failure. When these two signals are not allowed to freely function, markets operate less efficiently. To be successful a business must take in enough revenue not only to cover wages, rents and interest but profits as well. In order to accomplish that feat executives must not only satisfy customers but they must do it in a manner that efficiently utilizes all of their resources. If they fail to cover costs, it means that resources are not being used efficiently and/or consumers don't value the good being produced relative to some other alternative. When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm's resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

This is again true but we have to pay close attention to the details: First, we’ll have to see how long the dramatic decline in car sales lasts, but it may be possible that the market size during the past several years had been artificially sustained with too easy credit and profligate (and unsustainable) consumer spending. This means that it is possible for the foreseeable future to have a car market measurably smaller than it has been thus far. This in turn implies a significant overcapacity exists in the car manufacturing business, which would indicate that the auto manufacturing assets may not be turned over from an unprofitable to a profitable company (managers), but could simply be left to sit idle, the cost of converting them to other uses too high.

Second, the fact that a firm’s resources in a bankruptcy become available to someone else in no way means that there is someone else who can productively employ these resources. They may sit idle. Again, plenty of examples exist in the rust belt of America.

Herein lies the crux of the matter: Idled assets and unemployed workers may not have alternative uses and employment, unless the costs of these assets and workers becomes very attractively low. It is possible that if Detroiters were willing to accept $4/hour to work in a factory that manufacturing firms might flock to Michigan. It’s possible, even somewhat likely. This, however, would mean a reduction in the standard of living of these workers that is unseen and unimaginable in our lifetime, and unacceptable to the workers. The unspoken risk is that it may cause a disruption of the social fabric and of civil behavior. The real question is then: how do we sustain the standard of living while realizing that Toyota isn’t simply going to take over the bankrupt GM plants in Michigan?

Professor Williams’ paragraph sounds like there is no problem, that everything can work out without anyone giving it a second thought. This is perhaps why free market proponents often seem disconnected from reality: a failure to acknowledge the fact that many individuals are suffering and that, as I briefly discussed above, their suffering may not end in the foreseeable future. On the other hand, advocates of government intervention say, “We see and acknowledge the problem, we feel your pain, we’ll have the government do something.” The government, clearly, can do something—it’s an easy sell for people who face immediate economic difficulties. Instead of educating people that government intervention doesn’t help and makes things worse, and offering better alternatives, the free marketers come in and say, “Don’t worry about it, it will all work itself out.”

The failure of the free market economists is to engage in a public conversation about alternative solutions to the very real economic challenges we are facing. Just because the government shouldn’t force a solution on everyone doesn’t mean that every single individual should face and handle one’s problem completely alone without any support from or interaction with the rest of the community. Public discourse through the media, or in town halls, or in college or community seminars can be educational, it can stimulate creative ideas and solutions. All economic progress comes from inventing valuable things to do and to make. Such progress comes neither from government programs nor from doing nothing and only hoping each individual would figure something out alone.

Free marketers today seem to instinctively oppose any "public" or "community-based" solutions because they equate them with coercive government mandates. They seem to forget that Ford, Toyota, Google, and The Red Cross are all voluntary, community-based solutions to the problems of transportation, information gathering, and emergency response. By constructively engaging in public debate supporters of economic freedom are likely to contribute to both solving the current economic challenges and to legitimizing free market ideas as reasonable alternatives to socialism and coercive collective action.