By Eliminating Failure, The Government Robs Us Of Success

“Success by government decree” is the motto of the regulatory state

By Harry Binswanger

Where does the Left get its power? From one source at root: a wrong standard of morality, of good and evil. Self-sacrifice is said to be the good, self-interest the evil. The Left blames every social and economic disaster on “selfish greed.” What caused the financial meltdown, according to the Left? The selfish greed of Wall Street bankers. Why was Obamacare passed? Because people are in need, and the greedy must serve the needy.

Those on the Right should be pointing out that “selfish greed” is a smear-term: it blackens ambitiousness and the desire to produce wealth, which are virtues, by associating them with mindless gluttony. But Rightists don’t expose the smear because they share the anti-self morality, or at least fear to challenge it.

So far, most public defenders of capitalism have lacked the courage to say, in the words of John Galt in Atlas Shrugged, “your life belongs to you and the good is to live it.”

But, as a small step in the right direction, pro-capitalists are beginning to answer the absurd leftist claim that greed caused the financial crisis. They are pointing out this obvious fact: “greed”–as the desire to get rich–is a constant. It did not suddenly come into being, or flower, in the period leading up to the financial meltdown.

For instance, a Wall Street Journal editorial (April 25, 2013) observed that “the crisis had several causes other than the greed that is found at all times on Wall Street and every other street.”

Indeed. But something does change, psychologically, in the boom preceding a crash. The change is not an increased desire for wealth. Nor is it that people become fixated on the short range. What changes is people’s assessment of risk. People do not become more greedy, they become over-optimistic. Seeing stocks and real-estate go up and up, they imagine that this is the new normal and that a decline in prices is not in the cards.

By the same token, during the panic and bust phase, people become overly pessimistic. They imagine that there is no bottom, that investments are all super-risky, and that doom is at hand.

As the boom is not an excess of greed, so the bust is not a greed-deficit.

Beneath the psychological swings lies the root cause: the boom-bust cycle is due to government manipulation of the money supply, as the Austrian school of economists have demonstrated. The Fed’s injection of ever-more money into system is what creates the ever-rising prices and thus the over-optimism.

Another government policy fuels the over-optimism: failure has been (almost) outlawed. In a free economy, there are always some firms that are failing. In a regulated economy, the government props up failing firms, thereby creating the moral hazard that adds to the over-optimism.

“Too big to fail” is supplemented by “too small to fail” and “too medium to fail.” Myriad government interventions act to protect businesses, large and small, from failure.

The antitrust laws in particular are designed to prevent successful firms from driving competitors into bankruptcy–something that would be happening regularly on an unregulated market but is unthinkable under today’s antitrust regime.

Then there is the proliferation of occupational licensing laws. Licensing laws protect the already licensed from the competition of the unlicensed. And consider the effects of the tens of thousands of operational regulations dictated to business, plus impenetrable IRS rules. Both serve to protect big firms against competition from smaller ones, because the big firms can afford to have accounting departments and compliance departments, but small firms cannot.

It all adds up to a frozen market. The status quo becomes a government-supported Establishment protected from economic failure.

But an essential of capitalism is just that kind of failure. Capitalism involves a continuous selection process, the equivalent of natural selection in biology: business success fuels expansion, while failure causes contraction. Thus the better producers gain ever more economic influence, and the worse command ever fewer resources.

By intervening to eliminate failure, government has nullified this natural selection of the better producers.

We see the same philosophy among trendy educators: failure at school has been eliminated in favor of self-esteem by teacher-decree. Likewise, “success by government decree” is the motto of the regulatory state. And just as the flattered, puffed-up student gets a painful dose of reality after graduation, so the economy gets it when the never-liquidated errors finally bring about the inevitable crash.

It is not lust for lucre that creates a boom; it is government’s monetary expansion supplemented by government’s prevention of mini-failures–all ending up, inevitably, in mega-failure.