TCS Daily

Plato's Republic or Milton Friedman's Market?

By Arnold Kling - January 29, 2007 12:00 AM

"How can policy be improved? My first recommendation is that policymakers should pause and truly absorb the fact that government generally cannot be counted on to correct market failures efficiently by itself. Second, it is important for policymakers to acknowledge that the few microeconomic policies that have improved efficiency -- which the federal government eventually grew to support -- stem from market-oriented approaches."
-- Clifford Winston, Government Failure vs. Market Failure

Milton Friedman got it right, and Plato got it wrong.

That is the message that I take away from Clifford Winston's exhaustive survey of the actual results of well-intentioned government policies aimed at correcting market failures. He looks at policies designed to address all of the ills that economists and others have identified with markets -- monopoly power, imperfect information, externalities, and so on. Government tends to make things worse, not better.

Brad DeLong has a saying:

Why oh Why Are We Ruled by These Idiots?

I call this the Fundamental Problem of Political Economy. How do we limit the power that idiots have over us?

One solution, that might be traced to the expression "philosopher-king" associated with Plato, is to hand the reins of government to the best and the brightest. Since the late 19th-century, the Progressive Movement in American politics has championed this approach. The Progressive vision, which DeLong embraces, is to channel brains and technical know-how through government in order to improve people's lives. One hundred years ago, they sought to prohibit alcohol. Today, they are going after trans fats. One hundred years ago, they favored eugenics, based on the then-new science of evolution. Today, they embrace anti-growth economic policies, based on the contemporary science of happiness. Indeed, we get headlines like 'Tories promise to make happiness a priority'.

The other way to avoid having our lives run by idiots is to limit the power that others have over us. This is the approach that was embedded in our Constitution, before it was eviscerated by the Progressives. It is the approach for which Milton Friedman was a passionate advocate.

Friedman's insight is that a market limits the power that others have over us; conversely, limiting the power that others have over us allows us to have markets. Friedman argued that no matter how wise the officials of government may be, market competition does a better job of protecting us from idiots.

An Idiotic Insurance Company

A few months ago, one of my friends was seeking health insurance after leaving his company. The first company from which he tried to obtain insurance sent him a letter that said, "Unfortunately, we cannot offer you insurance, because your medical records show that you have X," referring to a medical condition with a fancy name.

My friend was outraged. "But X is just dry skin! I treat it with an over-the-counter medication!" He called the health insurance company and asked to speak with an underwriter. The person with whom he spoke clearly had no authority. That person could only look at a computer screen and say, "Our system won't let us take you."

My friend wrote a letter to the insurance company to complain. Recently, they sent him a letter saying that they had relented. They were now willing to sell him health insurance. However, he already has health insurance with a different company, and he did not respond to their letter.

The first health insurance company was idiotic. The Platonic solution for such idiocy is to pass a law. In states which have such laws, insurance companies are not allowed to turn away customers based on medical history.

The market solution is the one that my friend chose, which was to try a competing insurance company. The market solution worked well. In part because he lives in a state without a strong must-carry law, the health insurance he obtained was considerably cheaper than mine. I am jealous.

Friedman's Education Vision

One of Milton Friedman's strongest policy recommendations was vouchers for education. He believed that giving parents money to send children to the school of their choice would give them the power to improve schools. Ultimately, the pressure of competition could do a better job than philosopher-kings of running the school system. He did not live to see his vision fulfilled. I hope that I do.

Editor's note: A new television biography of Milton Friedman, The Power of Choice, will be airing tonight on PBS.


TCS Daily Archives