EL PACÍFICO CRISANTEMO QUE LUCHA POR SU DEFENSA: UNA NUEVA IDENTIDAD DEL JAPÓN?

Progress.

The man of system is apt to be very wise in his own conceit. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon the chess-board; he does not consider that the pieces upon the chess- board have not another principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, although different from that which the legislature might choose to impress upon

it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

— ADAM SMITH (1759)

As previously discussed, governments can often coordinate the provision of public goods — a small class of goods for which it is difficult to limit consumption to paying customers — better than markets. Many people also believe that the government can pick up industries, provide subsidies, direct investment, operate enterprises, and supply other goods in a way that will accelerate the growth of the economy. According to this view, government investment and “industrial planning”can improve on market outcomes.

This view has a certain appeal. Surely it makes sense to plan. Aren't elected officials and government experts more likely to represent the “gen- eral welfare”of the people than business entrepreneurs? Won’t govern- ment officials be “less greedy”than private business? People who do not understand the invisible hand principle often find the argument for central planning persuasive. Economics, however, indicates that it is wrong. There are four major reasons why central planning will almost surely do more damage than good.

First: Central planning merely substitutes politics for market verdicts.Re- member, government is not a corrective device. Real-world central plan- ners (and the legislators who direct them) are not a group of omniscient selfless saints. Inevitably the subsidies and investment funds doled out by planners will be influenced by political considerations.

Think how this process works even when decisions are made democrat- ically. Expenditures will have to be approved by the legislature. Various

business and unionised labour interests will lobby for investment funds and subsidies that provide them with benefits. Legislators will be partic- ularly sensitive to those in a position to provide campaign contributions and deliver key voting blocs. Compared to newer growth firms, older es- tablished business will have stronger record of political contributions better knowledge of lobbying techniques, and a closer relationship with powerful political figures. As former senator William Proxmire has said: “The money will go where the political power is.”The political process will favor older firms, even if they are economically weak, over newer growth-oriented firms. In addition, committee chairmen will often block various programs unless other legislators agree to support projects ben- eficial to their constituents and favored interest groups (pork-barrel proj- ects) only a hopeless dreamer would believe that this politicised process would result in less waste, more wealth creation, and a better allocation of investment funds than markets.

Second: The incentive of government-operated firms to keep costs low, be innovative, and efficiently supply good is weak.Unlike private owners, the directors and managers of public-sector enterprises have little to gain from improved efficiency and lower costs. Predictably they will be moti- vated to pursue a larger budget. A large budget will provide funding for growth of the agency, salary increases, additional spending on clients and others factors that will make life more comfortable for managers. Managers of government owned firms, almost without exception, will try to convince the planners that their enterprises are producing goods or services that are enormously valuable to the general public and, if they were just given more funds, they would do even more marvelous things for society. Moreover, they will argue, if the funding is not forthcoming, people will suffer and the consequences will likely be disastrous. It will often be difficult for legislators and other government planners to evaluate such claims. There is nothing comparable to private-sector profit rates that the planners can use to measure the performance of the en- terprise managers. In the private sector, bankruptcy eventually weeds out inefficiency, but in the public sector, there is no parallel mechanism for

the termination of unsuccessful programmes. In fact poor performance and failure to achieve objectives is often used as an argument for in- creased government funding. The police department will use a rising crime rate to argue for additional law-enforcement funding. If the achieve- ment scores of students are declining public school administrators will use this failure to argue still for more funds. Given the strong incentive of government enterprise managers to expand their budget and the weak incentive to operate efficiently, government enterprises can be expected to have higher per-unit costs than comparable private firms.

Third: There is every reason to believe that investors risking their own money will make better investment choices than central planners spending the money of taxpayers.Remember, an investor who is going to profit must discover and invest in a project that increases the value of resources. The investor who makes a mistake — that is, whose investment project turns to be a loser — will bear the consequences directly. In contrast, the success or failure of government projects seldom exerts much impact on the personal wealth of government planners. Even if a project is produc- tive, the planner’s personal gain is likely to be modest. Similarly, if the project is wasteful — if it reduces the value of resources — this failure will exert little negative impact on the planners. They may even be able to reap personal gain from wasteful projects that channel subsidies and other benefits towards politically powerful groups. Given this incentive structure, there is simply no reason to believe that central planners will

What Everyone Should Know About Wealth and Prosperity

Market with Politics

It is a common experience in Pakistan that managements of many public sector organisations like Pakistan Steel Mills, Pakistan Broadcasting Cor- poration, Pakistan International Airlines and Pakistan Railways have al- ways been complaining for deficient resources, while in fact the sectors which they belong to have unlimited opportunities to earn profit, espe- cially when they are enjoying their “legal Monopoly” status and they do not have to pay taxes like private sector firms.

be more likely than private investors to discover and act on projects that increase society’s wealth.

Fourth: There is no way that central planners can acquire enough infor- mation to create, maintain, and constantly update a plan that makes sense.We live in a world of dynamic change. Technological advances, new products, political unrest, changing demand, and shifting weather conditions are constantly altering the relative scarcity of both goods and resources. No central authority will be able to keep up with these changes, politically assess them, and provide enterprise managers with sensible instructions.

Market is different. Market price registers and tabulates widely fragmented information. Price information is constantly adjusting to reflect the changes always taking place in the economy. Price reflects this widely dispersed information and sends signals to business firms and resource suppliers. These price signals provide business- and resource-owners with the in- formation required to coordinate their actions and bring them into har- mony with the new conditions.

Some years ago it was widely believed that government planning and “industrial policy”provided the key to economic growth. We were told that market economies faced a dilemma: they were either going to have to move towards more government planning or suffer the consequences of slower growth and economic decline. Economists Paul Samuelson and Lester Throw were among the leading proponents of this view, which dom- inated the popular media and sophisticated intellectual circles during the 1970s and 1980s. The collapse of the Soviet system and poor perform- ance of the Japanese economy have largely eroded the popularity of the view. Nonetheless, many still believe that the government can direct var- ious sectors of the economy, such as health care and education. This, too, is a delusion.

Nearly two and a half centuries ago Adam Smith articulated the source of central-planning failures, including those that arise from efforts to plan

specific sectors (see quote, page 97). Unfortunately for the planners, in- dividuals have minds of their own, what Smith calls “a principle of mo- tion”, and when they confront an incentive structure that encourages them to act in ways that conflict with the central plan, problems arise. A simple two-by-two charts can be used to illustrate this point. As table 4 (below) shows, goods and services may either be produced by private enterprises or supplied through the government. They may be paid for either by the consumer directly or by the taxpayer or some other third party. This means that there are four possible combinations of production and consumption. Let’s consider the incentives accompanying each of these four cases and analyse the implications for central planning.

In Category 1 goods are produced by private firms and purchased by consumers with their own money.Predictably, consumers can be counted on to make decisions because if they fail to do so, their personal well- being will be adversely affected. Correspondingly, the private producers have a strong incentive to cater to the views of consumers and supply that desired goods economically. Failure to do so would lead to higher costs and lower profits. In this case both consumers and producers will have an incentive to engage in actions that also promote the general welfare. As Smith noted, under these circumstances “the game of human society will go on easily and harmoniously, and is very likely to be happy and successful.”

What Everyone Should Know About Wealth and Prosperity

Inefficiencies in the Public Sector

Another astonishing instance is the higher education in Pakistan, where all public sector universities have good physical resources and almost in all cases their physical and financial resources are much better than private sector universities. However, it is a usual complaint from the management of public sector universities that they do not have sufficient resources. All public enterprises in Pakistan give always the same jus- tification to explain their inefficiency, which is scarcity of resources.

Category 2 represents the case where goods are produced privately but are paid for by the Taxpayers or some other third party.The provision of health care in the US financed primarily by government (Medicare and Medicaid) and insurance provides an example of this organisational struc- ture. When someone else is paying, how much incentive does the con- sumer have to care about price? The answer is “not much.” Instead of economising, many consumers will simply purchase from suppliers that they believe offer the highest quality, regardless of price. The behaviour of producers will also be affected. Because consumers are largely insen- sitive to price, producers have little reason to control costs and provide services at attractive prices. Predictably, when a society organises provision of a good along the lines of category 2. Problems will result. Because

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