Monday, July 27, 2009

Trusting choice over control

In demarking his disagreements with Paul Krugman over healthcare, economist Greg Mankiw gets to the heart of how differing assumptions lead to differing policy proscriptions:

Perhaps a lot of the disagreement over healthcare reform, and maybe other policy issues as well, stems from the fundamental question of what kind of institutions a person trusts. Some people are naturally skeptical of profit-seeking firms; others are naturally skeptical of government. …)

I tend to distrust power unchecked by competition. This makes me particularly suspicious of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. …

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government
This is almost exactly the same puzzle I have faced ever since I began this blog. Most of my readers (here at blogspot) are interested in innovation and live either in the Bay Area or Europe, two of the most socially liberal places in the developed world. Thus I know we’d disagree on some key political or policy issues.

The Bay Area entrepreneurs believe in meritocracy and want to create economic success in the free market.† When they get personally involved in solving societal problems, the result is more likely to be John Gage’s NetDay (where I gave time and money to my local schools) or the Omidyar Network funded by eBay billions than yet supporting another failed government program.

So why do these people who understand the value of competition and markets want to have a single monolithic government mandate through bureaucratic fiat for 15% of the economy? Is it because the regulation will hurt other firms and not their own? Is it because their hearts overrule their heads?

An omnipotent ruler would not make optimal decisions for the computer or software or wireless communications or even photovoltaic industries. The independent decentralized knowledge and creativity of many producers will always be better than any central planner at creating solutions, just as the independent decentralized knowledge of many consumers will be better at choosing solutions. So why would anyone think central planning would work any better for healthcare?

† OK, so you would have to ignore KPCB's efforts to increase government subsidies for its cleantech investments, the exception that proves the rule.

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