Our perception of matters is often defined by context. If we tend to be having a fairly good run of things, as the equity markets did during the 1980’s and ‘90’s, our perception of markets tends to be positive. When we look at markets over the past ten years, most people view them as destroyers of wealth. So what is the truth? Are markets good or bad?
I think that it is important to make a distinction between the functioning of markets and the results that markets provide. All too often, we tend to combine these two factors and draw conclusions that are flat out wrong.
The power of markets is grounded in two key principles. First, that collective wisdom produces better results than any individual; and second, that competition produces better results than monopoly. Depending on which side of the fence we sit on, we may view the power of markets quite differently.
There tends to be a natural tension between markets and governments. Markets want to allocate capital based on a competitive process, whereas governments typically want to administer this process through a bureaucracy. I think we can all recognize the market distortions that result when government, as well-intentioned as it may be, attempts to incentivize behavior through inducements in the tax code.
One example of this is the substantial subsidies that government is offering for “green” energy initiatives such as solar and wind power. Perhaps the name Solyndra, Inc. comes to mind. Solyndra manufactured solar panels comprised of tubular shapes rather than the traditional flat panels that most of us are familiar with. The company suspended operations and filed for Chapter 11 bankruptcy last year, in the process welching on a $535 million government loan guarantee. The loan was made with the proviso that Solyndra would create 4,000 jobs. Needless to say, government’s backing of the wrong horse cost taxpayers dearly and did nothing to advance a “green” initiative.
For the moment, we will sidestep the issue of why government has to get involved in this type of venture when this nation has a vibrant venture capital industry. It is interesting that one of the greatest energy boondoggles has been the embrace and subsidy of ethanol. Instead of creating energy independence, it has increased the price of corn-based foods. Government’s forced use of ethanol was an attempt to reduce greenhouse emissions. Instead, it threw off twice as much ozone as gasoline exhaust.
Right now we are experiencing a market-based conversion of gasoline and diesel to compressed (CNG) and liquid (LNG) natural gas as alternative fuel sources. Although heavy duty trucks that are equipped to use LNG cost $30,000 more than diesel alternatives, the cost differential is recouped over about a year. Companies are not making the change because government is mandating it. They are changing because it makes sense.
Government has an important role to play in our economy by supporting and policing our markets. However, it cannot and must not be viewed as a replacement for the power of markets. Government should stop competing with markets and instead recognize them as potential solutions to our problems in energy and medicine.