The Revenge of the Unseen

Many on the statist left are using Hurricane Sandy to prove why big government is necessary and to stick it to the crazy libertarian Mitt Romney.

This is an example of what the French classical-liberal Frederic Bastiat called the inability to perceive both “the seen and the unseen.”  That is, we can all see the actual destruction caused by the hurricane.  But what we can’t see is how a society that didn’t depend on centralized government for disaster relief–not to mention disaster mitigation or prevention–would function in the first place.

At the American Conservative, Rod Dreher, for instance, has a perceptive post about how government disaster relief degrades civil society–it fosters helplessness among neighbors, who rather than helping each other, just wait for the government to arrive.

“Seeing the unseen” doesn’t have the raw emotional power of pointing to burnt-out homes.  But if we want to think maturely about government power, we should ask ourselves how people would act if they weren’t constantly that the government is the proper responder to hurricanes.  What kinds of levees would private companies have built to prevent destruction from the sea?  What drainage technology would private companies use that municipalities have never contemplated?  What kind of insurance contracts would people enter into and what level of responsibility would they feel toward their own neighbors if they weren’t taught that only the government could save them?  What would a privatized FEMA actually look like?  Would it take the form of private companies throwing their clients into the sea, as the picture above suggests?  Or would a more rational business model look something like AAA, where clients pay monthly fees so that, if trouble actually arises, they have an entitlement to relief work?

Above all: is the destruction so bad in spite of government relief work, or is government preemption of the relief market a contributing factor to the extent of the destruction?

I don’t claim to know all of these answers for certain–no one can really predict how new markets will develop.  But those are the kinds questions we should be asking, rather than just looking at destroyed cities and then repeating bromides over “good government.”


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9 thoughts on “The Revenge of the Unseen

  1. I’d concede on several of those points that we don’t know, however I must disagree on the levies and drainage technology. I don’t point to the government for an example, I point towards the private sector. There has been a tendency without regulation to go towards a system that promotes shoddy goods for the highest profit margins. If it breaks then it has to be replaced which means more profits, just look at the decreasing life spans of electronics, toys, cars (in general, though there are exceptions) and many other products. There is just truth to the idea that they “don’t make them like they used to,” and it’s highly doubtful that without regulations they will improve the quality since it would cut into profit margins and dividends paid to stock holders. While it could be argued competition would weed out the shoddy goods, that assumes an oligarchic system such as that of the late 1800s and early 1900s doesn’t form that will just put upstart competitors out of business by changing practices long enough to shut them down before slipping back into their ways without competition.

  2. Kelse Moen

    The issue, though, isn’t about whether private producers would make products that have a life expectancy of X number of years. It is about whether for-profit businesses will have an incentive to produce better goods than a government not subject to profit-and-loss signals. You can quibble about shoddy toys, but if private producers really produce bad products, they will suffer losses, whereas governments, as monopolists, suffer no bad consequences from producing bad products or from imposing bad regulations on private producers. Moreover, your response seems to take “profit margins” as a fixed concept that will only be decreased by quality improvements. In fact, profits grow and shrink to the extent that producers actually produce things that people want. I do not believe that a shorter life expectancy for toys or cars undercuts this point–it just means that the money spent on materials to give them longer life expectancies are more in demand in some other sector.

    • Except the demand for them won’t necessarily go up or down with better quality. Kids want toys, adults don’t, therefore the market is determined by the number of kids and their parents’ budget which is typically based on income and desired types of goods and services rather than quality of product. In the car industry roughly the same holds true, the demand is not finite or stagnant, but a 12 year old isn’t going to buy a car and neither is an 80 year old who can hardly see (hopefully). What are currently public goods such as levies or sewers have a finite demand, the people need them to live in cities without disease and flooding problems (or at least higher ones). They may not hire the same company to provide it next time, but if they get locked into a long term contract or they see that the competitors’ products/services aren’t better then they really are faced with problems. There are high barriers to entry to actually building drainage systems or levies much like energy plants due to high start up costs natural to the industry due to the equipment needed. Therefore it relies on lenders (unless they’re rich already) and not being run out of business one way or another by established companies by anything from mergers or corporate takeover to massive short term cost undercuts (see trade wars). I also disagree with the statement that there are no consequences to government’s shoddy work, we live in a constitutional republic that elects representatives. If the politicians want to keep their jobs, they’ll provide good services, at least if the people are smart enough to vote by quality of service rendered.

    • On the point about consumers relocating money to other sectors, that can be true to an extent, however certain goods and services have come to be a part of everyday life. Toys for kids, cars for adults in many areas, computers and TVs for most, etc.

      Demand has already shown to have complete disregard for life expectancy of TVs and computers as the newer systems burn out faster, but still continue to be in demand.

  3. Kelse Moen

    I certainly agree that the market for toys is different than the market for sewers or levies, and that how each is provided will be different. But that still doesn’t get to the fundamental point: even if the levee market is constrained by long-term contracts and high barriers to entry, I don’t see why government-owned levies are any better. Talking about a “constitutional republic” isn’t an answer–sure, in theory politicians are accountable if levees break, but people vote on a number of factors and there won’t be nearly the direct response to government failure that there would be to private failure (e.g., a refusal by consumers to enter into contracts with the same company in the future or in other locations, given that any private company, in order to succeed, needs to have an expectation of future business, rather than just relying on contracts it has already entered into). Moreover, as long as government monopolizes the levee market, there will always be fewer choices for consumers, compared to any market with free entry. So I get that a levee market presents unique challenges. What I don’t get is how the government satisfies them better than private producers.

    Also, I’m not sure what your point is about life expectancies. My original point was only that the optimal life expectancy for, say, a car, isn’t that “longer is better.” Rather, if cheaper materials can be used that have shorter life expectancies, that isn’t a bad thing, as the money and materials saved in producing or buying the cheaper product can be used in other areas.

  4. The question is whether one company will have the incentive to build a higher quality product in a market with more constraints on entry into the competition. Oligopolies easily can fall into the cartel mentality of just cooperating to make sure they all survive. So long as no new competitors are allowed to enter the market they can be content with market share if no regulations against collusion exist. If no product is better than any other then they still won’t have trouble finding contracts.

    My point on life expectancy is this, it is a measure of quality of a product. Not the only one, but a definite one. A levy that costs $20 million and lasts 30 years is better than one that costs $10 million and lasts 10 years. Same holds true for a car in my book. Some people may want to replace their car every couple of years, but that is an extreme waste of money over time. We’re talking the difference between short term versus long term savings.

  5. Kelse Moen

    But if you’re so concerned about monopoly, then you should actually support the privatization of public utilities. When they’re publicly owned, there is no competition at all–we have to rely on the good graces of the government or the weak effects of voting, that you mentioned earlier. On the other hand, the greater the privatization, the fewer constraints on competition there are. Likewise, trade regulations are also barriers to entry which help stifle smaller start-up competition.

    People have made the same arguments that you’ve made against taking away government monopolies in, say, the cable TV industry, which was historically thought of as naturally leading to monopoly. But the few places that have actually privatized are marked by much lower prices than the others. I live in an area where only 1 cable company is allowed, by government fiat, and have to pay high prices and get horrible service. If there were privatization, there would be much more competition than there is now. You say that oligopolies will tend to work together, but historically and theoretically, this is far from obvious. There is a ton of research about how they’re naturally self-destructive.

    As to your point on life expectancy, it misses the fact that, because people have varying degrees of time preference and access to money, there is no objective way to say that one product is better than another. This is really one of the core points of modern economics. Do you really believe that a product that costs $20,000 and lasts for 20 years will be valued the same by a 30-year-old investment banker as it is by an eighty-year-old on a fixed pension? Or would the 80-year-old want something cheaper that might last less time? But, regardless, that is all irrelevant to the real question here. It is only relevant if you believe that the government–through public ownership or through regulation–can lead to a more efficient use of quality resources than private actors. I see no reason, either in theory or in history, to believe that that will be the case.

    I do thank you for commenting on our blog though!

  6. I can show you proof in history, see the trust busting of the early 1900s. The oligopolies were broken up by the federal government. Also, look at the standards of living for the common laborer in the 1800s before regulations on working conditions and hours came into effect, see any cheap labor source working conditions.

    Comparing the cable industry to levies and sewers is the same as comparing toys to them. Levies prevent floods, sewers prevent disease. Cable provides one of many forms of entertainment, toys provide one of many forms of entertainment. Energy utilities provides power to the plants that make toys, and runs waste treatment plants, along with hospitals, etc.

    True, but that 80 year old is most likely going to be outvoted by younger people as to who gets the contract anyways in your system. Not to mention 80 year olds who have children might be tempted to go for what’s best for them. Though you’re right on no guarantees.

    The models used for those theories fail to take into account industries that have finite demand and public goods though in every case I’ve seen. If one person gets a disease from not having sewer access due to inability to pay, then that disease can spread to people who did pay for the protection which that service provides. These are industries that can have indirect consequences if left up to the chance that everyone can afford them and everyone is willing to pay into it in the case of private ownership or competition. If you go with government contracting out the construction then you run into the problems I mentioned above.

    When it comes down to it, I’ve seen too many examples of inferior goods made for lower prices and higher profits in the private sector, and faulty goods are the exact problems that started this discussion with sewers and levies. I’d argue the problems were not inferiority in several of these cases though, but rather outdated systems that need upgrading or modernizing.

    This is a good debate though.

  7. Kelse Moen

    I’ll try to streamline my replies so this debate doesn’t get too far afield.

    1. Trust busting is not an example of oligopolies being economically inefficient or even harmful in the first place. It is an example of government prosecutors acting under the specific economic theory that trusts are bad, which is not a theory that I think is correct.

    2. It is not enough to just point to rising standards of living since antitrust law came into effect. The question is whether the change in living standards was actually caused by government regulations. I don’t see any reason to believe that it was, especially since living standards were already rising since the beginning of industrialization.

    3. Sure, an 80 year old might have valid reasons for having different levels of time preference. But the point is the the existence of time preference undermines your claim that longer life expectancies for certain products are automatically better.

    4. The public goods question is the most important one. Part of the reason I mentioned cable TV is that it was once considered a public good but no longer is. The creation of commercials was a private-sector solution to the issue that TV viewing presents its own free-rider problems, because the viewers can get a TV signal that they don’t have to pay for. I think that Ronald Coase showed the same thing with lighthouses–they seem like a public good, but private companies were able to find ways to make them profitable, i.e. by charging a docking fee for ships that dock near the lighthouse. I don’t see why people can’t come up with the same kinds of solutions to privatizing levees and sewers. Indeed, for levees I don’t see why certain wealthy companies wouldn’t foot the cost to maintain them, even knowing there would be lots of free riders, if the alternative is the threat of a huge property loss.

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