Elsewhere in this issue of The Region, the views of
Milton Friedman and Friedrich A. Hayektwo
eloquent spokesmen for the virtues of free market capitalismare
summarized. Reflecting on their contributions, I am struck once again
by the intellectual force of their positions, many of which have been
confirmed by developments in the global economy in recent years. Further
reflection on their views leads me to consider two additional issues,
namely those circumstances in which limitations on market-determined
outcomes may be appropriate and, second, the depth of the commitment
to a market economy prevailing in the United States today.
While I firmly believe that most economic decisions are best left to the
market or to Hayek's "spontaneous order," I also recognize that there are
circumstances in which government intervention in economic affairs is
appropriate. Even Milton Friedman is "not in favor of no government." The
banking system, at least as it has evolved, provides a fine example of an
industry in which government supervision and regulation is essential.
A key development in banking was the introduction and ultimate expansion of
federal deposit insurance. Whether such insurance was really necessary to
stabilize the system is debatable, but it is also largely irrelevant at
this point. We have an extensive deposit insurance system in place, one
which, as we have seen, puts the taxpayer at significant risk as banking
institutions encounter performance problems. Regulation and supervision are
needed to limit risk-taking by banks, in order to protect the interests of the
taxpayer. Otherwise, bank depositors would have virtually unlimited and
unfettered draw on the taxpayer. The banking legislation passed last fall by
Congress and signed into law (The FDIC Improvement Act) has been criticized on
many grounds, but I thought it rather good legislation in that it did not add
to the taxpayer's exposure.
Maintaining that there is a legitimate role for government in a market
system like ours does not answer the question of the size and scope of that
role, however. Like Friedman, I am concerned that the government already
looms too large in our economic affairs. Put another way, I fear that we are
losing confidence in market outcomes, not because the market has failed but
because we are unhappy with the results. As a consequence, we turn too
often to government for redress.
Friedman cites several specific examples of this phenomenon, but the
question that intrigues me is: Why is confidence in the market economy
diminishing? There is no single answer to this question, but in my judgment a
major factor is the domestic impact of global competition. An increasingly
competitive global economy has put a good deal of pressure on some sectors of
domestic industry, its management and employees. To be sure, many consumers
and producers have been the beneficiaries of heightened competition, for they
can purchase a wide range of quality products at favorable prices, but these
benefits are generally subtle and widely dispersed. In contrast, plant
closings, job losses and weak earnings are highly publicized, and almost
inevitably call into question the health of the economy.
In this environment, not only are the benefits of competition
obscured or forgotten, but also perspective on the fundamental nature
of a market economy is lost. A healthy economy is characterized
by diversity, with some industries growing rapidly, some contracting
and some maintaining their position. This diversity is far preferable
to preservation, at whatever cost, of the status quo. In short,
declining businesses are a normal part of capitalism, for in a successful
economy resources move from areas in which they are redundant to
sectors which are expanding.
For those adversely affected, these adjustments can be painful
and costly. Thus, there is often a legitimate role for government
to facilitate such transitionunemployment compensation is
a program that quickly comes to mind. But I see no reason that these
adjustments should undermine our fundamental confidence in free
This conclusion is reinforced since it is simply not true that
America has failed to compete successfully in manufacturing and
in other major sectors internationally. Since 1986, the U.S. foreign
trade deficit has narrowed significantly and persistently. Further,
the volume of exports of U.S. manufactured goods has grown far more
rapidly in the aggregate over the past five years than those of
other industrial countries.
In short, the apparent diminution of confidence in the market
system does not square with the facts of U.S. global competitiveness.
While it is true that consolidation and contraction have characterized
some major industries recently, others have thrived and expanded
in this environment.