Making the Case for the Market: Good Results Are More Important Than Good Intentions, Says Robert McTeer
New York Sun
Oct. 29, 2002

This article is based on Mr. McTeer's keynote address at the annual meeting of the Acton Institute for the Study of Religion and Liberty.

Making the case for the market is more difficult during an economic downturn, and especially after the recent corporate scandals. But on a number of fronts it is a case that still must be made. As for the recent scandals, my hunch is that most corporate shenanigans start out innocently enough. The move from long-term profit maximization to short-term stock-price maximization, with the stock price determining the rewards to the decision makers, obviously started some good people on a small step down a slippery slope. First you do something only a little out of the ordinary to make this quarter’s numbers. That makes next quarter’s numbers more difficult, calling for more extraordinary actions. Pretty soon you are in over your head hoping the economic boom or inflation or the bull market will bail you out. If those gods or devils cooperate, your reputation as a genius grows and you start believing your own press.

Frankly, recent episodes surprised me. I’m naïve and remain so, I guess. In no way do I believe they are endemic to capitalism. No matter what shows up as the pond is drained, I remain convinced that a transparent market system is less a breeding ground for wrongdoing than more closed, secretive, command and control systems, where power is wielded by men and women rather than markets.

Recent revelations are triggering remedial legislation and regulation. I fear overkill. Laws designed to cover all circumstances in advance are bound to have undesirable unintended consequences.

The area of free trade is littered with unintended consequences. I once testified for free trade before a presidential panel on the trade deficit. The businessman who followed me also supported free trade, but it was clear that it was because his company would benefit from more exports. A true free trader is for free trade because of imports. Imports are the benefits of trade; exports are the cost of trade.

Almost everyone gets that backwards. One notable exception is Eddie Bernice Johnson, a congresswoman from Dallas. She understands and is willing to articulate the point that poor people benefit greatly from imports—including low priced goods made in China. Hooray for her. She gets it.

In addition to the other side claiming the moral high ground, another obstacle to selling the market is that a market approach to economic problems sounds like a do nothing approach. And "do nothing" sounds too much like "don’t care." Red-blooded Americans crave action. "Don’t just stand there," they say, "do something." A good economist might say, "Don’t do something, just stand there." The 19^th Century economist, Jeremy Bentham, had it about right when he said, "In political economy, there is much to learn and little to do."

This is an especially tricky lesson to learn when it comes to money. People talk about how much wealth was lost in the recent stock market correction—trillions of dollars. That may be the total reduction in the accounts of stock owners. But the economy didn’t lose trillions of dollars of real wealth. The economy, the day after a stock market plunge, has the same productive capacity as the day before—the same number of buildings and factories and machines. Its ability to produce goods and services is not diminished by stock price declines.

Our money and other financial assets are potential claims on future production. But future production hasn’t been produced yet. Future production may or may not be harmed by today’s market decline. It will be if the correction causes a recession or reduces investment and productivity over time. But, if that doesn’t happen, real wealth in the aggregate may not be affected. The jury is still out.

Similar considerations apply to problems like Social Security and private pensions. We can tinker with the financing, but the value of our claims at retirement will depend on the economy’s productivity at that time. Wealth must be produced. It can’t be printed.

The fallacy of job counting causes similar confusion. "Creating" jobs is a favorite past time of mayors, governors, and chambers of commerce. They believe they are doing the Lord’s work, and sometimes they may be. Individual towns may benefit by attracting new plants and new jobs. Or by building a new stadium. Or by subsidizing an unprofitable company to keep its jobs in town.

Those new jobs are real to the local community, and may give it a boost, but most such jobs aren’t new to the larger community. Most newly created positions are filled by workers leaving other jobs. One community's’ job gains are largely another’s job loss. Attracting jobs through subsidies may make the larger community poorer by allocating scarce resources to other than their most productive use.

It’s not potential jobs that are scarce; it’s the people to fill them. We should not count jobs, but rather make all jobs count. We should make sure scarce workers aren’t wasted in suboptimal jobs.

"Saving" jobs probably does more harm than "creating" jobs. What if we had protected the jobs of telephone operators from modern technology? Given how much we talk these days, half our population would now be telephone operators.

The other half would probably be elevator operators. I once stayed in a hotel in Tokyo where a young woman stood in the lobby to greet you when you go off the elevator. Japan had a low unemployment rate. But they were obviously counting jobs rather than making jobs count.

Such fallacies mean that good economics is often counter intuitive. Shocking as it sounds, progress can better be measured by job losses than job gains. Years ago, 90 percent of our population was needed to grow our food. Now we produce more food with less than 3 percent of the population. That’s productivity. The difference between 90 percent and 3 percent isn’t an army of unemployed farmers. It’s people working in other industries, many of which didn’t exist only a few years ago. That’s progress—progress measured by job losses through productivity gains. That’s, in the words of Martha Stewart in better times, a good thing.

About the Author McTeer is president and CEO at the Federal Reserve Bank of Dallas.