WEBVTT NOTE 12.04. Utility "Ex Post": Free Market and Government 1 00:00:00.000 --> 00:00:03.320 4. 2 00:00:03.320 --> 00:00:08.580 UTILITY EXPOSED, FREE MARKET AND GOVERNMENT 3 00:00:08.580 --> 00:00:15.380 We have thus seen that individuals maximize their utility ex ante on the free market, 4 00:00:15.380 --> 00:00:22.360 and that they cannot do so when there is intervention, for then the intervener gains in utility only 5 00:00:22.360 --> 00:00:28.560 at the expense of a demonstrated loss in utility by his subject. 6 00:00:28.560 --> 00:00:31.920 But what of utilities ex post? 7 00:00:31.920 --> 00:00:38.400 People may expect to benefit when they make decisions, but do they actually benefit from 8 00:00:38.400 --> 00:00:39.920 their results? 9 00:00:39.920 --> 00:00:47.260 How do the free market and intervention compare in traveling that vital path from ante to 10 00:00:47.260 --> 00:00:48.980 post? 11 00:00:48.980 --> 00:00:54.960 For the free market, the answer is that the market is constructed so as to reduce error 12 00:00:54.960 --> 00:00:56.520 to a minimum. 13 00:00:56.520 --> 00:01:02.920 There is, in the first place, a fast-working, highly accurate, easily understandable test 14 00:01:02.920 --> 00:01:09.280 that tells the entrepreneur, and also the income receiver, whether they are succeeding 15 00:01:09.280 --> 00:01:14.640 or failing at the task of satisfying the desires of the consumer. 16 00:01:14.640 --> 00:01:20.520 For the entrepreneur, who carries the main burden of adjustment to uncertain, fluctuating 17 00:01:20.520 --> 00:01:22.360 in Consumer Desires. 18 00:01:22.360 --> 00:01:26.120 The test is particularly swift and sure. 19 00:01:26.120 --> 00:01:28.220 Profits or losses? 20 00:01:28.220 --> 00:01:32.680 Large profits are a signal that he has been on the right track. 21 00:01:32.680 --> 00:01:35.820 Losses that he has been on a wrong one. 22 00:01:35.820 --> 00:01:40.720 Profits and losses spur rapid adjustments to consumer demands. 23 00:01:40.720 --> 00:01:46.120 At the same time, they perform the function of getting money out of the hands of the inefficient 24 00:01:46.120 --> 00:01:50.280 entrepreneurs and into the hands of the good ones. 25 00:01:50.280 --> 00:01:56.580 The fact that good entrepreneurs prosper and add to their capital and poor ones are driven 26 00:01:56.580 --> 00:02:02.760 out ensures an ever smoother market adjustment to changes in conditions. 27 00:02:02.760 --> 00:02:09.400 Similarly, to a lesser extent, land and labor factors move in accordance with the desire 28 00:02:09.400 --> 00:02:18.840 of their owners for higher incomes, and highly value-productive factors are rewarded accordingly. 29 00:02:18.840 --> 00:02:22.880 Consumers also take entrepreneurial risks on the market. 30 00:02:22.880 --> 00:02:28.200 Many critics of the market, while willing to concede the expertise of the capitalist 31 00:02:28.200 --> 00:02:35.000 entrepreneurs, bewail the prevailing ignorance of consumers, which prevents them from gaining 32 00:02:35.000 --> 00:02:40.080 the utility ex post that they had expected ex ante. 33 00:02:40.080 --> 00:02:46.400 Typically, Wesley C. Mitchell entitled one of his famous essays, The Backward Art of 34 00:02:46.400 --> 00:02:48.160 Spending Money. 35 00:02:48.160 --> 00:02:54.120 Professor Mises has keenly pointed out the paradox of interventionists who insist that 36 00:02:54.120 --> 00:03:00.480 consumers are too ignorant or incompetent to buy products intelligently while at the 37 00:03:00.480 --> 00:03:07.480 same time proclaiming the virtues of democracy, where the same people vote for or against 38 00:03:07.480 --> 00:03:14.240 politicians whom they do not know and on policies which they scarcely understand. 39 00:03:14.240 --> 00:03:20.200 To put it another way, the partisans of intervention assume that individuals are not competent 40 00:03:20.200 --> 00:03:26.860 to run their own affairs or to hire experts to advise them, but also assume that these 41 00:03:26.860 --> 00:03:33.740 same individuals are competent to vote for these experts at the ballot box. 42 00:03:33.740 --> 00:03:40.180 They are further assuming that the mass of supposedly incompetent consumers are competent 43 00:03:40.180 --> 00:03:47.660 to choose not only those who will rule over themselves, but also over the competent individuals 44 00:03:47.660 --> 00:03:49.220 in society. 45 00:03:49.220 --> 00:03:56.100 Yet such absurd and contradictory assumptions lie at the root of every program for democratic 46 00:03:56.100 --> 00:03:59.820 intervention in the affairs of the people. 47 00:03:59.820 --> 00:04:06.220 Neither are these contradictions removed by abandoning democracy in favor of dictatorship, 48 00:04:06.220 --> 00:04:12.560 Or even if the mass of the public do not vote under a dictatorship, they must still consent 49 00:04:12.560 --> 00:04:18.940 to the rule of the dictator and his chosen experts, and therefore their unique competence 50 00:04:18.940 --> 00:04:27.240 in the political field as against other spheres of their daily life must still be assumed. 51 00:04:27.240 --> 00:04:33.620 In fact, the truth is precisely the reverse of this popular ideology. 52 00:04:33.620 --> 00:04:39.620 Consumers are surely not omniscient, but they have direct tests by which to acquire and 53 00:04:39.620 --> 00:04:41.620 check their knowledge. 54 00:04:41.620 --> 00:04:46.060 They buy a certain brand of breakfast food, and they do not like it. 55 00:04:46.060 --> 00:04:48.480 And so, they do not buy it again. 56 00:04:48.480 --> 00:04:52.560 They buy a certain type of automobile and like its performance. 57 00:04:52.560 --> 00:04:54.140 They buy another one. 58 00:04:54.140 --> 00:04:59.040 And in both cases, they tell their friends of this newly won knowledge. 59 00:04:59.040 --> 00:05:05.160 Other consumers patronize consumers' research organizations, which can warn or advise them 60 00:05:05.160 --> 00:05:06.580 in advance. 61 00:05:06.580 --> 00:05:13.320 But in all cases, the consumers have the direct test of results to guide them, and the firm 62 00:05:13.320 --> 00:05:20.200 which satisfied the consumers expands and prospers, and thus gains goodwill, while the 63 00:05:20.200 --> 00:05:25.200 firm failing to satisfy them goes out of business. 64 00:05:25.200 --> 00:05:31.140 On the other hand, voting for politicians and public policies is a completely different 65 00:05:31.140 --> 00:05:32.140 matter. 66 00:05:32.140 --> 00:05:39.200 Here, there are no direct tests of success or failure whatever, neither profits and losses 67 00:05:39.200 --> 00:05:43.440 nor enjoyable or unsatisfying consumption. 68 00:05:43.440 --> 00:05:50.520 In order to grasp consequences, especially the indirect catallactic consequences of governmental 69 00:05:50.520 --> 00:05:57.920 Decisions, it is necessary to comprehend complex chains of praxeological reasoning. 70 00:05:57.920 --> 00:06:04.560 Very few voters have the ability or the interest to follow such reasoning, particularly, as 71 00:06:04.560 --> 00:06:11.520 Schumpeter points out, in political situations, for the minute influence that any one person 72 00:06:11.520 --> 00:06:17.880 has on the results, as well as the seeming remoteness of the actions, keeps people from 73 00:06:17.880 --> 00:06:21.880 from gaining interest in political problems or arguments. 74 00:06:21.880 --> 00:06:32.880 Lacking the direct test of success or failure, the voter tends to turn not to those politicians whose policies have the best chance of success, 75 00:06:32.880 --> 00:06:37.880 but to those who can best sell their propaganda ability. 76 00:06:37.880 --> 00:06:46.880 Without grasping logical chains of deduction, the average voter will never be able to discover the errors that his ruler makes. 77 00:06:46.880 --> 00:06:57.880 To borrow an example from a later section of this chapter, suppose that the government inflates the money supply, thereby causing an inevitable rise in prices. 78 00:06:57.880 --> 00:07:12.880 The government can blame the price rise on wicked speculators or alien black marketeers, and unless the public knows economics, it will not be able to see the fallacies in the ruler's arguments. 79 00:07:12.880 --> 00:07:28.380 It is curious once more that the very writers who complain most of the wiles and lures of advertising never apply their critique to the one area where it is truly correct, the advertising of politicians. 80 00:07:28.380 --> 00:07:39.380 As Schumpeter states, the picture of the prettiest girl that ever lived will in the long run prove powerless to maintain the sales of a bad cigarette. 81 00:07:39.380 --> 00:07:44.900 There is no equally effective safeguard in the case of political decisions. 82 00:07:44.900 --> 00:07:50.980 Many decisions of fateful importance are of a nature that makes it impossible for the public to 83 00:07:50.980 --> 00:07:59.060 experiment with them at its leisure and at moderate cost. Even if that is possible, judgment is, as a 84 00:07:59.060 --> 00:08:06.420 rule, not so easy to arrive at as in the case of the cigarette, because effects are less easy to 85 00:08:06.420 --> 00:08:08.420 to Interpret 86 00:08:08.420 --> 00:08:13.420 George J. Schuller, in attempting to refute this argument, protested that 87 00:08:13.420 --> 00:08:22.420 complex chains of reasoning are required for consumers to select intelligently an automobile or television set. 88 00:08:22.420 --> 00:08:34.420 But such knowledge is not necessary, for the whole point is that the consumers have always at hand a simple and pragmatic test of success. 89 00:08:34.420 --> 00:08:41.100 and Business, Does the Product Work and Work Well? In Public Economic Affairs there is 90 00:08:41.100 --> 00:08:48.420 no such test, for no one can know whether a particular policy has worked or not without 91 00:08:48.420 --> 00:08:55.440 knowing the a priori reasoning of economics. It may be objected that while the average 92 00:08:55.440 --> 00:09:03.060 voter may not be competent to decide on issues that require chains of praxeological reasoning, 93 00:09:03.060 --> 00:09:10.920 He is competent to pick the experts, the politicians, who will decide on the issues, just as the 94 00:09:10.920 --> 00:09:18.000 individual may select his own private expert advisor in any one of numerous fields. 95 00:09:18.000 --> 00:09:24.600 But the critical problem is precisely that in government the individual has no direct 96 00:09:24.600 --> 00:09:32.180 personal test of success or failure of his hired expert, such as he has in the market. 97 00:09:32.180 --> 00:09:39.360 On the market, individuals tend to patronize those experts whose advice is most successful. 98 00:09:39.360 --> 00:09:45.620 Good doctors or lawyers reap rewards on the free market, while poor ones fail. 99 00:09:45.620 --> 00:09:50.780 The privately hired expert flourishes in proportion to his ability. 100 00:09:50.780 --> 00:09:56.780 In government, on the other hand, there is no market test of the expert's success. 101 00:09:56.780 --> 00:10:03.540 Since there is no direct test in government and, indeed, little or no personal contact 102 00:10:03.540 --> 00:10:10.500 or relationship between politician or expert and voter, there is no way by which the voter 103 00:10:10.500 --> 00:10:15.540 can gauge the true expertise of the man he is voting for. 104 00:10:15.540 --> 00:10:21.040 As a matter of fact, the voter is in even greater difficulties in the modern type of 105 00:10:21.040 --> 00:10:27.220 issue-less election between candidates who agree on all fundamental questions than he 106 00:10:27.220 --> 00:10:33.800 is voting on issues, for issues, after all, are susceptible to reasoning. 107 00:10:33.800 --> 00:10:41.020 The voter can, if he wants to and has the ability, learn about and decide on the issues. 108 00:10:41.020 --> 00:10:48.200 But what can any voter, even the most intelligent, know about the true expertise or competence 109 00:10:48.200 --> 00:10:55.020 of Individual Candidates, especially when elections are shorn of all important issues. 110 00:10:55.020 --> 00:11:00.820 The only thing that the voter can fall back on for a decision are the purely external 111 00:11:00.820 --> 00:11:07.340 advertised personalities of the candidates, their glamorous smiles, etc. 112 00:11:07.340 --> 00:11:13.860 The result is that voting purely on candidates is bound to be even less rational than voting 113 00:11:13.860 --> 00:11:16.620 on the issues themselves. 114 00:11:16.620 --> 00:11:22.440 Not only does government lack a successful test for picking the proper experts. 115 00:11:22.440 --> 00:11:28.980 Not only is the voter necessarily more ignorant than the consumer, but government itself has 116 00:11:28.980 --> 00:11:35.800 other inherent mechanisms which lead to poorer choices of experts and officials. 117 00:11:35.800 --> 00:11:42.220 For one thing, the politician and the government expert receive their revenues not from service 118 00:11:42.220 --> 00:11:49.220 Fitness voluntarily purchased on the market, but from a compulsory levy on the inhabitants. 119 00:11:49.220 --> 00:11:56.420 These officials, then, wholly lack the direct pecuniary incentive to care about servicing 120 00:11:56.420 --> 00:11:59.420 the public properly and competently. 121 00:11:59.420 --> 00:12:06.300 Furthermore, the relative rise of the fittest applies in government as in the market. 122 00:12:06.300 --> 00:12:10.700 But the criterion of fitness is here very different. 123 00:12:10.700 --> 00:12:15.900 In the market, the fittest are those most able to serve the consumers. 124 00:12:15.900 --> 00:12:19.380 In government, the fittest are either 1. 125 00:12:19.380 --> 00:12:23.580 Those most able at wielding coercion, or 2. 126 00:12:23.580 --> 00:12:30.340 If bureaucratic officials, those best fitted to curry favor with the leading politicians, 127 00:12:30.340 --> 00:12:31.620 or 3. 128 00:12:31.620 --> 00:12:37.820 If politicians, those most adroit at appeals to the voting public. 129 00:12:37.820 --> 00:12:43.540 Another critical divergence between market action and democratic voting is this. 130 00:12:43.540 --> 00:12:50.220 The voter has, for example, only a one one hundred billionth power to choose among his 131 00:12:50.220 --> 00:12:58.600 potential rulers, who in turn will make decisions affecting him unchecked until the next election. 132 00:12:58.600 --> 00:13:04.600 The individual acting on the market, on the other hand, has absolute sovereign power to 133 00:13:04.600 --> 00:13:11.800 to make decisions over his property, not just a removed one-one-hundred-billionth power. 134 00:13:11.800 --> 00:13:18.240 Furthermore, the individual is continually demonstrating his choices of whether to buy 135 00:13:18.240 --> 00:13:26.040 or not to buy, to sell or not to sell, by making absolute decisions in regard to his 136 00:13:26.040 --> 00:13:27.040 property. 137 00:13:27.040 --> 00:13:33.640 The voter, by voting for some particular candidate, demonstrates only a relative preference for 138 00:14:03.640 --> 00:14:08.000 Living in a corporation is in similar straits, but he is not. 139 00:14:08.000 --> 00:14:15.160 Aside from the critical point that the corporation does not acquire its funds by compulsory levy, 140 00:14:15.160 --> 00:14:22.040 the shareholder still has absolute power over his own property by being able to sell his 141 00:14:22.040 --> 00:14:28.040 shares on the free market, something that the democratic voter clearly cannot do. 142 00:14:28.040 --> 00:14:32.540 Moreover, the shareholder has voting power in the corporation 143 00:14:32.540 --> 00:14:38.540 proportionate to his degree of property ownership of the common assets. 144 00:14:38.540 --> 00:14:43.540 Thus we see that the free market has a smooth, efficient mechanism 145 00:14:43.540 --> 00:14:51.540 to bring anticipated ex-ante utility into the realization and fruition of ex post. 146 00:14:51.540 --> 00:14:57.040 The free market always maximizes ex-ante social utility. 147 00:14:57.040 --> 00:15:03.040 It always tends to maximize ex-post social utility as well. 148 00:15:03.040 --> 00:15:12.040 The field of political action, on the other hand, that is, the field where most intervention takes place, has no such mechanism. 149 00:15:12.040 --> 00:15:21.040 Indeed, the political process inherently tends to delay and thwart the realization of expected gains, 150 00:15:21.040 --> 00:15:32.240 So that the divergence in ex post results between free market and intervention is even greater than in ex ante, anticipated utility. 151 00:15:32.240 --> 00:15:36.640 In fact, the divergence is still greater than we have shown. 152 00:15:36.640 --> 00:15:43.640 For, as we analyze the indirect consequences of intervention in the remainder of this chapter, 153 00:15:43.640 --> 00:15:50.200 We shall find that in every instance the consequences of intervention will make the intervention 154 00:15:50.200 --> 00:15:55.240 look worse in the eyes of many of its original supporters. 155 00:15:55.240 --> 00:16:02.520 Thus we shall find that the indirect consequence of a price control is to cause unexpected 156 00:16:02.520 --> 00:16:05.200 shortages of the product. 157 00:16:05.200 --> 00:16:11.280 Exposed, many of the interveners themselves will feel that they have lost, rather than 158 00:16:11.280 --> 00:16:13.880 and Gained in Utility. 159 00:16:13.880 --> 00:16:21.540 In sum, the free market always benefits every participant, and it maximizes social utility 160 00:16:21.540 --> 00:16:23.180 ex ante. 161 00:16:23.180 --> 00:16:30.640 It also tends to do so ex post, for it contains an efficient mechanism for speedily converting 162 00:16:30.640 --> 00:16:34.480 anticipations into realizations. 163 00:16:34.480 --> 00:16:41.440 With intervention, one group gains directly at the expense of another, and therefore social 164 00:16:41.440 --> 00:16:45.760 utility is not maximized or even increased. 165 00:16:45.760 --> 00:16:53.240 There is no mechanism for speedy translation of anticipation into fruition, but indeed 166 00:16:53.240 --> 00:16:54.780 the opposite. 167 00:16:54.780 --> 00:17:01.200 And finally, as we shall see, the indirect consequences of intervention will cause many 168 00:17:01.200 --> 00:17:06.600 Many intervenors themselves to lose utility ex post. 169 00:17:06.600 --> 00:17:13.640 The remainder of this chapter traces the nature and indirect consequences of various forms 170 00:17:13.640 --> 00:17:14.640 of intervention.