Restoring the invisible hand, technology remakes the market

The Half-Life of Policy Rationales: How Technology Affects Old Policy Issues
Edited by Fred E. Foldvary and Daniel B. Klein
New York University Press/Cato Institute, 2003, 276pages.
Reviewed by Frank Conte

“In a rapidly changing society,” wrote Milton Friedman in his 1962 classic Capitalism and Freedom, “The conditions for making technical monopoly frequently change and I suspect both public regulation and public monopoly are likely to be less responsive to such changes in conditions than private monopoly.” Despite the quantum leaps in technology and its potential for more individual autonomy, the growth of government continues almost unabated. Socialism may be dead but Leviathan prods on. The arrival of the new economy and its disruptive technologies has inspired those hoping to trim the sails of activist government -- believing that in this brave new world the ability of government to tax, regulates, stifle and shape has been greatly diminished. Once freed of the old constraints, market players can expand into new activities thereby serving the public interest.

But does technological advancement enhance the case for free markets? Can the case for state intervention be overturned if the argument for market failure in a highly technological society is disproved?

Economists Peter E. Foldvary and Daniel B. Klein think the prospects for opening up markets and limiting the reach of government lie squarely in the advances made recently in technologies. As the title of their collection of essays suggests, with technology on the march the best rationales for old policies have become increasingly obsolete. The applications cited in this provocative ensemble cover postal service, transportation, consumer protection, conservation and electric generation and water works. The new paradigm is both imaginative and unsettling. One gets the feeling early on that “Toto we aren’t in Kansas anymore.” Yet the tone of the book is studious not blindly ideological.

Mainstream economics has long assigned a role for government in the economy particularly when the “invisible hand” of the market fails. More precisely, in the provision of non-rival public goods, government is thought to be more efficient. Highways, public parks and education are good examples of public goods thought to be better maintained by government. For example an interstate highway system is better left in the hands of government (which armed with eminent domain power and the ability to tax motor fuel) can better coordinate the flow of traffic between cities, towns, states and private parties. On the other hand, private companies (which would have to negotiate and litigate highway expansion with thousands of property owners and dispersed toll collection) face large up-front costs and few if any incentives to build and maintain the interstate highway system.

The transaction costs to private parties would be enormous; private players would find the transaction costs involved would obstructwould obstruct gainful exchange. But technology is challenging this assumption head on. If technology trims transaction costs then the rationale for the invisible hand is restored. In turn, users rather than taxpayers would be footing the bill thus building the case for privatization and limiting government to night watchman functions.

Even if it were to turn, as it has, to high tech toll collection for its highway system, government would be at a gross disadvantage says the authors. This also applies to other activities.

First and foremost, technology itself doesn’t simplify matters even though we enjoy a measure of convenience and wealth of information. A financial analyst in investment banking, for example, may have access to high speed data, the fastest computers and reams of information about thousands of companies. But this informational capability doesn’t allow him to cover any more companies. In fact, he may cover less. That’s because to gain a competitive advantage for his investors, he must spend more time trying to grab hold of the moment-to-moment changes in those few companies. In other words, technology accelerates economic change and multiplies the connections between activities. History shows that profit-seeking firms are better positioned than government to take the risks and reap the rewards. And as a result the economy grows.

With the most properly aligned institutional incentives, technologies and free markets enable a happy coexistence between the environment and private property. As Michael De Alessi argues, regulatory approaches to marine conservation and fisheries have depleted both the fishing stock and the livelihood of thousands of fishermen. That’s because such intervention has precluded the evolution of private property rights. Thanks to Global Positioning Systems (GPS), electronic tagging, artificial reefs and sonar, private conservation and aquaculture are becoming more feasible. Thus the incentives to develop both fishing stock and industries are made clear. The fabled ‘tragedy of the commons” -- or in this case the high seas -- is resolved by changing the institutional settings that mitigate against depleting “natural resources.”

In one of the more promising applications, co-editor Klein tackles emission testing. “Fencing the Airshed” by using remote pollution sensing to policy auto emissions is far superior to the current command-and-control ‘inspection sticker” program, a program with its own set of inherent problems. This kind of “smog check” would diminish the need for inane policies such as carpooling electric vehicle quotas and alternative fuel mandates.

Moreover, “remote sensors” would do a better job identifying the dirtiest 10 percent of the fleet. Using an infrared beam shone across the road, regulators can measure individual vehicles. This is a clear example of how the government as night watchman can facilitate the obsolescence of programs such as carpooling and high occupancy lanes.

Natural monopoly has been the reason d’etre of big government. Public utilities – water, electricity, natural gas, telephone and cable – have large “sunk costs” but they also enjoy government protection against competition. But technology, if allowed to flourish, overthrows this old rationale.

Putting aside the Enron catastrophe, the movement to free-markets is closer to reality in part to “dispersed generation.” As technology evolves with the help of microturbines, end-users will create their own mobile site-based generators. These efficient generators are capable of delivering energy without creating pollution. However, such co-generation models have hit a regulatory roadblock. Regulators prefer to regulate a smaller number of larger entities. Yet as Alvin Lowi Jr. and Clyde Wayne Crews observe “Technology has delivered conditions and alternatives that recommend a system whose success no longer depends on regulators making the right decisions.”

There are other imaginative proposals. Some that are clearly radical in nature. David Friedman and Kerry Macintosh revisit the world of laissez faire banking and private currencies broached by Friedrich von Hayek as recently as 1976. Both authors here suggest that the critiques of free banking – that it would be too unstable and prone to panics and bank runs – no longer holds. That’s because smart cards, encryption and the ability to deploy several outside competitive auditors would all ensure bank solvency and cultivate trust. But in an age where consumers still covet paper checks regardless of the cost to clear them, the idea of free banking is perhaps left best on the shelf.

There is clearly nothing wrong in aggressively expanding the debate and underscoring the revolutionary nature of new technology nor in declaring its promise as favorable to a more liberal market economy. As Goethe said, “Whatever we can do, or dream we can, begin it. Boldness has genius, power and magic in it.” Foldvary, Klein and Company are certainly bold and in due course will find their ideas more palatable as technology marches on.

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