ECONOMIC
LIBERTY 101: A Crash Course for California's Governor Gray Davis
By
Michael Giorgino
Governor
Gray Davis sat stone-faced while President Bush told California
business leaders, "Price caps do nothing to reduce demand,
and they do nothing to increase supply." Davis then renewed
his demand for price controls on energy, threatening a lawsuit to
force the administration to impose federal caps on the rates charged
by out of state generators.
President
Bush wants to get government out of the way, unleashing the limitless
potential of American business to increase supply in pursuit of
private profits. Governor Davis wants to place a noose around the
necks of energy producers, expecting them to provide power at the
point of a gun.
Bush
is right, and Davis is wrong: price controls cannot work. Government
imposed maximum prices always lead to shortages. (This is
even true in wartime, when scarce price-controlled commodities are
taken off the shelf and sold at high prices on the Black Market.)
Davis should read the works of the 19th Century French
economist Frederick Bastiat, who taught that every economic regulation
has both seen and unforeseen consequences. The key is the ability
to anticipate those unintended effects, which are often disastrous.
Thus, "the bad economist pursues a small present good that
will be followed by a great evil to come, while the good economist
pursues a great good to come, at the risk of a small present evil."
The
governor could also learn a lot from 20th century economist
Henry Hazlitt. In Economics in One Lesson, he identified
the two unintended consequences of price controls: First, demand
risessince the commodity is cheaper, people can afford
more of it. Second, production decreaseswith profits
slashed, marginal producers go out of business (see Pacific Gas
and Electric) and efficient producers have no incentive to turn
out their product at a loss. What always occurs when government
caps prices is shortages.
The
essential role of profits in achieving market efficiency is not
a new concept. Davis must know of Adam Smiths The Wealth
of Nations, published in 1776. The Scottish economist
noted that the typical investor "intends only his own gain,
and he is . . . led by an invisible hand to promote an end
which was no part of his intention. . . By pursuing his own interest
he frequently promotes that of the society more effectually than
when he really intends to promote it. I have never known much good
done by those who affect to trade for the public good."
Human
effort works best to supply human needs and satisfy human desires
when men are free. This is as true of electrical power as anything
else. The market works efficiently when government is limited, property
rights are respected, and individuals are left alone to pursue their
individual happiness. Even more important than the economic case
for liberty is the fact that capitalism is the only truly just
system ever devised by mankind!
In
a free market, producers are allowed to keep what they earn. Trade
is voluntary. No force is involved. Human relationships are based
upon persuasion and agreement, not coercion. Men compete with one
another in the marketplace to offer the best quality products and
services at the cheapest prices. All parties benefit, in an ever
expanding world of mutual prosperity and good will. It is only when
force is initiated by government that the individual incentive to
cater to the needs of others is interrupted.
I
wish Governor Davis would read Ayn Rands novel Atlas Shrugged.
It is a work of genius, proclaiming the crucial importance of mans
mind, and describing in detail what happens when government condemns
men of ability as greedy and selfish, destroying industry after
industry with ever widening controls. Rand wrote, "There is
no conflict of interests among men, neither in business nor in trade
nor in their most personal desiresif they omit the irrational
from their view of the possible and destruction from their view
of the practical." Instead of declaring "war" against
out of state generators and demanding Washington point guns at them,
Davis might come to see these producers as the true heroes of
the energy crisisthe men and women whose intelligence and
respect for reality offers Californians their only opportunity to
keep the lights on this summer.
With
some in depth classical liberal education, Governor Davis might
come to see that the only way out of this mess is to do what President
Bush suggests: Unchain producers! Eliminate price controls. Remove
restrictions on mergers and acquisitions. Lift counterproductive
land use regulations. Support a balanced approach to environmental
regulation, committed to maintaining clean air and water while allowing
rational development of energy resources. Above all, recognize that
the unshackled human mind is the fountainhead of all human progress.
Mike
Giorgino retired as a Commander from the U.S. Navy in 1997. He graduated
from the University of San Diego School of Law in December 1999.
He currently practices law in San Diego. He may be contacted at
[email protected].
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