Markets aren’t perfect – but are far better than the alternative

 
Allister Heath

MOST economists have a limited shelf life. I suspect that Thomas Piketty, the fashionable French socialist whose book on wealth and inequality is topping the charts, will ultimately fall into that category. Gary Becker, a brilliant US Nobel Prize winner in economics who died on Saturday, is the exact opposite: he will continue to influence the way we think for centuries to come.

Becker specialised in showing how markets, while imperfect, work better than government intervention. It is a shame he was never unleashed of some of today’s wooly thinkers here in Britain. There is no way that he would ever have agreed with those who feel that the government should intervene in Pfizer’s bid for Astrazeneca. Shareholders should decide, not politicians; countries should introduce the right policies to make sure that economies prosper, grow and create jobs, not seek to direct corporate decisions. Of course, markets do get it wrong – but political interference, on average, is far worse. As Becker rightly put it, “the recommendation of government intervention does not follow from the demonstration that government intervention could improve matters”; to argue otherwise is to have committed a non-sequitur or to have made the incorrect assumption that politicians have not only superior knowledge but also no interest in buying votes or pandering to the electorate.

Becker made his academic name by extending microeconomic reasoning into a series of new areas, including crime, family life and education. He showed that criminals respond to incentives – that the higher the probability of detection and the higher the expected cost of being caught, the less crime we get, for a given propensity towards law-breaking, and vice versa. This helped revolutionise criminal policy, and the spread of a more rational approach towards crime-busting and law enforcement is one central reason why crime has fallen in the UK and the US, especially in urban areas such as London and New York.

Becker also showed that education is a form of human capital and is often more valuable, in terms of generating a rate of return, than traditional, physical assets. Parents and individuals who invest in education and skills are well aware of this – in fact, rate of return calculations are second nature for anybody planning an MBA. But such ideas need to become ubiquitous to make sure young people don’t go to university for the wrong reasons, or end up studying the wrong courses.

But Becker’s work as a commentator shows why free-market economists, classical liberals and libertarians don’t fit into some of the traditional boxes of contemporary politics. Take Becker’s last two blogs. In the most recent, Becker called for the ending of trade sanctions on Cuba; in the penultimate he called for the legalisation of marijuana. These are policies usually embraced by the “left” and rejected by the “right”; and yet Becker was inevitably described as a right-winger.

In reality, he simply applied his principles consistently. He argued that “powerful drug cartels ... have made enormous profits from their trafficking in drugs. The Mexican government’s battles with these cartels have caused tens of thousands of deaths, and wholesale corruption of Mexican police... The trend toward legalization of marijuana in America is lowering the profitability of Mexican cartels and weakening their hold over the Mexican population.” As to Cuba, he argued that the embargo had provided politicians with an excuse for the poor performance of their economy, in reality due to the destructive effect of socialism: “Free trade is a principle that the United States should follow except in extraordinary circumstances...such a move [would put] added pressure on the Cuban government to end its failed experiment with communism.”

It is such a shame he never got the opportunity to tear today’s British protectionists to shreds on Astrazeneca.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath