A cure can be worse than the disease

A man was drinking beer and watching soccer with friends. "I don't know what to do with my son," the father confided in his buddies. "Every morning his bed is soaking wet. I tried all kinds of diapers. I sought advice from pediatricians' websites. I experimented with three kinds of drugs that gave him nosebleeds, insomnia, and seizures. Nothing works. Should we try surgery?" One of the less inebriated men in front of the TV looked up and suggested, "If I were you, I'd try to fix the roof first. It's the monsoon season, you know."

Governments, even those in mature democracies, often act like the criminally stupid father from that anecdote. In their efforts to "stimulate" the economy in recessions, they max out their nations' credit cards. Trying to cope with the consequences of irresponsible spending, they create inflation. In an attempt to "cure" inflation, they use price and wage controls. When the effects turn out to be shortages, black markets, and economic stagnation, the new crisis seems to beg the political class to supply more bureaucratic regulation and more direct interventions in the market.

Unfortunately, most government meddling with supply and demand is driven by special interest concerns that ignore the basic lessons we learn in our introductory economics courses-those involving opportunity costs and perverse incentives. Even in cases when market participants, left alone, fail to allocate resources in a manner that maximizes social wellbeing (such as natural monopolies and neighborhood effects), we may do better trying to improve the rules of the game instead of relying on an arbitrary decision-making mechanism within a federal regulatory agency. It is irrational to refuse so often to make a serious cost-benefit analysis before we vote for more political interventions in the economy.

Governments may be useful, perhaps even indispensable, in discovering the correct principles for the creation of a legal framework supporting free market interactions. Political mechanisms, authoritarian or democratic, have never been good at running the show. That is the reason why we need to re-read every so often the works of Friedrich Hayek and Milton Friedman. Their insights serve as constant reminders to be very careful what powers we delegate to our public servants for the purpose of fixing undesirable market outcomes.