Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

is a second more subtle point. Even if government has an important role to play in the economy, such as building roads and bridges, it does not follow that government must actually do the work. Government employees do not have to be the ones pouring cement. Rather, government can plan and finance a new highway and then solicit bids from private contractors to do the work. If the bidding process is honest and competitive (big “ifs” in many cases), then the project will go to the firm that can do the best work at the lowest cost. In short, a public good is delivered in a way that harnesses all the benefits of the market.

This distinction is sometimes lost on American taxpayers, a point that Barack Obama made during one of his town hall meetings on health care reform. He said, “I got a letter the other day from a woman. She said, ‘I don’t want government-run health care. I don’t want socialized medicine. And don’t touch my Medicare.’” The irony, of course, is that Medicare is government-run health care; the program allows Americans over age 65 to seek care from their private doctors, who are then reimbursed by the federal government. Even the Central Intelligence Agency has taken this lesson to heart. The CIA needs to be on the cutting edge of technology, yet it cannot provide the same incentives to innovate as the private sector can. Someone who makes a breakthrough discovery at the CIA will not find himself or herself worth hundreds of millions of dollars six months later, as might happen at a Silicon Valley startup. So the CIA decided to use the private sector for its own ends by using money appropriated by Congress to open its own venture capital firm, named In-Q-It (in a sly reference to Q, the technology guru who develops gadgets for James Bond).1 An In-Q-It executive explained that the purpose of the venture was to “move information technology to the agency more quickly than traditional Government procurement processes allow.” Like any other venture capital firm, In-Q-It will make investments in small firms with promising new technologies. In-Q-It and the firms it bankrolls will make money—perhaps a lot of money—if these technologies turn out to have valuable commercial applications. At the same time, the CIA will retain the right to use any new technology with potential intelligence-gathering applications. A Silicon Valley entrepreneur funded by In-Q-It may develop a better way to encrypt data on the Internet—something that e-commerce firms would snap up. Meanwhile, the CIA would end up with a better way to safeguard information sent to Washington by covert operatives around the world.

In the private sector, markets tell us where to devote our resources. While sitting in the center-field seats at a Chicago White Sox game, I spotted a vendor walking through the stands wearing what was prominently advertised as the Margarita Space Pak. This piece of technology enabled the vendor to make frozen margaritas on the spot; somehow he mixed the drinks in his backpack-like device and then poured them through a hose into plastic cups. The ostensible social benefit of this breakthrough technology was that baseball fans could now enjoy margaritas, rather than just beer, without leaving their seats. I suspect that some of our country’s top engineering minds—a scarce resource—devoted their time and effort to creating the Margarita Space Pak, which means that they were not spending their time searching for a cheaper, cleaner source of energy or a better way to deliver nutrients to malnourished children in Africa. Does the world need the Margarita Space Pak? No. Could the engineering minds that created it have been put to some more socially useful purpose? Yes. But—this is an important point—that’s my opinion and I don’t run the world.

When government controls some element of the economy, scarce resources are allocated by autocrats or bureaucrats or politicians rather than by the market. In the former Soviet Union, massive steel plants churned out tons of steel, but the average citizen couldn’t buy soap or decent cigarettes. In hindsight, it should not have been a surprise that the USSR was the first to send a rocket into orbit (and equally obvious that it would not invent the Margarita Space Pak). The government could simply mandate that resources be spent on the space program, even if people would rather have had fresh vegetables or tube socks. Some of these resource allocation decisions were tragic. For example, Soviet central planners did not consider birth control to be an economic priority. The Soviet government could have made contraceptives available to all; any country that can build intercontinental ballistic missiles has the know-how to make a birth control pill, or at least a condom. But contraception simply was not where central planners chose to channel the country’s resources, leaving abortion as the only form of family planning. In the years of communism, there were roughly two abortions for every single live birth. Since the collapse of the Soviet Union, Western contraceptives have become widely available and the abortion rate has fallen by half.

Even in democratic countries, the political process can devote resources to some pretty strange places. I once interviewed a technology expert about the government’s plans at the time to build a high-speed particle accelerator (a good example of basic research). The accelerator would bring jobs and federal money to the location that landed the project. This was in the early 1990s, and the two leading sites were northern Illinois and somewhere in Texas. According to the fellow I was speaking with, Illinois was the more attractive site because it already had a particle accelerator and a major federal laboratory. Much of the scientific infrastructure was in place and would not have to be duplicated. Despite that, the project was sited in Texas. “Why?” I asked. This guy looked at me as if I were some kind of idiot. “Because George [H. W.] Bush was president,” he answered, as if there could be no