“The benefits of allowing the free market in oil and gasoline to operate, particularly in the moment as opposed to several months or a year down the road, are not only diffuse and widespread but cannot be directly compared to the immediate, concentrated, and highly visible costs being realized in the oil industry. In fact, most of these benefits have yet to occur.”
There is a proposition in public choice economics called the special interest effect. It basically argues that government grows because, for most government programs, there are concentrated beneficiaries and diffused cost bearers. What this means is that the benefits of government programs will fall on relatively small, easily definable and therefore organizable groups, i.e. special interests, while the costs will be thinly spread across the population as a whole.
For politicians who support a program, this means that it is relatively easy to point to those who will benefit from it. For those opposing the program, it is much more difficult to identify in any precise manner who will be bearing the costs. And even when this is possible, the costs for each individual will be so small that no one will have a strong incentive to expend resources working against it. The concentrated beneficiaries on the other hand will have a much greater incentive to put resources into lobbying in favor of the program. For this reason, new government programs, like, for example, free community college for “all,” become politically appealing.
A problem of selling the free market is that often, when resource allocation is left to the process of free exchange, the opposite is true — there are concentrated cost bearers and diffused beneficiaries. In other words, when there are changes in the market, possibly due to new technology, the benefits will be widely spread and not readily identifiable while those who bear the costs are members of a clearly identifiable group. This could be called the “general interest effect” and, unlike the special interest effect, which works in favor of new government programs and intervention, this effect works against defending the free market or reversing the growth in government.
Falling Oil Prices
We are seeing this right now with respect to the falling price of oil and gasoline. Almost on a daily basis there are stories in the press about how falling oil and gasoline prices are causing layoffs in the oil industry. Particularly hard hit are states like Texas and Oklahoma. (This article at Dailyfinance.com is typical.)
The jobs being lost in the oil industry, concentrated costs, are very visible. Television news reporters can travel to the oil fields of Texas or to fracking sites in the Dakotas and easily find people who are being laid off from their jobs because of the dramatically lower prices and the cut backs in production that they are causing.
Are there offsetting benefits to the lower gas prices? Yes! In fact, they will be more than offsetting. They will lead to more goods and services being produced throughout the economy and lower prices.
Gasoline and other petroleum-based fuels and products are an input into every production process, everywhere, some more than others. As I noted in a previous newsletter, at every stage of production agriculture is fuel intensive. The USDA describes agricultural production as “sensitive to energy costs,” and “higher energy-related production costs … generally lower agricultural output, raise prices of agricultural products, and reduce farm income.” Of course, this means that the opposite is also true: Lower energy costs will result in greater output, higher farm income and employment, and lower food prices.
This consequence of lower oil prices is likely to be experienced, to one degree or another, throughout the economy. And not just because of lower fuel prices, but because there are literally thousands of products that we use everyday that have petroleum as an input. This includes everything from automobile tires, to paint, perfumes, and nail polish.
The problem is that these benefits, while likely to be substantial, will take time and will spread throughout the economy in often untraceable ways. In other words, the benefits will be diffused, and it will not be so easy for reporters to shine a spotlight on precisely who the beneficiaries will be. Many more jobs will be created in these industries as lower input costs filter through the economy and production expands than will be lost in the oil industry.
The benefits of allowing the free market in oil and gasoline to operate, particularly in the moment as opposed to several months or a year down the road, are not only diffuse and widespread but cannot be directly compared to the immediate, concentrated, and highly visible costs being realized in the oil industry. In fact, most of these benefits have yet to occur.
Intervention Effects
For this same reason, the general interest effect also makes it difficult to explain the benefits of repealing existing interventions. A good example of this in North Carolina would be the repeal of certificate of need laws (CON), which protect large hospitals from competition by forcing anyone who wants to enter the hospital services market to jump through a labyrinth of regulatory hoops to prove that their services are “needed.”
If this legislation were repealed, the general public would clearly benefit from more expansive and more diverse medical care competition. But these benefits would be spread across all health care consumers, and there is no way to know what new opportunities would come about as a result of the expanded competition. On the other hand, the costs of repeal are concentrated on entrenched hospital interests, giving them a strong incentive to oppose any change and devote large amounts of resources to making sure that change doesn’t occur.
The challenge for those of us who, as a matter of principle, are trying to “sell” the free market, is to somehow make these broad based and often not clearly identifiable benefits known and understandable to the general public.
As someone who has been working at this for many years, I can attest to the fact that it is not an easy task.
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Dr. Roy Cordato, vice president of research and resident scholar at the John Locke Foundation, is a distinguished (generation six) practitioner of the Austrian School of Economics. His doctoral dissertation, published as Welfare Economics and Externalities in an Open Ended Universe, is a major contribution to the literature informing economists of the caveats and limits to traditional cost/benefit analysis, which so often is used by government planners to usurp private property rights.