An ancient legend has it that a Roman emperor, asked to judge a singing contest between two entrants, heard only one contestant and gave the prize to the second under the assumption that the second singer could be no worse than the first. The problem with the Emperor’s judgment, of course, was that his assumption was unwarranted. The second contestant might have been much worse.

Unfortunately, much of the popular debate concerning whether the market or government should be relied on to provide certain goods and services follows the same myopic pattern of behavior as that of the Emperor. When the market economy can be shown to “fail” in some area, it is simply assumed that the government can provide the service better. One of the most important tasks of economic education is to reverse this lopsided way of thinking.

Adam Smith, for example, argued in The Wealth of Nations that not only would the government not be in a position to efficiently judge the best use of scarce resources, but that “The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could be safely trusted, not only to a single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

The great French economic journalist, Frederic Bastiat, wrote in his classic essay, “What is Seen and What is Not Seen,” in Selected Essays on Political Economy that “There is only one difference between a bad economist and a good one: the bad econo mist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” The full extent of the harmful effects of such government policies as taxes, public works, and restraints of trade unfortunately can only be gleaned by a careful and thorough examination of interventionism and its effects (both direct and indirect) on the economy.

Though the debate over government versus free market is old it is never ending. Each generation must fight the battle anew. The free market response to advocates of government intervention is twofold. First, it must be pointed out that many so-called market failures are not really failures of the market but instead the consequence of government failure to clearly define and strictly enforce private property rights. Second, it must be stressed that even in situations where the market could be said to fall short of the optimality conditions of the best of all possible worlds, the proposed government remedy may actually worsen the situation. This type of argument has been put forth by generations of economists from Adam Smith to J. B. Say to Ludwig von Mises to F. A. Hayek to Milton Friedman to James Buchanan. Sometimes their arguments have carried the day—if not in policy implementation at least in policy discussion. At other times, the teachings of economists who possess a boundless optimism concerning the ability of the government to solve our problems dominate. Economists who favor government intervention in a wide array of economic affairs, such as John Maynard Keynes, Paul Samuelson, and John Kenneth Galbraith, have more or less dictated the terms of the debate for most of the post World War II era.

During the 1980s, the terms of the debate shifted so that the burden of proof was on those who proposed government intervention. Unfortunately, the debate has shifted back again so that the presumption in the policy debate is that the government can provide an easy and efficient remedy to economic ills. The recently released Economic Report of the President, written by the administration’s leading economists Laura D’Andrea Tyson, Joseph Stiglitz, and Alan Blinder, officially signaled the shift in the terms of the debate. The Report calls for economic intervention by the government, including “microeconomic initiatives to promote efficiency and productivity.” As the New York Times (February 15, 1994) pointed out, the Report does not examine the age-old free market litmus test for justifying government action (i.e., identifying the market failure, and then examining whether the government could outperform the market in dealing with the problem). Instead, the Report identifies market failures alone. As Laura D’Andrea Tyson stated herself in the press conference to announce the publication of the Report, “I think there is something different in the whole tone of this . . . . There is a lot here implicitly about the role of Government to do something that would be beneficial . . .”

Laura D’Andrea Tyson, Joseph Stiglitz, and Alan Blinder are accomplished economists—in many ways leading representatives of their generation. Their arguments must be addressed in the most scholarly manner possible. We will find neither a complete nor effective answer to their arguments in Mises or Hayek or Friedman or Buchanan, let alone Smith or Bastiat. Repeating the basic principles of the free society taught by these great thinkers is not enough (though, of course, it is a good start). Instead, we must find the answer to these “new” challenges to the market economy ourselves.

As Mises pointed out in his preface to the Henry Regnery edition of Adam Smith’s great treatise, “the reader will [not] find in the Wealth of Nations a refutation of the teachings of Marx, Veblen, Keynes, and their followers . . . . Read the great book of Smith. But don’t think that this may save you the trouble of seriously studying modern economics books.” Similarly, the debate has now shifted to a new generation. Free market thinkers must address the questions of 1994 and beyond, with fresh refutations of modern theorists who favor government solutions over the voluntary choices of individuals within the market.

—Peter J. Boettke