Technology and Free Enterprise
Does technological progress require more or less government intervention in the economy? The evidence is that advancing technology makes the intellectual and theoretical case for free enterprise stronger than ever.
by Fred E. Foldvary, Senior Editor
The truly free market has always been morally and economically justified, but economists have found alleged imperfections in a free market. Now economists have found that recent technological progress has made many of these alleged problems recede into insignificance, so that the case for a pure free market is brighter than ever.
Economists generally recognize that competitive markets allocate resources to their most valued uses, so any intervention creates a social burden on the economy and leaves folks less well off. But conventional economic texts have claimed that there are some flaws in a free market that require government correction.
First, there is asymmetric knowledge. That's when one party knows a lot about a product, and the other, usually the buyer, knows very little. For example, I know very little about how cars work, while the mechanic at place where I have my car serviced knows a great deal. So the argument is that the savvy seller can and will exploit the ignorant and gullible consumer. That is the rationale for consumer protection laws, including licensing.
Secondly, there is the problem of natural monopolies, enterprises with a very high cost of fixed capital goods and a low cost for each user. Piped water is an example; there is a large investment in the city water pipes, and it would be uneconomical to put in a whole nother set of pipes.
Third, there is the alleged problem of public goods. According to conventional economic theory, the market process fails to provide an optimal amount of public goods because of free riders, who can benefit from collective goods without paying for them, since once the goods are there, they are available to all.
Advances in technology have diminished these market flaws. A key effect of better technology is to reduce transaction costs, the costs of doing business beyond the direct payment for goods. With lower transaction costs, everyone can get information cheaper and faster, and the asymmetries are diminished.
Another effect of technology is to reduce the costs of production. For example, with cheaper localized electricity generation and water purification and recycling, what were natural monopolies become naturally competitive.
Small-scale production by microturbines is increasingly economical. On-site generators can make office buildings, factories, and residential communities independent of a central power supply. Also, the cost of building competing grids has fallen, reducing the fixed costs. Electric monopolies are no longer natural.
Private enterprise is developing better civic technology, of administering and creating whole communities, and that enables proprietary communities, owned and operated by private enterprise, as well as land trusts, cooperatives, residential associations, and condominiums to provide public goods. It is now more economical to have private streets and highways, paid for by user charges.
An example of reducing transaction costs is the new technology for collecting tolls and charges. With the old toll roads, you had to go through a collection point where a person had to physically take your money, causing lines and delays. Now tolls can be registered electronically, and you don't need to stop. That not only enables tolls to be collected and billed, but the toll can be changed during the day so that the charge can be just high enough to eliminate congestion.
Similarly, recently developments in parking meters enable them to collect fees flexibly, letting you park all day if you want, and charging according to how crowded the street parking is. The ideal is to always be able to find a spot within a block or two.
In these ways, advancing technology makes private enterprise as well as government services more effective. The tech reduces transaction costs, makes knowledge available, and makes small-case production cost effective.
But to fully unleash technology and entrepreneurship, we need to unshackle enterprise entirely. We need to untax productive activity and eliminate trade barriers from physical as well as virtual enterprises. Community services generate land value that can then be tapped to make the services self-financing. Public finance should use land rent and charges on the bad side effects of production, such as pollution. Eliminate the restrictions and taxes on innovations, and we will have better lives. Technology is not anti-nature. Technology leverages natural physical and biological laws to empower humanity and use resources better.
-- Fred Foldvary
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Copyright 2000 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.