Sunday, January 27, 2008


One of the arguments made against the free market is that businesses are shortsighted - only concerned about short-run profits. Now, I'm not going to make a sweeping claim saying "no they aren't" because that would be simplistic (just as the original claim is). The truth of the matter is that some business are shortsighted and, of course, some aren't. The market process has a way of sorting out those entities whose vision (short or long) doesn't align with consumer interests.

My own personal experience shows that companies can be both long- and shortsighted at the same time. For example, I currently work in the rail industry as a software architect. Like a lot of technology companies, there is a tendency to produce software quickly without looking at the long-term costs of "rushing to get into production." While at the same time the rail industry is spending billions to upgrade their rail network. In one case you have a short-run view to get products delivered, while in another you have a long-run view of protecting future revenue.

I had a discussion with someone this week about the health care industry and whether or not such companies were shortsighted. He gave the example of the shortsighted companies that just wanted to produce drugs, for example, that only dealt with treating current problems and not investing in research for cures to diseases like cancer. (This was also part of discussion about the so-called conspiracy to keep the cancer cure secret from the public.) This is not true, of course, because there are lots of companies spending billions to find cancer cures. What the correct mix of investment for producing treatments for current problems and searching for new cures is something only the market process can determine.

I bring this up because the claim that the market is shortsighted goes along with the claim that government is better at long range planning. This is silly on its face because politicians have an incentive to pander to constituents on a time frame based on the next election. A perfect example is ethanol. Everyone knows that ethanol is at best no better than regular gasoline, and when all environmental impacts are taking into consideration, may even be worse. Yet we spend billions on subsidizing ethanol in part because Iowa is the first test for presidential candidates.

Anyway, Steven Landsburg has a great article on the shortsighted "stimulus" plan now circulating in Washington (HT: Cafe Hayek). Here's a quote:
Ultimately, the only solution to unemployment is for displaced workers to get retrained and find their way back into the workforce. The new stimulus package only delays that process by propping up dying industries for a while and postponing the day of reckoning. Ultimately, there will be just as much hardship because the stimulus package can't last forever. Why spend all this money trying -- and probably failing -- to delay the inevitable?

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