March 18, 2008

Principle Begets Innovation

Justin Katz

Tom Sgouros decries the lack of worthy investments for people with money. The problem, he's arguing, isn't that the wealthy don't have the money to invest; it's that they have nowhere to invest it; they're holding it or directing it to safer investments. Me, I'll take his argument at face value, because I think he points to a more fundamental, and ultimately more important, discussion:

To be sure, there are still niches to find and exploit, but in a world with the global competition we have now, those opportunities are narrower and more elusive than they once were. Our problem isn't a shortage of investors or funds to invest, but a real shortage of places to invest them.

Instead of showering our largesse on the investor class, shouldn't we instead be focusing our resources on all the other essential parts of the equation: the inventors, the markets, the workers, the supply chains? Just as an example, recent talk about finding renewable energy opportunities, like building blades for giant wind turbines at Quonset, or creating local markets for clean electricity, seem much more on target to address these problems than current state policies. If you understand our economic issues this way, slashing school and university funding to benefit investors hardly seems to answer the needs we face, but that's what's in store this year.

Just to be clear, we're not talking government subsidies for investment; we're talking "cuts in corporate and income taxes," as well as capital gains. That being the case, conservative readers will surely pick up on, and object to, Sgouros's view that allowing people to keep money that they've earned is equivalent to "showering our largesse" on them. To the contrary, as a key matter of principle, it isn't "our" money; it's theirs, and if they were to remove themselves from our tax base (speaking especially in the context of Rhode Island, here), then we'd have none of it.

I agree, however, that we have to focus (our intellectual resources, anyway) on "the inventors, the markets, the workers, the supply chains." The question is how we do such a thing. Sgouros makes a somewhat oblique reference to the fashionable green energy industry, but he doesn't explain what it would mean to "focus our resources on it."

Curiously absent from these discussions, it seems to me, is any mention of what motivates our ostensible targets. What do inventors and workers want? What creates markets and facilitates supply chains? Well, workers want to make a living. Inventors are the same, but are often driven by intellectual curiosity to chase specific ideas. Markets arise when people want or need something, and supply chains develop to... err... supply them and their components.

These are all intentions and actions that arise unbidden. They do not need government bureaucrats and special interests to get together around a mahogany table in an air-controlled room so that they can step beyond the door to a pool of waiting microphones and announce to the society what direction would prove profitable. Inventors will solve problems and seek applications for their innovations. The people who comprise markets will look for what they want. Businesspeople will attempt to marry available technologies with apparent demand. Marketers will work to coax that demand along. And workers will calculate their own equations of need, interest, and ability to find the best opportunities for themselves.

An elite Board of Social Direction can only retard this process. By its nature, such a body begins with a priori requirements (which are ultimately political), and the only market that it can promise, it must wrest from all of the above citizens for reallocation. As much as that approach may periodically be necessary (in times of calamity and war), it is by no means efficient and too often proves irrevocable.

It oughtn't be controversial to suggest that the class of people who exist somewhere between neediness and opulence are so positioned that they will, by opportunity and necessity, make the most productive use of resources, but only rarely is a public entity most advantageously positioned to decide what that use ought to be. In attempting to allocate resources, that entity will more often overlay unnecessary and counterproductive obstacles.

To maximize a system of competition, the proper role of government is to facilitate the removal of obstacles that create unequal barriers to entry. That can mean physical obstacles, such as those literally lying in the path of transportation, but it can also mean regulatory obstacles — minimum wages and benefits, mandatory coverages, insurance, and other costs imposed by government.

People love to imagine that they can determine specific and ideal courses for their local societies, and many have direct interests in particular political outcomes, but even if one takes the tack that all wealth is ultimately "our" wealth, a largesse that we dispense at our pleasure, it's a whopper of a presumption that we can collectively elect or appoint a board with sufficient good will, objectivity, and intelligence to direct our economy.

In short, if we truly are to the point that further "tax cuts for the rich" only serve to give them money for which they've no productive use, it shouldn't fall to government to fabricate areas of investment. Rather, just as it has let out the monetary leash, so to speak, for an investor class, it must now let out the regulatory leash such that innovators and workers can more easily slip through the door.