Show-Me Institute Podcast
Why Markets Matter for Human Progress with Russell Sobel
James V. Shuls speaks with Russell S. Sobel, Professor of Economics and Entrepreneurship at the Baker School of Business at The Citadel, about his latest paper, "Why Markets Matter for Human Progress & Prosperity." They discuss how free markets drive innovation, prosperity, and human flourishing, the historical context of market-based economies, the pitfalls of government intervention, the long-term benefits of entrepreneurship and competition, and more.
Read the full paper here: https://bit.ly/3zISjZA
Produced by Show-Me Opportunity
- Duration:
- 29m
- Broadcast on:
- 15 Jul 2024
- Audio Format:
- mp3
(upbeat music) - Hi, I'm James Schulls, the Director of Research and a Senior Fellow at the ShowMe Institute. You know, at the ShowMe Institute, we're constantly talking about free markets and trying to promote free markets. We talk about free market policy and all sorts of areas. And one of the things we realize is that people seem to forget why free markets matter. And so we thought of doing this new paper series, really explaining why free markets matter. And I'm delighted to be with the author of our first paper in this series, Why Markets Matter for Human Progress and Prosperity, Russell Sobel, thank you so much for joining me. - Thank you so much for having me today, I appreciate it. - Well, I wrote up a little blurb about our series and what it's supposed to capture, but I'm gonna skip what I wrote because I think what you wrote in your paper captures it even better than what I had thought. So here's a quote from your paper. We seem to be a people with amnesia, forgetting the principles and policies that have paved the way for unprecedented progress throughout the world. Instead of cheering the progress produced by free markets, Americans have increasingly embracing socialism and big government policies. That captures exactly what we were thinking. Tell me more, what led you to that conclusion? - Well, I think it's actually kind of amazing. I mean, my 50s just to kind of give away my age, but when I was a child growing up, it was the Cold War era, it was the United States versus the Soviet Union, the two big dominant forces in the world. And what happened when the Soviet Union fell is we realized that basically after three generations of socialism, their people rose up over through their government. They were at the time about, only about half as rich as the average American. I mean, basically the socialist system had proven itself not as effective at creating wealth and prosperity as America and the market economy. And we thought we'd won kind of so to speak in terms of the free markets, just dominating the world. After the fall of the Soviet Union, most of the countries affiliated with the Soviet Union and the Eastern block moved toward market economies. Shoot, we've now got a situation where Estonia and Lithuania, which were actually former Soviet republics, along with the Czech Republic, which was part of the Eastern block, are now all in the top 20 most pre-market economies on the face of the planet. And twice as rich now as their counterparts who haven't moved as much toward markets. But we thought we had won in that the whole world was kind of moving towards markets and it had demonstrated itself. But what seems to have happened over the last decade or maybe two decades is that there's been this, the Bernie fans, I say, kind of if you want to put them in that category. It's like, you know, these, they have college students in America who are out there saying socialism is great and we need to move towards it. And there seems to be this trend, you know, towards wanting government to do more and less reliance on markets. And it's kind of amazing that that's happening given the evidence of how much better that the market economy is, even for the poorest people in every society than is central planning and control. And I kind of tried to write up, you know, for you guys, this little report to kind of remind people of why markets are well and why they do produce so much prosperity. - Well, and we're going to talk about that more, but I want to dig into your background just a little bit. Right now you're a professor at the Citadel in Charleston, South Carolina, Economics and Entrepreneurship. You are an author of a popular, you know, principles of economics textbook. What led you this direction, you know, how did you get so passionate about markets and what led you to where you are? - That's a very good example of irony of that. There's actually a really good personal story that I rarely get a chance to tell about that, which is I grew up in Charleston, South Carolina. So I'm back in my hometown now. And I was there during Hurricane Hugo, which was a really devastating hurricane that hit the area when I was a teenager. And the first thing that happened is our government imposed all these price controls. And the price controls were a disaster. I mean, basically that they resulted in it making and it possible for people to get goods and services. And everybody was like, please remove the price controls, but there was all this anyway. So it was one of these things where I saw the power of markets. I was in college, I went to my economics classes and just fell in love with the ideas of economics because they helped me understand the world around me. And anyways, so I ended up getting my PhD in economics from Florida State University. And mostly in public finance and public choice, which is the economic analysis of government policies. And I've had a couple of different university jobs over time, but at one of them, I got an opportunity to be the founding director of an entrepreneurship center. So what happened as a result of that is I really transitioned my work by research into this overlap between economics and entrepreneurship, which I think is an area that not a lot of people pay enough attention to even the principal's textbook that I write, which does have probably some of the best entrepreneurship coverage on the market. Most principals books don't really have much coverage of entrepreneurship. And it's a shame because we have some economists from the past, like Joseph Schumpader, who I hope we have a chance to talk more about today, who have really added your understanding of why markets are so good at creating prosperity and wealth over the longer time horizon. So anyway, I ended up getting a chance to move back home to Charleston, South Carolina. And I'm at the Citadel now. And I do teach classes in both entrepreneurship and economics there and still continue to write my textbook and do research. - Well, when I first pitched this idea to you, I think you brought up Schupader in like the first conversation probably 'cause you were really excited about this concept of creative destruction. Tell us more about what that is. - Yeah, so Joseph Schumpader is kind of famous for a couple of things, but the most important of which is his concept of creative destruction. We all think of entrepreneurship as something creative, entrepreneurs inventing new things like Henry Ford, bringing us the automobile that we could all afford. But what Schumpader pointed out was that, equally important is the process is the destruction part. And that is that the automobile replaces the horse and buggy and results in the unemployment of tens of thousands of people who were raising horses, making the wagons, making all the leather fittings for the horses. And, you know, when I was in college, here's a funny story for you. When I was in college, I worked at Blockbuster Video's biggest competitor, Picaflic Video. And actually the funny thing is when I was a freshman in college, my dream after getting my business major was to go back and be the regional manager for Picaflic Video in Charleston, South Carolina area. That job doesn't exist anymore thanks to Netflix. You know, Picaflic always thought Blockbuster was running them out of business. And Blockbuster always thought it was Picaflic, but Netflix ran us both out of business. And, you know, creative destruction is this constant process by which new things replace the old way of doing things. And it's very disruptive. I mean, there's malls around America that are sitting there empty now that, you know, 20, 30 years ago were packed, you know, and hard to find a place to park at. And it's a very disruptive process. You have taxi drivers, protest in Uber and whatever. And, you know, there's constant calls on government to slow this process down to protect jobs, to stand in the way of it. And what Joseph Schumbater points out to us is that if you want to have prosperity over the long run, you have to let this process unfold. We're so much better off today because we have the automobile rather than the horse and buggy. But, you know, the horse and buggy industry association of America actually tried to get Congress to outlaw the introduction of the automobile based on how many jobs it would destroy. And it did. I mean, there was tens of thousands of people who lost their jobs, but that was a short run transition. And, you know, decades later, we're better off letting it unfold. And I think it's very important to understand that it produces long run benefits that far exceed the short run transition costs. - Yeah, so the opposite of markets, in this case, would really be protection of these industries, not letting them fail so that we don't want those jobs to go away. You mentioned, I think, in the paper, the pickle mall, you know, I wonder about the whole pickle ball craze that's going on right now. - Well, where would that be if it hadn't been for the death of retail in many places? You know, what are the malls here close by? Has pickle ball courts inside of it? Were there used to be, you know, shops set up and whatnot? So you see that in so many areas of our lives, you see places in which innovations are replacing things that we thought would be there forever. Like you're, what was it called, pick a flick? Is that the name of your? - Pick a quick video, yeah. - But, you know, I was just in, I was in Phoenix, I think not too long ago. I'm sitting there having a drink with a friend and a car drives by with no driver in it. Drops off a passenger, goes along the way. That's something that's going to disrupt a lot of jobs. Is that something we should be scared about? Should we ban those types of things? What do you think? - Yeah, exactly. And everybody's worried about AI and the jobs that's going to replace and driverless trucks, all those things, right? And what we've got to realize, and it's hard, I guess, for maybe for college students to do so, especially because they haven't lived through the things that some of us older people have, is that, you know, when the computers were first getting introduced, my gosh, when I went to Florida State University for graduate school, the Secretarial Pool consisted of 20 full-time workers who typed up every exam, every, you know, now you visit Florida State as an alumni, the department's got like one person in that job that used to be 20 people, you know, 19 people in that one department lost their jobs because of computerization, right? But it's not like we have an army of unemployed people sitting around somewhere. You know, what markets are really good about is about repurposing resources. It's not always immediate, and it's not always seamless. But what entrepreneurship is about is about finding new uses for resources. And I love that you brought up the example that I wrote about in there about pickle mold because I've been telling my students for the last decade or so in my entrepreneurship class, I said, you want to make a fortune, find a way to repurpose all these old molds. They're sitting there, you can get them for a song and a dance, right? A dime a dozen to get these places that have giant square footage, wonderful parking lots to repurpose them and make some money. You want to make some money, find a new use for those. And sure enough, the founder of pickle ball has started a company pickle mall where he's going up, buying up these old molds and turning them into indoor pickle ball courts. I mean, it's brilliant, right? But it took a decade or so or 15 years, you know, for somebody to find that. Of course, there's other companies doing it to HBO, for example, has purchased or renting. I don't know which, about half the mall that I used to go to as a teenager where they film the righteous gemstones and a couple other HBO series and in the mall I grew up in and our hospitals take it over the other half. But, you know, that's the thing is that, you know, there will be replacement jobs, there will be replacement purposes, and that's what the job of entrepreneurs is is to figure those out. But it does happen and the problem is is that we need to rely on markets to do those and free up the transitions to occur, even though they might not be, you know, perfect. It's the driverless trucks that are gonna, you know, I mean, you know, truck drivers obviously have restricted number of hours that they can drive, all those things and the cost of them and the accidents and things like that. You get driverless trucks that are much safer on the roadways than trucks with people and that can drive for 24 hours without needing a break. It's gonna lower the cost of goods and services tremendously across America and the world for consumers to be able to have those things delivered much more cheaply and much more safely. And I mean, those things bring prosperity to us if we let them unfold. - Well, Russell, let me push back though. I mean, isn't this sort of inhumane? I mean, it sounds, you know, we're not caring about the individuals who lose their jobs. I mean, shouldn't we want to protect them in those jobs and not displace them? I mean, that's an argument we hear about capitalism or free markets or whatever you wanna call it, is that it doesn't care about these individuals. - Yeah, well, I mean, you know, it might sound that way, but the bottom line is is that I would much rather us invest in things like worker retraining programs, job education programs and things to help make those transitions less painful than to stop them from happening altogether. And I think that's kind of the plea is that in a world where we stop that stuff from happening altogether, we don't end up with progress, right? And, you know, there's some places around the world that have just banned Uber and Lyft, right? Because their taxi industry is gonna die. You know, it's one of those things that there's a lot of economies that do that. And, you know, finding ways to ease those transitions is much more important than trying to stop them. - Well, let me push back on you again in another way. You greedy capitalists to you. You write in defense of profits in this paper. I thought profits were evil and terrible, and we shouldn't want people making profits. - Well, you know, it's losses that are equally as important because, you know, what really happens in a market economy is that the beauty of what markets bring to the table that isn't possible under central planning is experimentation, right? Is entrepreneurs who have crazy ideas, ideas that nobody else thinks will even work, and they're able to roll the dice. You know, if you want to start a restaurant that's selling roasted cauliflower sandwiches, and that's the only item on your menu, you can do that. You can go rent a storefront and do it. And who decides whether you stay in business is not a government central planner. It's whether or not that there's enough customers that you can make a profit or you make a loss. And it's the profit and loss system that gives entrepreneurs quick feedback on whether the ideas that they're trying are good ideas or bad ideas. Here's a very famous clip that's on YouTube that your listeners should Google after they hear this about Steve Balmer, who was the CEO of Microsoft, getting interviewed when Apple had just unveiled the iPhone. And he's actually being interviewed on like one of these business programs, and they ask him, you know, Steve, what do you think about this iPhone that we've just unveiled? And he starts laughing about the iPhone and he's saying, there's no reason this will work. They're going to charge money for this when we give our phones away for free. He's like, and not only that, it's not good for email 'cause it doesn't have a dedicated e-board with real keys for people to touch. You know, the point is is that Steve Balmer was obviously a brilliant guy and he was wrong. A lot of us are wrong every day, right? And the things that succeed in the world are things that we, you know, Steve Jobs didn't need Steve Balmer's permission to introduce that, right? And that's the beauty of markets is that people can roll the dice. You can experiment with a phone that has no keyboards or with pickle mall or with roasted cauliflower sandwiches or whatever you want. And it's really consumer demand that decides whether your product is going to survive or not. And that consumer demand is reflected through the profit and loss system. It's how we weed out pick-of-flicks and blockbusters when we don't need them anymore is through the loss system, right? And, but there's a lot of other great examples. You know, some people may on listeners may be familiar with the fact that there was a serious experiment with steam-powered automobiles, the Stanley Steamer was the name of them, right? And they went out of business. There's a lot of other car companies that went out of business, right? And it's the profit and loss system that helps us get rid of restaurants that are not serving good food or are not cleanly clean enough. And people are getting sick when they eat there. And, you know, it's through time how we send signals to entrepreneurs about whether the new combinations or resources they're experimenting with or something that we like or not. - Well, in your paper, you tell us that the record of history is clear on this, that free markets outperform government control. Why do you think that's the case? I mean, well, tell me, I guess, not why that's the case 'cause you've been doing that already. Why is it so clear throughout history? What are the stories that you see throughout history that help illustrate this point? - Well, my favorite story, at least with regard to entrepreneurship that I have on this, is something that I wrote about in the report that I did for you guys about the Travant, which was a car produced under the centrally planned East German economy by the Soviets. And, you know, the Travant in 1981, I've got a wonderful little YouTube video. I show my class where it's a nice, it's a guy who's like a car and driver guy refused cars all the time, has a guy bring in a 1981 Travant and they take it for a test drive and talk about it. The car, by the way, at the point when you got it, was on a 10-year waiting list. So, if you lived in East Germany or the Soviet Union in 1981, there was about a 10-year wait to get the only car that you could buy that was produced by the government-run car company, the Travant car company. The car didn't even have a gas gauge that you could read from the inside. You had to stop the car off the hood, use a dipstick to test the level of fuel in the fuel tank, which, by the way, was a mixture of half gas, half oil. It was a two-stroke engine, 26 horsepower. Top speed was 60 mile an hour downhill. But what I love about this story really is that, you know, here in 1981 is the same time in America, we've got Smokey and the Bandits Trans Am, we've got like a lot of really cool cars, you know, going around in America, all of which had fuel gauges inside for the driver, right? So, a serious question, why is it that the Soviets are beating us in the space race at this point in time? But they can't produce a car with a gas gauge in it, right? And it's not a knowledge problem. And that's what I love about this example. It's not that the Soviets didn't know how to put a gas gauge inside a car. It's that they have no incentive to do so. There's a 10-year waiting list for their cars, but there's no competition. If you're a Soviet consumer, it's not like there's multiple dealerships to choose from. There's nobody who works at the Travant Car Factory who makes a profit from it. They're meeting production quotas every month that are set out to them. And you know, the Travant was considered a huge success by the central planners of an example of a wonderful company that socialism was producing. But as a customer, you know, in America, the Travant Car Company could not have survived. You know, there's a lot of brilliant people that worked there, but they just didn't have the incentives to bring to bear the knowledge and the experimentation on the production process. You know, the way that you have in America when there was Ford and GM and Pontiac, all competing for the dollar votes of consumers. And the problem is, is when you have a system where there's very little competition and monopolies, it's not a good thing. And that's the problem with government bureaucracies is that exactly that's what they are. I mean, if you think about the areas where people are at least satisfied with the goods and services in their lives, it's things like our criminal justice system, our public schools, our congested roadways, which are all government produced things where there's a lack of competition and profits and losses. When you compare that to how satisfied we are with our computers or our clothing choices or, you know, things where there's a profit and loss motive and a lot of competition. And, you know, I think the problem is, is that the incentives under government are just different from under markets. And if I may share one more quick story with you, you know, is that my boss at my last job is the most frugal person I've ever met in my entire life. He drove a beat up old car, refused to like buy new stuff. He was very frugal, never went out for lunch pack to peanut butter and jelly sandwich every day. We're just so frugal, right? But at the end of our fiscal year, you know what happens to government budgets at the end of the fiscal year? If you don't spend all your money, they take the money back and they cut your next year budget. And every year at the end of the year, we used to get an email from our boss that said the same thing, which is, hey guys, we have money left in our budget. Now would be a really good time for you for you to help me spend this to buy. And you would even suggest that like, maybe you need some new business cards. Maybe you'd like some new books for your collection. Maybe your mouse is broken. You know, he would like, here's the most frugal guy I know, trying to waste money at the end of the year because the money's gonna disappear and get his budget cut for next year. And the reason I love this example is that too often we hear people say, oh, it's about who wins the presidential election or who wins the next congressional race. We just need to get the right people in government. The problem with government isn't really so much that there is the right or wrong person in it. It's that the incentives faced by the people in government are different than they are in the market economy. And those incentives aren't always the right incentives for, you know, pleasing customers for saving money, for, you know, no private firm in the world would just throw away money and waste it because, you know, as the owner of a restaurant, if there's money left over, you can take it home as profit, right? You know, and the problem in the public sector is you don't have the residual claimant like that. And, you know, it's just such a good example. But, you know, the FDA is often criticized about how long it takes to approve new drugs. But, you know, they're so deftly scared that if they let one onto the market, you know, that has side effects that they're gonna get blamed for it, they tend to be over cautious. Well, there's a lot of people who die every year waiting on new drugs to be introduced. And, you know, the point is that government incentives are just different, right or wrong. And those incentives just aren't as strong to meet the demands of what consumers want as the incentives are in markets. - Yeah, you remind me of a Milton Friedman quote that I'm gonna butcher. So I'll just paraphrase the Milton Friedman quote about politics. And it was something like, you know, we don't need to worry about getting the right person in. We need to have the incentive set up so that the wrong person is incentivized to do the right thing, you know. - That's. - And that's where you have, with the free market system is, it doesn't, I mean, we certainly want good leaders of business and corporations and all of those things, but ultimately we want people who are gonna be meeting the needs of other individuals. And that's what's incentivized through the market system is people meeting the need through voluntary association, voluntary transactions to meet the needs of other people. - Yeah, I mean, like we were saying, pick a flick and blockbuster out of business 'cause they're profit and loss mechanism. We still have regulations on the books from 100 years ago about what you can do with your horses. You know, we have new deal programs that are still in place that, I mean, there's no loss mechanism to get the things out that are no longer, you know, needed. And, you know, but the one thing I would be nice that we have a second to talk about or how much time we have left is that the one thing I think that's equally important to talk about is that there is a role for government. You know, the call for markets is not a call for anarchy. It's just the opposite. You know, under a real market economy, you have a strong government. It's just a government that's limited to its proper role. And it's equally as important that we free entrepreneurs from regulations and excessive taxes as it's equally as important that we have the rule of law and secure property rights and, you know, all the institutions of government, courts, police to prevent theft and fraud. And unfortunately, the one thing that is necessary for government to do is the thing that in a lot of the country, the government's stopping to do. Like you see the things happening in California where they basically made it, you know, they basically made the penalties for shoplifting anything under 900, I think it's $950. I don't think there's much of a penalty or punishment for it now. And you have these people walking into stores just walking out, you know, with goods and services not even scared of anything. And, you know, the problem is markets can't function when you don't have the rule of law and secure property rights. And so the irony is, as well, California has one of the biggest governments in the United States. Its government isn't doing the very basic things that you need for, you know, goods and services to be produced and, you know, the stores are closing in those areas because they can't get protection for their, you know, their goods and services. And, you know, we need a good government that does the right things to protect people and their property and contract law and enforce people's liberties. - Yeah, that's such a good point. Well, we started off by saying that we're a country with a lot of amnesia on this topic. What do you think causes that? Where does that come from? And then what do we need to be doing to continually remind people of the beauty of markets? - Well, I think one of the things that you tend to see when you see the people who are anti-capitalist, anti-profit, pro-socialism is a lot of these catchphrases, like, you know, production should be for people and not for profits. And I think that there's this thing even, you know, when you were playing devil's advocate on these questions that somehow that capitalism isn't good for the average person that it overlooks people and the sake of profits. And, you know, the irony is, is that it's the opposite, right? I mean, you know, how do we know if production is, is for the people or not? Well, when it's profitable, because when it's for the people, right? It's the goods and services that we love to buy, like apples that are profitable industries, particularly because we like apples, right? You know, you can't produce mud pies and make a profit at it. Having a business that's losing money, if we had a bunch of blockbusters still around in business, being subsidized by government, that's not better for people than having those resources redeployed other areas where people do want goods and services. Now, I think that, you know, Adam Smith's Invisible Hand Principle, the idea that when we have the right incentive is that production is channeled to the areas that benefit people, you know? And I think that concept is something that a lot of people just don't understand. Now, you don't understand when you walk into a grocery store and the fruits and vegetables section and see all of those fruits and vegetables from all over the world fresh that keep us healthy and for so little money, that all that gets there through decentralized markets rather than some sort of central planning. And you try to go to that same grocery store and somewhere like Cuba or Venezuela or North Korea or the former Soviet Union and those same goods and services aren't there. And you ask, you know, which is better for the people and economy where you have this wonderful stock fruits and vegetables section at Whole Foods or, you know, your food line or a country where you can't basically get the food to survive and there's very little stuff around. And, you know, I was lucky enough we have a study abroad trip that takes students to Cuba every year and, you know, they have to get State Department permission. And I went on it and I wish more people had an opportunity to visit some of these places that they think are model examples of this and to go see how life really is there. I think the problem is there's always, you know, a utopian in your head that isn't quite as nice as it is when you actually get a chance to live there because you go to Cuba, almost everybody there is trying to get you to sneak them out, you know, like all the girls there were trying to hit on the guys that were there for our school group, and I understand, please bury me so I can leave with you. I mean, the people they're trying to flee, they're not even allowed to own boats because they're trying to escape when they get boats. But people, you know, think that somehow that system is wonderful. I go talk to the people who lived there desperately worn out and you see all the Cuban communities in Florida who, you know, were able to get out or some of the staunchest proponents of markets in America, right, coming out of those socialist economies, you know? - Yeah, we seem to take for granted the freedom and the liberty that we have. And I think there's a natural inclination among young people to see problems of the world and think government must do something. We must do something. - Yeah. - And I think the lesson that you teach us is that we do something by allowing markets to work, by putting in place the rules and regulations and enforcing the contracts and the law, just as you said, you know, allow markets to work and over time that leads to prosperity for everyone. It raises, it's the rising tide that lifts all boats over time, whereas government interaction so many times causes more problems. It reminds me of, you know, not the invisible hand, but the, you know, we see the things that we're addressing, but we don't see all of the unintended consequences that we cause when we intervene in the markets. Well, Russell, I really appreciate this time with you. I'm excited about this paper. Why markets matter for human progress and prosperity? Thank you so much for joining us today. - Thank you for hosting me. 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