The resignation of House Speaker John Boehner and the VW diesel car scandal — two rather extraordinary events — might not initially appear to be related, but there is a connection. The most conservative members of the Republican caucus celebrated Representative Boehner’s resignation because they felt he did not fight hard enough to shrink the size of the federal government through more aggressive tactics, like government shutdowns. Although one of government’s most important functions is to deter behavior such as that of VW, the radical Republicans would organize American society using only markets, not government. The difficulty with this stance is that corporations “cheating” consumers is an unavoidable aspect of capitalistic markets, making government regulation a necessity.
Adam Smith in the Wealth of Nations famously identifies an “invisible hand” by which individual self-interest has the effect of benefiting society more effectively than when an individual intends to promote it. One virtue of markets is the benefits that competition does produce. Another is that markets are associated with individual freedom: individuals are free to seek their own self-interest in exchange-based relationships.
Radical conservative ideology treats this alchemy as a truism, but it’s really a caricature. Markets only work as Adam Smith described when certain conditions are present. One such condition is that consumers have full and complete information about the products and services they purchase so that they can decide whether it is in their self-interest to engage in a monetary exchange. VW’s fraud violated this very basic requirement of competitive markets.
The profit motive encourages companies like VW to obtain an advantage in the marketplace over its rivals. VW’s market strategy, we now know, was to oust Toyota as the world’s number one selling car manufacturer by substantially expanding its sale of diesel cars in the United States. Ideally, companies would build a competitive advantage through innovation or efficiency through cost reductions, which VW rejected. Nevertheless, VW’s decision to cheat rather than innovate or be more efficient was completely economically rational. If it costs less to cheat then to take other steps, companies will be tempted into doing so.
We need both markets and government. The challenge is finding the appropriate balance between the two. About this, there can be reasonable disagreement. Those politicians celebrating Boehner’s ouster, however, are not interested in debate about what is an appropriate balance; they instead elevate ideology over sensible policy insights. In the meantime, the rest of us are held captive to their ignorance and intransigence.
This blog is cross-posted on the Huffington Post.