Economic Games

Capitalism is usually portrayed by its champions as a positive sum game. A positive sum game is one in which both parties to a transaction benefit from it. Under this sort of model no one needs to force either party to participate. They just do it naturally because they both perceive a benefit to themselves in the transaction. Opposition to this model usually arises from people who either insist that one or the other party is being cheated or that the two parties are adversely effecting third parties who are outside the transaction. This, they say, gives rise to the need for the government to regulate business transactions. Let's address these two possibilities separately and see if they have any merit that justifies third party intervention. Note that I'm not considering environmental effects in this post but am only looking at things from an economic perspective. I'll look into environmental concerns later.

It is indeed true that someone is occasionally cheated in a free market transaction. The question that must arise then is whether the cheated party has any recourse to rectify the situation. Such a recourse does exist within the court system. If anyone ever feels cheated they can take the other party to court in order to be compensated for their loss. If the matter is too small to justify even a small claims case then chances are the offended party will take their business elsewhere while complaining to anyone who will listen about how they were treated. They may also take their complaint to the Better Business Bureau for help. If the other party cheats enough people then sooner or later they will be out of business or perhaps even in jail. So several mechanisms already exist to deal with cheaters that work in the vast majority of cases. What's more, the people involved in the transaction are the best ones to judge whether they were cheated or not and initiate action to resolve the problem. No outside meddling that is not chosen by the parties involved is necessary.

Third party complaints are usually complaints because that third party either didn't get chosen to participate in the transaction or they feel that their is a forth party that is more deserving of the business. For example, they might say something like, "That company is putting me out of a job because they've moved their manufacturing overseas." This sort of complaint is really just sour grapes because someone wasn't competitive enough to win the deal. If it is expensive to run a company in one place and cheap to run it in another then where would any rational person put the company? If you would put your company in the more expensive place then what are you really doing? I think you are most likely fooling yourself. You don't go out and find the most expensive products possible for your personal use. Why should you expect a company to be any different? You are only being hypocritical if you do. The correct reaction to losing business this way is to look for more ways to be competitive instead of trying to force other people to pay more than market value for your products or your time.

Another potential third party effect touted by the interventionists is the effect arising from the scarcity of resources. We are running out of oil, for example, so everyone must now buy high gas mileage cars and use florescent light bulbs to conserve oil. Or we are running out of fresh water so everyone must use toilets with smaller tanks and low flow shower heads. This line of thinking neglects the fact that the rising prices of scarce resources alone should be enough to encourage their rationing. If oil prices go up, people automatically try to do things in a more energy efficient way. Back in the 70's when oil prices rose rapidly millions of people started buying fuel efficient cars without any government coercion at all. In recent years, when gas prices have spiked people have started demanding hybrid cars to further conserve. I was buying florescent bulbs long before the government mandated them precisely because they are cheaper in the long run.

Similarly, if the price of water rises enough people will automatically start trying to conserve. The problem with water though is that its price is usually directly controlled by the government and its price doesn't rise even if an area is hit with a long drought. If the prices are allowed to rise people will find ways to conserve and entrepreneurs will be inspired to try to find new and innovative ways to get water to the stricken area. Their efforts may even result in new ways of producing fresh water that can increase the supply for everyone everywhere.

See Thomas Sowell's excellent book "Basic Economics" for a crystal clear explanation of how prices in a free economy automatically signal scarcity of resources and encourage rationing and conservation.

Thus third party complaints seem to me to be unjustified in the cases I've presented here. If you can think of any cases I haven't covered let me know.