Last week, President Obama delivered a speech in Colorado in which he praised the 2009 auto bailouts, saying that they were good for business. Maybe so, but what’s good for General Motors, and the business world in general, is not necessarily what’s good for American consumers.
What’s good for the U.S. economy isn’t bailing out old, failed businesses and subsidizing new ones, but freeing the market for greater competition, because that is what benefits all of us in our capacities as consumers and citizens. Supporting freer markets is not the same thing as being “pro-business” — in fact, businesspeople often despise the competition that truly free markets create.
Free market competition makes firms earn every dollar of revenue by innovating and providing the goods that consumers want at ever cheaper prices. Competition forces firms to tweak existing products in ways that consumers want, as we have seen in the market for cellphones in the last 15 years. Firms can also profit by developing innovative new products, as we have seen with Apple and the iPad. Real competition demands that businesses stay one step ahead of consumers, which makes life tough for them but improves all of our lives.
The key to market competition is that it is a profit and loss system. Profits are an incentive to produce what people want, but they also give firms information about what people want and how best to produce it. Conversely, losses inform firms that there’s something they should be doing differently. In a free market, profit means businesses have created value, while losses mean they have destroyed it. Businesses that don’t add value will eventually go out of business.
By contrast, Obama’s vision of writing checks to GM, Solyndra and “too big to fail” banks manages to be pro-business — at least pro those businesses with stakeholders who will vote for him — while simultaneously undermining the competitive marketplace that best serves the average American. Bailing out failing firms cuts businesspeople off from the knowledge that they are making mistakes and removes their incentive to avoid making mistakes. Bailouts end up extending those mistakes, where competition would eliminate them quickly.
Subsidies to new firms like Solyndra presuppose that politicians know what products consumers would prefer and how best to make them. Discovering that sort of knowledge is exactly why we have competition in the first place and why real profits and losses are so important. Politicians are simply guessing in the dark and inevitably end up rewarding politically connected businesses rather than economically effective ones.