Governmental Interference Causes Problems -- Week 13 Response

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The talk this week was a fascinating explanation of how organizations and industries that are “jump started” by use of government subsidies are almost guaranteed to fail, and to waste funding in the process.

One fundamentally crucial stabilizing market force that is often forgotten is that business ventures must be able to fail. This is not obvious at first glance, but it is vitally important. If a business venture cannot fail, it can continue draining resources, and can operate in conditions where such a business should not exist. For example, if a business cannot fail and will persist regardless of circumstances, it can lower its prices to unsustainably low levels, netting a terribly negative profit, making competition impossible and driving competitors out of business. Once all the competition is out of business, the company that cannot fail is guaranteed a monopoly, and can manipulate the prices at will. Obviously, this is problematic for a large number of reasons. However, if a business is allowed to succeed or fail naturally, these problems can be prevented entirely.

The problem with governmental assistance for various programs is that governmental intervention is usually begun with the premise of being a one-time stimulation to get the industry started. However, this inevitably results in more governmental attempts at stimulating the industry. Once these attempts become regular, the government becomes invested in ensuring the success of this industry and goes about it by trying to throw money at it until it works. However, an almost unlimited supply of funding and no fear of failure does not motivate the industry to innovate or optimize. As a result, the program or industry ends up being significantly more expensive, less efficient, and of overall lower quality than if it had been allowed to grow or fail naturally.

However, there are some ventures that are important, and yet too costly for a single entrepreneur to begin pursuing (like exploring space, for example) making governmental intervention necessary for the industry to even exist. My solution to this type of problem is to have the government provide a one-time grant for such an institution to be constructed/implemented, and then have no further intervention from the government. This is not a perfect solution, as there is still the possibility of fraud, but the initial investment without further intervention would provide the resources to begin, as well as the motivation to optimize and innovate, since there will be no more coming. However, if this plan seems overly flawed, the default could also just be patience. Eventually, someone will come along who is wealthy enough to start a space program (or the like) themselves, and the industry will be able to compete and grow naturally.