the fundamental flaw in the free market

Not everything that is worthwhile is profitable, and not everything that is profitable is worthwhile. That is the basic argument for government intervention in the economy. Everything demonized by “free-market conservatives”—from regulation to public works projects—exists as a way to rectify this fundamental flaw in the free market system.

A true free-market advocate will argue this: if it is worthwhile, then innovation by individuals will find way to make it profitable. But however good that sounds in theory, we already know that it doesn’t work. You can imagine that eventually a truly free market would have created things like the internet, the interstate highway, and GPS, but the fact of the matter is that they were all government-initiated and government-funded projects. When the internet was first created, it was not a commercial enterprise. And if you approached any company in 1988 and said, “I would like you to invest huge amounts of capital in a gigantic technological infrastructure for a system for FREE, distributed, public, computer-to-computer communication because I think you’ll be able to make a lot of money with it in 20 years” you would have been laughed out of the room. Hands down. Left to the mechanisms of private enterprise and free market, the internet would never have happened. Or at least, it wouldn’t be around yet.

On the flip side, there is regulation. Nobody has yet been able to tell a plausible story about how universal availability of seat-belts in vehicles would have gotten started without a law demanding it. The only way that it makes sense in a free market is that the public is so scared of accident and injury that they are willing to pay more for safety. And any sociologist or psychologist would tell you that the only way the public becomes that scared is after a huge tragedy. That’s how the free market “regulates itself” in every argument: by reacting to tragedy. The corporation chooses to spend more to make safer toys only after they get a reputation for killing children and their sales begin to drop off. That’s the free market for you: regulation by way of body count.

In the end, we have very concrete, very real, very non-abstract examples of things that are worthwhile that are not profitable. Seat-belts. The internet (at first). GPS (at first). These things were made profitable by the free market system after they were innovated: but the innovation itself was a leap of faith because before anyone knew how to make it profitable, they knew that it was worthwhile.

The economic role of government is simple. It’s not to drive the economy, and it’s not to manufacture goods. It’s just to compensate for the fundamental flaw in the free market: an inability to identify the differences between what is profitable and what is worthwhile.