The Incentives Debate: Free Markets vs. Central Planning | Eastern North Carolina Now

    Publisher's note: The author of this post is Dr. Roy Cordato, who is Vice President for Research and resident scholar for the John Locke Foundation.

    As the legislature comes back into session, there is a renewed focus on what are typically referred to as economic incentives, or by many who are more skeptical of such programs, corporate welfare or simply cronyism. Programs that are and will continue to be debated are subsidies to "big Hollywood," otherwise known as film incentives; special tax breaks for the renovation of historic buildings; and huge tax credits for providers of renewable energy, especially solar power plants. But there are a host of other corporate subsidy programs that include both direct government grants and tax breaks.

    In reality, the more intellectually correct, if less concise, description of what is being referred to is "state based central planning." In other words, economic incentives are an attempt by politicians to direct resources that are not their own to investments that they believe would be better for the economy than those that would be made if the actual resource owners were left to their own judgments. Simply stated, they substitute the investment decisions of politicians and politically appointed bureaucrats for the investment decisions of market participants. These market participants include not only the businesses that receive the incentive awards but also all of those taxpayers whose incomes are being forcibly reallocated to fund those awards.

    Although the claims are much less grandiose, the presumption behind state incentives is exactly the same as that behind the most centrally planned economies in the world, from Cuba and China to the 5 year plans of the former Soviet Union, namely that politicians operating outside the market have better knowledge and can better determine the proper use of resources than individuals and businesses operating within the market. This is what economist Frederick Hayek, in his 1974 Nobel address, referred to as a "pretense of knowledge." It is an idea and an attitude that animates progressives of both political parties when it come to economic policy; experts who face none of the market perils nor stand to reap any of the market rewards are in a better position because of their expertise to determine what is the best use of resources. Economic growth and prosperity is better promoted by central authorities than by the decentralized decision making of the market.

    The implication of this is that it is justified for politicians and bureaucrats, guided by these experts, to step into the market using their powers of taxing and spending to alter resource allocation and therefore market outcomes. This is at the heart of the central planning mentality and, stated or not, what lies behind all state government incentives programs.

    In North Carolina, no less than in the former Soviet Union, legislators, bureaucrats, or secretaries of Commerce have no way of making anything but arbitrary decisions when it comes to allocating market resources. They cannot possibly know how those resources would have been alternatively used if left to the free decision making of private sector owners. Without this information they have no way of knowing how their decisions fit into the larger picture of alternative investment possibilities. They can only pretend to have this information, even if this "game of pretend" is supported by the "research" of highly paid consultants.