Market uncertainty is uncertainty about how private economic actors – consumers, business executives, entrepreneurs, and investors – will spend their own money. In contrast, regime uncertainty is uncertainty about how government officials will spend other people’s money. The relevance of this distinction is found in the fact that the range of actions that a person will plausibly take is significantly narrowed by tightly tying that person’s material well-being to the actions that he decides to take. These actions thus become more predictable than they would absent such a tie. To use an extreme example, I might get great satisfaction by publicly proclaiming a belief that magic crystals outperform modern medicine at curing people of injuries. But if my child is seriously injured in an automobile accident, I’m likely to bring my child to a hospital rather than to a new-age healer. And you, as an outside observer familiar with human nature, will predict my response with great confidence.
Being human themselves, as well as being participants in the market, investors can with some confidence distinguish opportunities that have plausible prospects of being successful (the parent’s use of modern medicine) from prospects that are implausible (the parent’s use of magic healing crystals). Choosing only among plausible investment opportunities, investors thereby reduce their exposure to market uncertainty. The five-to-ten-year future created by genuine consumer and entrepreneurial choice, while open-ended, isn’t wholly unpredictable.
Much more difficult is the attempt to predict the actions of people whose personal, material self-interests are not very much affected by the decisions they make. Modern government officials do not put their own personal material welfare at risk when making decisions that affect millions of strangers. And so government officials sincerely committed to an ideological agenda hostile to markets can pursue that agenda largely on other people’s dimes – as, for example, Donald Trump and Peter Navarro are doing today with their agenda of protectionism.
And if the climate of public opinion also features hostility toward commerce and creative destruction, even the constraints posed by the need for reelection become a positive inducement to destructive assaults on free-market activities. The range of government interventions that might undermine the security of property and contract rights is thus very wide, bounded not by the relatively tight constraints imposed by private interests but, instead, only by the imaginations of ideologically motivated officials and voters.
Not only is the range of potential government interventions that threaten the value of private investments wider than is the range of market activities that threaten the value of private investments, but the duration of destructive government interventions is longer. No one likes to discover that he made a mistake. But recognition of mistakes is faster among market participants than among government officials. The reason is that the more quickly market participants recognize their errors, the more they save of their own money. The entrepreneur who was confident that consumers would have a high demand for anchovy-flavored breakfast cereal will be embarrassed to learn of his error, but even more eager to reverse course from that error.
In stark contrast to private market actors, government officials are not only less likely to recognize their errors quickly but also, even when such recognition dawns on them, less likely to act quickly to correct these errors. After all, continuing with erroneous policies generally costs the government officials responsible for those policies personally very little. But also at work is an even more perverse incentive: government officials – again, spending other people’s money – often have incentives to double down on their errors.
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