Keep the Capitol out of capitalism

Americans are souring on the idea of free markets, according to some newspaper reports. Gas at more than $4 a gallon, plummeting home values, a volatile stock market, tightening credit and mounting job losses are said to have undermined the consensus, politically dominant for a generation, that the heavier burden of proof falls on those who want the government to intervene to correct the market, rather than on those who believe that the market should be allowed to correct itself.

For capitalism's defenders, having to face skeptical audiences could prove beneficial. Capitalism, like most ideologies, has received dubious assistance from its most zealous publicists. "The market" becomes the focus of every grievance when people have been encouraged to believe that it is the best system imaginable.

The stronger argument is that capitalism is the best system available. Prices set in markets convey information about "demand" -- how widely and avidly various goods and services are desired -- and "supply" -- how difficult or risky it is to make these goods and services available. These are not fixed properties but are reflections of tastes and technologies, whose constant evolution is reflected in constantly changing prices. As Cass Sunstein, a Harvard law professor who writes frequently on political economy, puts it, "the knowledge of individuals, taken as a whole, is far greater than that of any commission or board, however diligent and expert. The magic of the system of prices and of economic markets is that they incorporate a great deal of diffuse knowledge."

The diligent experts who administered the federal oil-price-control programs of the 1970s quickly learned this. They took the country's crude oil supply and tried their best to figure out how much of it should be refined to produce gasoline, diesel fuel and home heating oil. The result? Massive supply disruptions, lines around gas stations and "odd-even" plans that told drivers whose license plates ended in the "wrong" number that they would have to wait until the next day to fill up. Ronald Reagan abolished the price regulations on his eighth day in the White House.

What's remarkable is that the recent jump in global oil prices has driven up the price of petroleum products but has not resulted in gas lines or Rube Goldberg rationing schemes. Prices, set in markets, are allocating a scarce resource more efficiently and knowledgeably than government planners ever could.