koshersalaami

koshersalaami
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Male, Jewish, in my extremely early sixties, married with kids (well, at this point I guess that should be "kid"). Thanks to Lezlie for avatar artwork - sort of a translation of my screen name. "Salaam" is peace in Arabic, hence the peace sign. (No, my name doesn't mean "hunk of meat" and yes, the pun is intentional.)

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Salon.com
SEPTEMBER 12, 2011 9:01AM

A Misplaced Article of Faith

Rate: 31 Flag

When I listen to arguments I pay particularly close attention to assumptions. I’ve found that most of the time the real issues are found here rather than in what’s being said. Lately, I’ve been listening to (and participating in) arguments about economics. A lot of the arguments made seem utterly insane when taken at face value but start to make at least internal sense when looked at through the Assumptions prism. The biggest assumption I run across goes something like this:

“If you leave markets completely alone, as close to in a vacuum as you can get, the result will be equilibrium, a system of magnificent efficiency that runs like a well-oiled machine and will take care of everything. How many problems the economy has is a function of how much the market is interfered with.”

There are two corollaries, one each for Current Republicans and Current Democrats/Historic Moderate Republicans. They are:

Current Republican Corollary:

“We will be at our healthiest and most effective when most efficient. A rising tide raises all boats, so this goes for everyone. Anything that interferes with this equilibrium does us a grave disservice, hurting both our material well-being and our freedom. The agent of interference with this sacred equilibrium is Government, a sort of Economic Satan, and so the best thing we can do is minimize the size and scope of Government. Those who favor Big Government want to run our lives and make us pay for it.”

Current Democrat/Historic Moderate Republican Corollary:

“The economy is not our only priority. There are people who need help, people who need protection, people who need justice. There is an extent to which we have to put our obsession with free markets aside so that we can live in a world that is worth living in. Yes, this interferes with market efficiency, but it’s a price we have to pay.”

I don’t subscribe to either corollary for one simple reason:

The assumption they’re based on is wrong.

I feel like a bit of a heretic when I say this, particularly given that I’m reasonably sure that the President supports the Current Democrat corollary, but the Assumption doesn’t work for all sorts of reasons, none of which I hear much about. So, what’s wrong with the Assumption? Here are some problems with it, in no particular order:

Free markets tend toward monopoly. We saw this in America a little over a century ago and again in Russia when the Soviet Union folded. The problem with monopolies is that they kill competition, and it is competition that makes the free market worth supporting. How do we get around this? Regulation. Where does such regulation come from? The Government.

Free markets focus on short-term incentives at the expense of long-term incentives. Competition is such that you have to be competitive Now. Short-term planning isn’t the most effective way to achieve long-term success. The Government often takes a longer view, which is how we ended up with such assets as the interstate highway system, an enormous economic asset.

Free markets are poorly structured to cope with environmental damage, even if that damage results in economic damage. The mechanisms by which markets self-adjust can be very efficient but they are dependent on certain kinds of linkages to work. To change the behavior of a supplier, decrease demand; the supplier is likely to change behavior to regain market share. Environmental damage could be controlled this way effectively if the primary victims of pollution were the polluter’s major customers, but they normally aren’t - if these victims stop buying, they typically comprise such a tiny market share of the polluter that a reduction in demand wouldn’t be noticeable. In the event these victims suffer a major financial impact (such as the fishing industry in polluted waters) from the pollution, the practice contributing to the environmental damage could save the polluting industry less than this pollution costs these victims, resulting in a loss of GDP. In that case, the free market has no way to protect itself from harming itself. The only efficient way out of this kind of problem is regulation.

Free markets are driven by social mores to a far greater extent than economists admit. Economists like to think that business people are primarily financially self-interested actors and that this trumps everything else -“We don‘t worry about black and white; all we worry about is green” - but business people are people, not earning machines. Here’s an example: If you were the personnel director of a major corporation and the board sent you word that you couldn’t have access to better than 50% of your talent base, you’d consider changing jobs to avoid working for people who were that crazy. And yet, that’s exactly what American business used to do to itself by ignoring women and minorities for most positions, putting social priorities over economic priorities. I’m not talking about justice here, I’m talking about efficiency, and it took Government instituting Affirmative Action to correct this particularly gross inefficiency. I’m not giving Democrats credit for efficiency; Democrats typically aim for justice and hit efficiency by accident because justice and efficiency actually live in the same neighborhood. However, because most Democrats neither know nor care about efficiency, regarding it as belonging to the Other priority, they don’t take advantage of their ability to achieve it, which may be the biggest political mistake they habitually make.

Free markets tend toward the lowest common denominator. If you’re in business, sometimes it’s cheaper to practice with less stringent ethics. You can opt to remain relatively ethical anyway, at least until a significant competitor becomes less stringent with ethics, at which point you may have to join them to stay competitive, whether you want to or not. Do you ever buy not-from-concentrate orange juice, like Tropicana? Next time you’re in the supermarket, look at the half gallons of not-from-concentrate juice. You’ll notice that Tropicana and Florida Natural use cartons that hold 59 oz., which means they aren’t half gallons at all - they just look like half gallons. The supermarket house brand is often a full 64 oz. Why are we seeing more than one manufacturer using deceptively-sized packaging? Because everyone has to compete with the first company that did this. (House brands have lower expenses, which is how they can afford to keep their packaging.) How do we end the problem? Regulation: Mandate that if you’re near a standard measurement, stick to a standard measurement.

I happen to think that regulated economies are more just than laissez-faire economies but that’s beside the point: I think they’re also more efficient, particularly over time, that if we took two identical economies, regulated one and left the other laissez-faire, the regulated economy would out-compete the laissez-faire economy in the long run. This hypothesis runs counter to the prevailing wisdom, which has become so dominant that the President didn’t argue against it during the debate about the Federal Budget; neither did I hear anyone in Congress do so.

Enough already. Trying to fix a broken economy while believing that the way to fix it is to leave it alone is roughly the equivalent of trying to run a space program while believing that the world is flat. Accepting the conventional wisdom means we’ll never get a decent launch.

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This is the finest such analysis I have seen, Kosh, and it should be a 'Cover'. r.
I agree with J that it should be a cover.

It wasn't that long ago that breaking up or preventing monopolies was considered a public good. People seem to live only in the moment, and in this moment government regulation is the work of the devil.

(I don't think this is quite what Ram Dass meant by Be Here Now.)
Markets have well acknowledged "failures," although some people overemphize that too, and are always looking for a reason to intervene.
The alternative is government or some social institution, which have their own failures.
At this point, it is no longer a subject that people can debate, an article of faith that they work, and an article faith that they don't, leading to political conflicts that don't let the market or government function well. It's a good point about social forces. For example, one can't just offer money over Jerusalem, or be interepreted that way, if one says, have the Saudis pay for it. Or, social status being the motive for working in an office for lower wages rather than construction.
Governments have their failures too, of course. But (except where they're paid lackies of Big Business) their motives are closer to The Public Good than those of the market, which is interested almost entirely in profit, forget The Good. Seems to me this is a reasonable set of checks-and-balances.
Thank you all.

Don,
I wouldn't dream of arguing that private/public is an all or nothing proposition; this isn't a question of market vs. government. They each have their strengths and weaknesses. The trick is to combine both in the most efficient and just balance we can get. What I support is regulated capitalism - start with the free market system, which has a lot of advantages, and adjust the inherent problems with regulation. Regulation is necessary; not only isn't it inherently evil, it's not inherently inefficient.
Not being an economist, I can only give my uneducated opinion, which isn't worth the price of a cup of coffee in China, if you go into a cheap restaurant. But I do know people, and as in everything, greed is a factor. Greed has to be be regulated, there's no other way. You can't let the prisoners run the prison and still keep them inside, if that makes any sinse at all!
Can we please, please stop using the lie that is the term "free market?" It's a totally manipulated construct. Once we're all on agreement about that basic reality then perhaps we can move forward in an honest and constructive manner.
Scanner,
Yes, greed is an issue, though one of the things that bothers me most about what's happening in our current economy is that the rich aren't even getting greed right - if the middle class collapses, so do their investments. That diatribe aside, greed has the potential to screw up the system (well, more than the potential - it has, quite successfully) and so we need ways to regulate it. I guess that's really the best way to state my overall point.

Shadow8,
Of course the market isn't free; in fact, the biggest problem with the current market in America is that we subsidize the rich instead of everyone else. My point is that even if you achieved what may be theoretically impossible and reached a free market, it still wouldn't work right, so it's the wrong goal to begin with. A regulated market is actually both more just and a whole lot more efficient.
Ditto, J and M on the Cover vote. Your analysis makes a lot of sense to me.
Thanks, Matt. We're spending too much time screaming at these guys and not enough time answering them. We'd do more good knocking the legs out from under their argument.
Monsieur Chariot, thank you. I'd been answering Matt when your comment posted.
Maybe it doesn't matter to the corps and rich people - in this global economy - if the American middle class goes under. I read somewhere that the middle class of India, while a small proportion of its population, is still in numbers larger than that of Europe or North America. And then there's China... Maybe we just don't figure any more, even as consumers...
You've raised a very complex point. Some historical perspective:

I love the rising tide metaphor because it is unintentionally accurate. Having grown up on the ocean, I know one fact for an absolute certainty. A rising tide raises all bottoms, but what matters is the distance between the deck and the landing. If a rising tide raises all bottoms by three feet, but your speed boat only has three feet of free board between the waterline and the deck, that boat isn't going to rise to the level of the dock, whereas that ocean going liner, with several decks above the waterline will, and does.

A rising tide doesn't raise all ships equally, unless you think the bottom is the top.

Makes you think, doesn't it?

The managed economy of the old Soviet Union was a case study for adverse effects of government control over economic policy. It didn't work. The managed economy of Communist China is a marvel of efficiency based upon a constantly increasing global economy. This is also destined to fail because the planet simply cannot sustain unlimited growth.

On the other hand, corporate management of political policy here in the United States was also a spectacular failure, because it led directly to the Great Depression which, itself was a consequence of World War I and the overbuilding of production capacity which always attends large scale military conflicts.

Theodore Roosevelt, a Republican, saw the necessary for throwing a bridle over unrestrained capitalism. His Republican successors, post Wilson, cut the reins off at the bit so that it seemed like we had some control where we had none.

The worst case example of unbridled capitalism was in Nazi Germany, where large corporations seized control over the nation and drove it into a global war precisely to create a demand for their products. (Most historians gloss over the role that German corporations played in putting the Nazis into power, and everyone always forgets that Hitler was appointed as chancellor by a duly elected government having won sufficient seats in a national election to force his ascension as chancellor.)

War is always the solution to economic malaise but it is a cure that contains the contagion for the next economic epidemic.

Unbridled capitalism creates political dictatorships because the capitalists want a government that will rubber stamp their policies.

Unbridled social legislation bankrupts national governments because there is never enough to go around.

Life is an unequal proposition. Some people get more than other people get.

The conservative argument that the liberal agenda is to take money from the rich and give it to the poor is 100% accurate. That's what liberal governments do.

It's also 100% correct, because, without exception, those capitalists who have prospered have prospered by taking advantage of the disadvantaged.

Every product we produce, and every product we purchase, has a percentage of profit built into the price.

Profit is the amount of the purchase price over and above the cost of the raw materials, the physical plant, the production costs, the transportation costs....and the labor....that goes into that product.

Profit accrues to investors in return for their investment in corporations....but the only reason that corporations sell shares is to capitalize on the perceived value in their companies.

Think of it this way. Who, in their right minds, would give away shares of their company in perpetuity if they could simply borrow the money from the banks to underwrite their development costs, pay off the loans, and never have to pay dividends on investments because there wouldn't be any.

Huh. Right. No one thinks about this. Dividends are the precise mechanism through which the ruling classes take profit from the work of the lower classes.

The basic concept of socialism was (because it no longer is) to collectively own the means of productions, to live off the value of the labor that workers contribute to the creation of the company's products, and to expand through the use of borrowed funds rather than by selling shares of stock because the workers would then own their own means of production.

That's true communism, which has never been tried, in Russia, China or anywhere else because the state always takes over the role of the capitalist, and workers remain slaves to new masters.

There is no interest rate at which borrowed funds aren't preferable to selling shares of stock and giving up a share of the profits in perpetuity.

To answer your root argument: you're right. Neither paradigm works because both paradigms are based on the same conundrum: in order for there to be wealth, there has to be poverty. The only way to do away with poverty is to do away with wealth...but no one, neither the rich nor, paradoxically, the poor, want to live in that world.
God damned rating button.
Extremely interesting and easy to follow. Will forward to my husband who is the economics guy in this house.
Myriad,
The problem with this line of thinking is that a lot of China's and India's prosperity is due to exports and we're the monster importer. Their consumers are in part dependent on our consumers.

Alan,
Of course neither system works in pure form. My argument isn't against capitalism per se, it's against unregulated capitalism. The best system I've been able to figure out so far is regulated capitalism because it can, if done right (or approximating right) can accomplish three things:
1. keep incentives in place
2. take care of those in serious poverty
3. remove some of the inefficiencies inherent in free markets.

Getting the formula right, unfortunately, entails what Mao referred to as Perpetual Revolution.

Ande,
Thank you. Glad to be of use.
This post raised so many thoughts and ideas for me. Great work. I will focus my comments on one area only.

You are so right that is is all about assumptions being wrong that blows up economics. I actually think you've missed 2 important false assumptions: "assume a perfect economy" and "assume rational players." So much of economic theory is based on these two ideas, a perfect economy roughly meaning it tends toward the place where supply equals demand, and that demand is what drives price. Rational players is finally coming under scrutiny in the economics world and I so wish this sort of research* had more public when I was in school because I could have done more than just sit there saying "but it's NOT a perfect economy. People aren't perfectly rational. This is bullshit."

The free markets we have seen in action are, simply put, not free, can't be free and assumptions that underlie the economic theory behind free markets are fallacious. Wouldn't it be nice, then, to place our efforts on structuring regulation and controls that lead toward the best balance?

OK - one more thing - I think (and really it's just an idea in my mind, haven't researched) that the changes in retirement fund structures are the #1 reason corporate profits and stock price and have become so prioritized in recent times. Previously, it didn't matter to most middle to lower upper class people what the stock market was doing because they weren't in it. It was a game for the rich. Now most people who have any retirement savings are in the game and the bubble built crazy expectations everyone wants to see again.
* this sort of research, from my other comment:

http://www.theirrationaleconomist.com/

http://danariely.com/
Alan - if armaments production gets an economy chugging and people employed, how come the U.S., at war now these many years, is having a depression? Or does the U.S. outsource war production too?!
Kosh, you are one smart sonofagun, for sure, but are you the only one on the face of the Earth that can see these flaws in thinking? Is it because of our tendency to polarize politically that the great minds aren't yelling these truths to the rooftops? This work should not only be on the OS cover; it should be on the front page of the Wall Street Journal, as far as I'm concerned.

Lezlie
I like this and pretty much agree...but I wonder if we might shake a little harder the roots of capitalism. For one thing, I wonder why there has to be a concept of profit, rather than reasonable fees for added value of production. What if all corporations were non-profit? CEOs could still make millions, and corporations could still do billions in sales...but no one would have passive rewards. One of the things I find interesting about Islamic Banking is that there is no interest: It is a sin to charge interest. They can charge a fee to loan money, but not interest. Thus, dividends would not be appropriate either. So much of capitalism seems like gambling to me. Futures markets? Yikes. And the notion that Perry recently pointed out again that corporations are PEOPLE, with rights? How could we have let that fly by us? It's like corporations are their own life forms. That can't be good for the equality of individual rights.
Excellent points, very well written and believable. Thanks for sharing.
A very meaty piece worth every pain staking chew. A second read a must to digest it all. Very, very good post.
Spot on . . . as usual . . . I like the way you break it down into comprehensible chunks . . .
Keri,
I didn't address "assume a perfect economy" directly but I did address "assume rational players;" that's what the Social Mores point was all about. Rational decisions may be made where money isn't the rationale and, as basic a point as that sounds, the Assumption doesn't allow for it.

I think retirement is one thing that changed business; the other is how out of sight medical care got. Those two factors changed how expensive it was to produce in the US and what we needed to ameliorate that, as acknowledged at the time even by GM, was more Federal involvement, not less.

Lezlie,
Thanks for the compliment, obviously. The things I see alone are more a source of frustration to me than of gratification. The reason so few others are seeing this is because they aren't looking for it. As I told you in a comment on your blog about life lessons, a big one with me is Stop looking so hard at the arguments and start looking at the assumptions underneath them. We're trying to weed a garden without doing anything about roots.

Helvetica,
It depends on what mechanism we use to get seed money to companies that want to grow faster than their profits can pay for. If it's all in the form of loans, it's banking; if not, it's investments/ownership. I've never really looked at the most efficient ways to get money into the right hands in the right quantities. That's probably more of an Alan Milner question, or maybe Rw009.

Dianaani, thank you.
No bad Kosherman.

I'd add this: democracy is based on the assumption voters will seek the alternative that most closely approximates their interests. When ideologies, traditional affiliations, and vested interests intervene progress in creating a govt. "for" the people is slowed if not stopped.

The other "assumption" not often fleshed out is that government is not a profit making entity per se. It can be manipulated in that way to serve the interests of the vested few, but it isn't set up that way and eventually this becomes a sort of corrective. At least, those who know better are given a leg to stand on in combating the greed of the hierarchy.

My salami doesn't have to be Kosher, but it has to have taste. Eventually, in this dialogue you have to talk about the difference between Keynes and Milton Friedman, but I'm sure you know that and wish to put your own spin on it. Economic theory is not for everyman. They need food on the table and the average American has a 5th grade reading level.
Just Cathy and Owl,
Thank you both. I was writing my answering comment while you were posting yours.

Ben,
Both good points but beyond the subject of my post. I'm talking about the nature of the market itself today, not the nature of government and its effects on the economy. In terms of economic theory, which I'm not really grounded in: Even if I were, I wouldn't go there because of who I'm trying to reach. I wouldn't want to talk to the average Congressman about Friedman and Keynes, let alone the average voter. I very rarely write anything very theoretical here because I want every point I make to be so screamingly obvious that you can't hide from it once you read it. I'd rather that anyone who relied obviously on the Assumption in an argument with one of my readers suddenly found themselves faced with very simple questions that they were having an unexpected amount of trouble with and, if the argument has an audience, even better.
@ Ben Sen the average reading level of the Spartan warrior was zero, zilch yet no capitalist pig would ever have dreamed of taking food off their table, if my knowledge of history serves me correctly when the merchants of Athens decided to give it a try the end result was the complete annihilation of Athens. Did any of you hairless apes ever possibly give it some thought that we should instill virtue in our offspring instead of the insane and scientifically untenable theories of laissez-faire
Every morning my alarm clock goes off and I get up and shout "Offspring! Time to rise and get our daily lesson about laissez-faire. There's this big evil organization called the Government and it will try to take your allowance from you! Don't let it! Now let's get ready for M16 practice with Uncle Token before the school bus comes. I want to see some bullseyes today!" Maybe that's my problem.

It could, of course, all be in the labeling. I've commented before about how "trickle-down" is really upside down, because by this model, trickle-down doesn't work but trickle-up does. Maybe we have the same problem with laissez-faire. Now, if the French had only had the foresight to call it "laissez-unfaire".....
Good summary kosher. Too often the defenders of laissez-faire and the free market stop at the lessons of the basic model as taught in the freshman year. Take a couple of more courses in higher years and one learns of all the shortcomings of the basic model. Everyone regulates their economies in terms of workplace and product safety, child labor, minimum wages, financial reporting and at least a minimal level of pollution controls. But if you listen to some of the mouthpieces on Fox, you get the impression that all regulation is pernicious.
Abrawang,
Thanks. I doubt the commentators on Fox care about those issues. My overall point, though, is that those regulations follow what I'd characterize as the second corollary: because there are priorities other than perfect market balance, there are regulations we're going to put in place; but even if you gave the Fox guys what they say they want, they STILL wouldn't get a perfect working economy for the reasons given.
Myriad asks an important question: if war drives capitalist economies, and we have been at war for ten years, why is our economy so depressed.

There are several interrelated answers to this question.

1. If we had not been at war for the past 10 years, the depression we in now would be much, much worse. A million more young men and women would be out of work, and a million more would have been laid off by defense contractors.

2. Yes, much of our war-making capacity has been out-sourced to private companies, which adds additional layers of profit to war making, which sucks more money out of the collective economy.

3. The impact onf war on the economy goes much deeper than simple armament production. War affects every spehere of the economy. If you want to see a real depression, cut off all defense spending beyond the absolute minimum we need for our national defense.
Keynes never envisioned the dark, primitive, macabre world that Milton Friedman and Alan Greenspan have created. Keynes was describing conditions. Friedman and Greenspan have been imposing their version of reality upon the Commonwealth.

There's a huge difference between a philosopher who observes conditions and draws conclusions about their implications, and political operatives masquerading as "worldly philosophers."

I will speak very briefly about how, when and where Keynes failed, which is where localism and globalism meet. Keynes proposed that aggregate demand governed economic growth, which presupposes that all localities contribute to the aggregate. What really happens is that there are global concerns that address aggregated demand, and local concerns that address local demand. Economies function most efficiently when local demand is serviced by local supply. Economies become progressively more inefficient when local demands are met by global supplies of goods and services.

The reason for this is self-evident, but Keynes didn't live long enough to see the symptoms evolve into the present condition.

When you aggregate production to address the aggregate demand, your global economy is at the mercy of localized demands.

Fluctuations in local demand reduce global demand, which adversely affects global production because the larger the system is, the more unwieldy it becomes. It takes a tractor trailer more feet to come to a stop than your small, efficient runabout.

While ostensibly advocating laissez-faire capitalism, Friedman and Greenspan were actually promoting the consolidation of global production into fewer hands for the specific purpose of diverting the political power of the individual nations into the hands of mega-transnational corporations that are essentially ungovernable by any single governmental entity.

Ultimately, laissez-faire capitalism (how I hate that damned French term; never spell it the same way twice) is nothing more than political anarchy, which always devolves into anarchy, which is the stage we are now approaching.

Whoever called economics the dismal science was absolutely right. The more you understand about economics, the more depressed you get.
Alan (and, for part of this, Myriad),
I'm not familiar with economic theory but your remarks have led me to some questions, particularly regarding local vs. aggregate.

Regarding Myriad's question about the military, my answer would be that this particular series of military episodes differs from previous ones in that the Bush administration didn't raise taxes to pay for it, so some gains in economic activity were offset by interest payments on the deficit it created. This is new territory: I'm not sure there's another historical example in any country of a government that waged war without raising taxes.

Back to local vs. aggregate: What sort of efficiency are you referring to? If you're talking about producing and distributing the most goods with the fewest people, aggregate makes more sense. It also makes more rather than less sense in terms of fluctuations of demand because the larger and more diversified your market, the steadier demand is - when one area is slow, another is typically active. In this respect, aggregate is safer than local.

However, there are also inefficiencies inherent in aggregate, and at least one of these really matters:

Meeting local demand in a customized sense is easier done at the local level. Aggregate works best when making a whole lot of something with no variation. Like you said: stopping the truck.

Transportation becomes a much bigger deal with the aggregate approach. Transporting goods over long distances is more expensive, more environmentally unsound, and slower.

The key one: If what you're looking for is job creation, aggregate is worse for the reason listed above as an advantage. Supplier consolidation is a real problem this way - not only does it reduce competition, it reduces jobs. If you have two competitors, each one has a production team, a sales team, an accounting department, a personnel department, a PR/advertising department, etc. When you combine two companies, many of these combined departments will be larger than either individual one was but not large enough to need everyone from both individual departments. That means layoffs. If one of the two companies was in trouble before the takeover or merger, the move might in the long run be a plus for employment, but if both companies were healthy (AT&T/T-Mobile), the result is to take a whole lot of employees who are operating efficiently and well and eliminate their positions in spite of the fact that they were, from a market standpoint, competitive. In fact, worst of all, their jobs are being eliminated by their company being bought precisely because they were competitive.

There is a further issue here which has tended to muddy the waters: Domestic vs. international competition. It is preferable to merge two companies if neither is capable of competing successfully with an international competitor (or series of competitors) on their own because losing most of one makes more sense than losing both. Now, I'm not at all sure how often this really happens. I suspect it's held over our heads more often than is legitimate.

Given that the local approach is, I think, better at job creation and maintenance, I would probably opt for an approach combining stringent antitrust enforcement with another suggestion of yours made elsewhere: protectionism. I don't object to tariffs, for one thing because I've watched the United States refuse to use them when major healthy international competitors practice all sorts of protectionism (tariffs not being the only way to do this), a prime example being Japan of the late seventies/eighties. Again, I'm not willing to accept that protectionism is a bad thing based solely on faith. One reason we're against it is because we're so eager to export but with a trade imbalance as awful as ours that may be too optimistic a concern, in addition to which our domestic market when healthy is more valuable than most of these foreign markets.
I forgot my first comment, dammit, but remember adding that your closing paragraph sums it all up... plus highlights the state of our county's complacency (sorry, but most of the anger is selfish and rote) and our leaders cynical use and abuse of same.
This is very good. I strongly recommend that you read Hyman Minsky. He's a very readable economist, and his most important contribution to economic thought is that the concept of equilibrium in economics is a fundamentally conservative construction, directly benefiting those in power. Furthermore, economics, by its very nature tends not only towards disequilibrium, but actual chaos. Valuations can be hopelessly overvalued or undervalued. The end result is that bubbles and depressions are not strange anomalies.

Bubbles and depressions are the very life blood of economics. And that is yet another reason why we need government regulation.
Sally,
Thanks for commenting on the second iteration.

ONL,
Thanks for the information. I'm not surprised that adjustments are normal. They're normal in the same way that earthquakes are normal - there's a certain amount of structural resistance to change, so changes don't always happen instantly in real time, their pressures accumulate.
MBA 101- How to attract a capitalist: engender ONLY 1 of 2 things, Fear or Greed. This is what they teach in school, folks.

However, school is full of propaganda, and the Wannabee a VC types use envy to imply THE INVISIBLE HAND is some sort of force of physics or nature ... it is not, it is, well, see paragraph 1 above.

Imua (Onward)
Well, if there is an invisible hand, it screws up a lot even when it's left alone. Onward (Imua)
The argument here reminds me of the philosophy of the American progressive religionist, John Caputo, who said rather famously that if only certain changes could be made to capitalism--the rich are taxed through an altered tax code, environmental regulations are strengthened and enforced, racism is combated etc.--then, if Marxists still complained that capitalism is a monster, based on exploitation at the most fundamental level, then he would be glad to meet that monster with a yawn. In other words, tamed capital is good capital, or at least benign capital, whereas "what we have today" is predatory capital. If only it can be "fixed", regulated etc., then things would be tolerable and the disastrous rush toward self-destruction could be arrested.

But this premise is based on a twin fallacy. The first part of it is that capitalism has ever been any different. In fact its past is filled with violence and predation. It began with the most violent displacement of people in history, the period that Marx refers to as "primitive accumulation" when hundreds of thousands of people were forced off their land and into factories, thrown in prison for refusing to work, for being in debt etc. It continued, through the cheap labor of early proletarian organization and the free labor of slavery, and finally, in the period just prior to our own, it sought out extra value through neocolonial violence--under the illusory label and utopian nonsense of "neoliberal" economics--all around the world. Its collapse is no accident, it is a result of internal contradictions that the system has carried within itself from the beginning. It proceeds by the ruthless logic of its own expansion, regardless of the costs to human beings and the environment.

The other objection to the idea of a "benign" capital is that the idea that its logic can somehow be regulated out of existence by government is patently untrue. This idea rests on the grossest assumption of all, the assumption that somehow what is going on today is separate from capital, that it is some sort of viral mutation rather than the playing out of the originary and consistent operation of the system. To regulate this or that, or nip and tuck here and there, would have almost no effect at all today, and in fact may even create more ruthlessness and destruction. To assume otherwise is to underestimate the sociopathic "genius" of global capital to find the very worst way of taking advantage of even the best intended of measures. For instance, do you realize that the original intention of the subprime loan program, which was backed by the government and given the blessing of Greenspan and Clinton, was to help the poor!? This is no joke or scam either. This was really the intention. But once given over to the social-organic, based on class exploitation, between labor and management, working class and upper class, and on "getting over on the other guy," between capitalists themselves, the logic took over and it became a form of mass predation. It was only later that the additional insult was added to the original injury and the mortgage-backed securities industry arose.

So even the most recent and most obvious events give the lie to this idea of bringing about some kind of soft or benign capitalism. What Caputo and others who believe in this fantasy fail to realize is their own utopianism. They both underestimate the power and (predatory) ingenuity of the system and overestimate the real-world grounding of their own ideas. I could say more, but I think that's enough for now.
Rated.
Boko,
Fair enough, but the history of the primary alternative is even worse. Communism in any governmental setting I can think of has produced worse oppression with less efficiency, taking the details of what in theory should be a very moral system and coopting its labels for the support of an oligarchy that is held even less to the rule of law than capitalist elites have been so far (with the exception of Nazi Germany, which was more of an equivalent on the rule of law question).

Given the failure of both systems, got any ideas?
Seer,
Thanks. (Took me a minute to figure out which advisors - I gather you mean those who told me to pull this Saturday when it originally ran and repost it after 9/11 so people would actually see it.)

I appreciate the cover assessment, but I don't normally get covers. In the year and a half plus that I've been posting, I've gotten two EP's. I don't know if it's because the editors don't like my writing or don't read my writing. I certainly don't begrudge them either; they've given me a free place to write and I write for those who read me regularly rather than for them, so I'm cool with that. I seem to be respected by my regular readers, for which I'm grateful; that respect is more valuable to me than the respect of the editors who are basically unknown to me.
Thanks for the invitation, K.S.

I agree with your analyses. For starters, the market orthodoxy is false. Markets left unregulated do not function as a system. Markets left unregulated function like gravity. Money flows to money. The less regulated the market is, the faster the market trends toward monopoly, and then seizure. Market ideology, and that old canard referred to as the "free market." Free markets do not exist, can not exist, and never have existed. To set a policy azimuth on a "free market" principle is to wave a magic wand and hope for the best. Markets require management to achieve whatever the values or principles of the society served by that market. Living in a world where "free market" superstition is indulged is like living in a world where serious consideration is given to the Tooth Fairy for dental maladies, where navigators account for sea monsters along the edge of flat oceans, and where gnomes and spirits cause seeds to sprout in soil.

Markets do not "work." Markets are worked. There is no automatic component to markets and there never has been. Markets always have some level of management. The notion of a "free market" is pure superstition.
Bill,
I am seriously glad I invited you a second time. "Markets left unregulated function like gravity. Money flows to money" is one elegant piece of analysis. This comment, with only slight editing, could function independently as a post. It has the twin virtues of being very informative and very clear, both of which are personal Holy Grails.
Kosher

Thanks for the invite.

I'm a little at a loss to write about "economic theory" in any terms that don't take into account the basic "unfairness" of any method of coercion. The best economy is the one that involves the least coercion, just as the best government is the one that involves the least coercion. To that end, encouragement is instituted among our offspring. Uncle Token doesn't give lessons in "Laissez Faire" so much as in "laissez ME the Faire alone". Unless i either hurt a fellow citizen or ask for help, don't bother me.

The biggest problem is the assumption that people who disagree with you are automatically either evil or insane. You are pretty good about not making that assumption, but the only thing that happens when you try to coerce someone like me into doing anything, is that the problem will no longer be whatever the problem was, it will then be that you tried to coerce me, and all else will become secondary. That is a useful thing to think about in terms of why the T-party is NOT against government, but is rather against a centralized coercive government- whether the coercion is about economic theory or the theory of evolution, encourage, don't attempt to coerce. The Lazy Fairy of encouragement is usually best.

People do best who do for themselves. They should be trained and encouraged to be able to "do " for themselves. This doesn't mean don't help, and it doesn't mean don't ask for help. But "Do it yourself" is only possible if they are "Left to go" (Laissez Faire) their own way. I've got more to say if you want to hear, but I'll have to come back later, the wife calls.
kosher - But beyond the polemics, you didn't answer any of my arguments. How do YOU plan on regulating a system that produces toxic mutations--in speculation, in predatory conditions, in slums, in planned famines and wars and other constructed "disasters"--not as side effects, but as its primary mode of producing extra value? And how would a regulated system with the present gigantic inequities look any different from the oligarchies of the past, real-socialist or capitalist? Aren't you just arguing for "resetting" the system in its current condition, and throwing those millions who have been shoved into poverty by the crisis to the wolves so the rest of us (a rapidly diminishing number) can go on?
while we're talking about economic models and coercion, I came across Whoreville's latest post :

http://open.salon.com/blog/jimgalt/2011/09/16/assume_the_position_and_accept_the_insertion

I'd be interested to hear your opinion on it- I'll check his comments, or watch for your comment on it here.
I'm in an interesting position here, being asked to defend regulated capitalism from Token and Boko at the same time. So I'll start with the easiest task and answer Pierre:

Overall I agree, though I have some issues with the specific cases here. There are more incentives for private sector employees building jets to build them safe then you seem to assume and, I'm afraid, fewer incentives to keep the costs down if I know anything about defense contracting. Also, public sector employees aren't always more conscientious than their private sector counterparts. Not always less, either.

OK, on to the tightrope:

Token,
This post is first and foremost about efficiency. I've observed that a lot of people appear to assume that the more we stay out of the way of free markets, the better they work. I don't buy that; this post is about why I don't. I might care about people's feelings in general but not in this context. It's certainly not about what motivates the Tea Party; in one respect, I'm offering a handle on how to make more sense of the Tea Party than the average liberal is capable of. Unlike most of OS, I am not saying "Tea Partiers, you heartless hypocrites!" I'm saying "Guys, have you noticed that you're building on a foundation that can't support your weight?"

Boko,
I would assume you don't have a problem with the point of the post, which is that unregulated capitalism is less efficient than regulated capitalism. That being said, I'll get to your points:

Yes, there are tendencies within capitalism for capitalists to screw people, just like there are tendencies within government to protect people. There is not an historically straight line going from less oppression to more oppression. There are swings of the pendulum rather than an uninterrupted slide; in fact, in many respects we've climbed more than we're given credit for, certainly in terms of gender and ethnic equality, consumer protection, worker safety, etc. Both Roosevelts brought less unbridled corporate power, as did Lyndon Johnson. Can we regulate our way completely out of our problems? Of course not, though we can regulate our way a good deal further out than we are at the moment.

If you want me to say that capitalism is extremely screwed up, sure: Capitalism is extremely screwed up. If you want me to say that capitalism is inherently screwed up, sure: capitalism is inherently screwed up. However, how screwed up it is may be a moot point. In order for its screwed-upness to matter, an alternative has to be realistically available and some evidence has to be presented that said alternative is more desireable. You're asking me to defend capitalism. Compared to what? What do you propose we replace it with and how to you propose to get there from here? If capitalism is absolute shit but no alternative is available, then who cares? If capitalism is absolute shit and you think you have an alternative whose shit is less absolute, I'm listening. Without an alternative, this discussion is pointless
Kosher

I also speak of efficiency. the best "free market'" capitalist enterprise I recall working at was my Grandfather's dairy farm. Of my grandfather's ten children, all earned a certain living, enough that those who wanted to were able to obtain college degrees- 2 doctorates, a master and 5 Bachelor .
The two brothers who stayed on the farm inherited it, one raised a family, the other never married, but spent winters hunting in Alaska and fishing in Belize. We cousins who worked there as summer help made room, board and $15 from Memorial day to labor day.

It was also the best experience of "socialist" living I have ever had. From each according to his ability, to each according to his needs.

Of course what made this possible was our love for each other as a huge extended family. I have 54 first cousins, about a quarter of whom I'm unclear on their names-- but we remember and love each other . Agree with each other? Hell no-- but we took care of each other, and we continue to take care of each other.

This is what I would call "Christian" (You may refer to it as "Enlightened Self Interest") capitalism, the ideal sort wherein you treat all people fairly and as you would be treated yourself. Like Family. Not a lot different from idealized social democracy.

It isn't the economic system that is more "fair" or more "efficient", it is the attitude of the people involved and why they do their jobs. "Fear" is a common motivator for both "Capitalist" and "Communist" systems. I's also one of the least efficient. "Joy" is one of the best motivators- though I'd rather not say where I got that one.

I'm not sure how you would classify the "economy" of the Amish, but I take them as a model of efficient economy. This ties in to the question of coercion I mentioned above. the worst punishment the Amish inflict on their wrongdoers is to leave them alone. (Shunning)

Our Tea Party economic foundation is small family businesses. The ones who lack lobbyists to play at the crony capitalism of a Chase, or a GE or a Solayntra. I have absolutely no objection to reestablishing the very big difference between "Natural Persons" and Corporations. Corporations are the golems created by government and the government must control them. But by the same token, governmenmt is the golem created by the people , and we must control it.

God help us all when the two Golems of Government and Corporation mate to form the crony capitalism of Fascism. This appears to be the goal of the current federal government, despite whoever is president.

Read Sarah Palins Indianola Iowa speech for a little bit of enlightenment about how she (and we) feel about Crony capitalist. I would say you might have a little trouble assessing the firmness of the foundation, until you understand the nature of the structure being built.

( As to Whoreville's post on how the moneychangers and market manipulation are the root of economic evil- it is another crux of economic understanding, but maybe for another time.)
Token,
If the economy worked like your grandfather's farm, we wouldn't need all that regulation. Unfortunately, it doesn't. I doubt your grandfather would have dreamed that agribusiness would put chickens in cages too small to turn around in, basically for life, because it was cheaper to raise them that way. How would he have reacted when he got undersold by guys like that? We shouldn't have to legislate decency, but sometimes we do. I'd rather tell agribusiness that you can't legally do anything that inhumane to an animal than allow them to leave guys like your grandfather with the choice of learning to be inhumane to his livestock or going out of business. There are simply too many cases where that it the choice.

The point isn't to overregulate humane, decent people; the point is what to do when we're faced with people who are neither humane nor decent. Given that the inhumane indecent population doesn't readily self-identify ("Will everyone inhumane and/or indecent please raise your hands?"), the only way to reach them is sometimes to use blanket regulations.
Oh, regarding Whoreville's post:
I took a quick look. He didn't write anything, he presented three videos, which altogether run for something like 25 minutes. I don't have a block of time that long to spend on a single post.
Kosher

my point, and much of the "T-party small business" point IS the distinction between "Family Farms" and "Agribusiness"
Read Palin's Iowa speech- we object to the government attempting to "Regulate" the behavior of "Natural Persons" as if they were government subjects while treating unnatural persons (Corporations, politicians, and market manipulators) as a ruling elite.

As to "Unnatural Persons" (Be they corporations or simply Milo Minderbinder type moneychangers ) , the regulation of such Golems who pull such scams is one of the reasons for government (NB- Federal Government vastly oversteps the "Interstate Commerce" clause- the states and local governments need to be restored to their proper authority- they are closer to and more answerable to the people)

There is no doubt at this point, however, that the Federal government is feeding these monsters with crony capitalist legislation, rules, grants, subsidies, patronage and other pork besides which the issue of income tax rate is irrelevant.

I have no objection to the government regulating the market all that is required for public safety and "honesty of trade", so long as the government is regulated by "The People" and not Lawyers, politicians and Crony capitalists.

The current state of the world market is neither capitalist nor communist, I'm not sure what to call it except Milo Minderbinder 's M& M enterprises on steroids.

The problem of the regulation the federal government does today is that, as the banker to the cartels, the regulations it passes are designed from the start by favored lobbyists to boost their interests and destroy their competition.

Regulation of government created entities?( corporations)
That's what government is for.
Regulation of natural persons by a government that is a puppet of those entities? No.
Also - regarding what Whorevilles post concerns- it points out the "Grandfather" of all Crony Capitalist schemes, the Federal Reserve , and how it came to be the arbiter of our economy.

A discussion for another time, except that The Federal Reserve is the largest Golem in the government/market/Citizen mix of "Regulations of the Market for the Public Good" (and only incidentally tremendous private profit)
A further point:

The "blanket Regulation" is what keeps people from allowing regulations at all. As an example, I grew up drinking raw milk straight from the cow. I don't have any opinion as to whether it is better or worse than pasteurized milk. Some people claim benefits and insist on drinking it raw AS IS THEIR RIGHT. There recently was a full scale swat team raid complete with family dogs shot and terrorized children held away from their parents without explanation, because it was alleged the family farm was "Selling" Raw milk. Even though the co-op was structured specifically for those who wanted raw milk, the "ringleaders" ( a local farmer and his wife) were charged with RICO violations.

Personally, I believe that all those who set up and participated in that raid should be hanged, but then, I can be as indiscriminate in my judgment as the Law Enforcement Professionals.

Until the government learns to discriminate between "The Bad Guys" and people pursuing their own happiness as is their right, and dispel the more than suspicion that such regulation is passed merely to suppress competition to crony cartels, we will continue to object to regulation by the ruling classes crony government. Indiscriminate Blanket Regulation designed by and for government cronies IS the problem.
Token,
I have no trouble with this line of logic. We don't like cronyism any better than you do. In fact, those big businesses who are getting favorable legislation are a lot more likely to be run by Republicans than by Democrats. When it comes to Big Business, Democrat is the exception, not the rule.

Given this, if there were anything bipartisan about the Tea Party, I might buy this line of logic, but most of their vitriol certainly looks like it's headed this way rather than the other way. If they want to take on Wall Street, more power to them; there are bipartisan alliances possible on key issues if that's the case.

Be careful here. If you are involved with the Tea Party because you think it's addressing a key concern of yours beter than it's being addressed elsewhere, I get it. However, it doesn't follow that the rest of the Tea Party's agenda is represented by you. What I've seen out of the most public Tea Party candidates lately has been a complete refusal to consider raising taxes on the wealthy BUT consideration of letting tax breaks run out for the middle class. That doesn't say they're anti-tax so much as that they're anti-tax on some people, specifically people who can both afford to be taxed more than the rest of us and who are currently taxed at lower rates than the rest of us. That doesn't sound like you at all.

You don't like to see the rich setting the agenda and getting away with murder, particularly at your expense. You're also too smart to buy into the "but these are the job creators" argument, which absolutely doesn't fly. After all, how does inheriting a fortune create jobs? How does finding all these shelters create jobs, at least jobs here?

I hate to break it to you, I really do, but in this respect you may belong more with us than you do with the Tea Party. Yeah, it's galling, and yeah, there are all sorts of things about liberals that drive you straight up the wall, and even yeah, liberals are way too trigger-happy (forgive the expression) when it comes to using tools you'd rather not go near, but there's one thing you should understand about liberals, the one thing that defines us more than any other single factor:

Playing fields that aren't level drive us nuts.

Seriously, that's liberalism in a sentence. Damned near everything we do is driven by that. Government is the handiest tool for addressing this concern but we're married to the goal, not the tool. Hand us a better tool and we'll switch to it.

I'm dead serious.
Like Scanner, I'm no economist nor will I try to be. However I have to agree with what you have said here. I will agree with others here, who said this should be on the cover page!
Thanks, Kenny. I'm not holding my breath. I don't see many covers.
These assumptions are correct. Sadly, much of the math taught in current economics courses in American universities, is based upon qualitative assumptions such as the ones you lay out above. After that, all the math just serves to prove that which was assumed qualitatively, from the outset.

You really don't need complicated math to understand economics. The greatest economists who have ever lived didn't use much math in their writings. Smith, Riccardo, Keynes, Marx, List, etc...
Nice, I may not exactly have much knowledge of this type of thing, but from what I've learned, you're right.
This is a fantastic piece. Your arguments are so strong and you make it seem so obvious that it's a wonder so many people have been taken in by the other side.
Kemstone,
Thank you. Also, glad you got to it.

The reason people are taken in by the other side is because no one I know about is making this case explicitly. It's one of my biggest frustrations as a Democrat: Most of us are so busy castigating the Right for asking what we think are the wrong questions that we don't notice how often they come up with the wrong answers.

And it's really often. They talk about Christian values and don't go anywhere near Jesus' actual teachings. They talk about economic efficiency while pushing policies that kill it, a list so long I don't have time to make it here. They oppose abortions while simultaneously opposing sex education in the schools, which statistically reduces unwanted pregnancies and, by extension, the frequency of abortions, in addition to having the added conservative benefit of reducing teen sex. They oppose funding for programs like Head Start even though such programs reduce the numbers of lifelong criminals.

And how do our guys respond? "Keep religion out of politics," which makes us look anti-religion and, by extention, anti-God.
"Tax the rich more because they deserve it," when taxing the rich more would create more jobs than taxing them less does. "Be realistic about what our kids are going to do as they come of age" when sex education even reduces teen sex because kids become more aware that sex has serious consequences. "Poor minority kids deserve Head Start" when such investments can save us a fortune, both in reducing the number of criminals and raising the number of job-holding taxpayers who create more business, pay more taxes, and use fewer social services. The arguments we ignore would be far more effective with the Center and the Right than the arguments we use, which we use because they appeal to Us. But We're not the target audience that counts!

And we wonder why we lose elections.