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.