Friday, October 31, 2008

More on (moron?) the market (and other systems)

I wrote yesterday about how government intervention, even that which is designed to "free the market," is inescapably non-market in nature. I may have appeared to disagree with that intervention, but I don't; despite being essentially a free-market guy myself, I recognize the need for democratic institutions to condition the market at times. It's the specific remedy which needs to be discussed, and I really don't care for the snake oil that's being peddled by folks who want to cover up the real effects. For example, a cap-and-trade system is not market-based at all, as the cap has to come from somewhere, and it is fair to question how these caps will be derived, who will benefit, and so forth.

More broadly, and excuse me if I've written about this before, we need to understand that these systems in which we live are created by human beings for the benefit of human beings. There are those who would claim that free-market capitalism and representative democracy have somehow been conferred on us by God, but that's a pretty unhelpful view, not to mention kind of nuts.

Since they are human-created systems, we have the right to change them when they don't work in the ways we would like, when their results cause conflict with other values. We could have a health care system based solely on market principles, but it offends almost everyone's sensibilities to see people dying in the street.

Clearly, if we believe in the basic premise of the system, it makes sense to find solutions within the system itself. One of the remarkable aspects of our democratic system is that it offers a marvelous balance of powers within the system, so we can frequently find redress by using the system as it was designed. For example, no elected official has an infinite term, so dissatisfied voters can turn out that official at the completion of the term.

More amazingly, our democracy allows us to change the system itself. Do we want term limits for senators? We can get that by passing an amendment to the Constitution. One of the current issues in Illinois is that we don't have a recall provision in the state constitution, and a lot of people would like one, if only to get rid of the hugely unpopular governor. However, there is a mechanism by which we can add a recall provision if it has sufficient support, and this is a real strength of our democratic system.

Unfortunately, free-market capitalism has no such facilities within itself for change. The very essence of it is "freedom," which includes freedom to uplift as well as tear down. If a CEO decides to pay his/her workers 50 cents an hour while pocketing $20 million a year, there's nothing in free market doctrine that prevents that, no matter how much our sensibilities might be offended. (Yes, I understand that there are other countervailing long-term tendencies, such as competition among companies for that labor and worker mobility, but these tend to work fairly slowly.)

It is natural to assume that, were pure free-market ideology allowed to prevail, that individual incomes would fit a bell-shaped curve. I don't know if that's exactly true, but let's assume that as reasonable. Obviously, that would leave significant numbers of people below a line of subsistence, and that result offends most of us. But, working within the free-market system, we have no correction to this.

Therefore, we need some extra-market way of making results conform to our other beliefs, our sense of fairness and justice. Few people realistically complain about such things; only a very small number of people on the fringe would seriously contend that we should dismantle our public education system, even though it clearly is not the result of free-market forces.

Most of us understand this pretty well, we really don't think, Reagan notwithstanding, that government is always the problem. It is the only system through which the mass of people, through their elected officials, can effect changes to the result of the pure free market. That is why the current Republican thrust to paint Barack Obama as a "socialist" for believing that wealth needs to be shared is doomed as a campaign strategy, because there are few of us who are rich or heartless enough to believe otherwise - we are all, in the Republican formulation, socialists, even the preposterous Joe the Plumber.

What is interesting is to see even the most unassailable orthodoxies, upon closer examination, fall prey to modification based on real-world results. There have been few things more unanimously supported over the last few decades than wondrous free trade. Anyone who pointed out potential pitfalls (or that the very definition of "free" in this context is problematic) was hooted down as ignorant; certainly no self-respecting economist would utter a discouraging word. That "amateurs" would point out that 60,000 Americans paying $1 less for a sweater doesn't really make up for the loss of a $40,000 per year job made no difference to the folks who believed that national income was the only measure of success. Concern over the plight of workers who were losing their careers was swept aside in a fervor of graphs and equations that proved we were better off, no, really.

So it's interesting to read an article in The New Republic by Christopher Hayes in which he documents growing doubts among economists that the gains from free trade are as large as we were promised, that other factors need to be taken into account (link from Mark Thoma). I won't quote from it, you should read it for yourself, but it does show that theory can sometimes yield to practical results, at least in some minds. We would be wise to heed this example in considering future "common wisdom."

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