Wednesday, March 16, 2005

Government Lesson No. 1: Government Interference with Economics

Political interference in the workings of the free market economic machine is a perfect example of government gone amuck.

For this first lesson, read Economics Lesson No. 5, below.


Blogger Gary Malcolm said...

Interference. Very interesting choice of terms. How, pray tell, can the market make the best choice for one's sick grandmother? How does the market ward against disaster in light of the developing supply and demand of non-elastic resources such as petroleum? How does the economist equate the value of clean air or mercury free fish in comparison to the the stock value of WalMart?

There simply must be a flaw in giving time-point valuation to life requirements.

3:38 PM  
Blogger Gord0 said...

Responding to Gary Malcolm: Markets don't make choices; people make choices. Free markets just provide the framework that leads to better choices. The alternative is to hand the decision-making to people who care only about power and don't give a damn about your grandmother. Or who care only about winning the next election and would trade the last barrel of oil in the world for a few more votes. History is littered with examples of individuals who set out to make the world a better place (in their humble opinion) by interfering with markets. But show me a case where one of those individuals actually succeeded.

7:06 PM  
Anonymous jim h said...

Hear hear, gord0.

Also responding to Mr. Malcolm,one of the problems with understanding the logic of free markets is the lack of understanding of the logic of economics. Unfortunately as Katy has brilliantly pointed out in the few things I've read so far (sorry, just came across your fab blog this evening!) economics is a highly politicized discipline, if these days it can be called a discipline at all. That's why it used to be called Political Economy.

The main idea around "interference" is the notion of "moral hazard". By obfuscating the actual condition of economic health through monetization of debt, manipulation of price indicators like CPI, creating smokescreens and circular logic to defend incredible level of public debt, we create a situation where people are less able to make rational economic decisions since the signals are made deliberately inaccurate. "Tough love" generally leads to more discipline and responsibility than "coddling".

Unfortunatley these days, it is not a case of left vs. right or republicans vs. democrats or other variations of the same around the world. It is the power elites against everyone else. They love it when we argue about left and right, because it camoflages the actual axis of interest which is up and down.

In the case of your (I hope hypothetical) grandmother, the value she represents is large, since a very effective MO for politicians for a very long time has been to MAKE her "sick" (figuratively or really) then "come to the rescue". Your grandmother then becomes a poster child for increasing taxes and expanding government since "something must be done". Creating a need that wasn't there in the first place and then making us dependent on the "solution" which inevitably puts more and more of the nations wealth under their control. That's how you accumulate power.

Fun eh? Until you're hooked and the powers that be say, "oops, remember that Social Security thingy we promised you?... sorry baby, gotta go"

1:01 AM  
Blogger Gary Malcolm said...

Gord0 and Jim,

Thanks for the reponses but neither have addressed my questions beyond cheerleading your local economics department. Please illuminate for me why the air you breath is less valuable than the belching petro-chem plant down the lane. Explain how the market will correct my great-grandchildrens DNA related illnesses. Show me how economics will create schools of new blue-fin tuna. For that matter, what is the dollar value of a school of tuna that remains unfished and why does the dollar value even matter? Cost-Benefit analysis of our environment has worked very well so far, just ask Kiribati
(Sarcasm dripping from keyboard).

Keep reading for slightly related rant:

Philosophically, I see little difference between Libertarian/Anarchical systems and the blind faith of free market fundamentalism. Isn't the societal contract an attempt at gaining control over randomness or at least guiding our communal future? And at the most basic level that contract is a belief that we can control our actions to the greater benefit of ourselves.

gord0, you made a very telling statement, " The alternative is to hand the decision-making to people who care only about power and don't give a damn about your grandmother", that illustrates what has become a truism of Americans broken relationship with their government (really a reflection of themselves).

We vote, pay taxes, and consume to no end, all the while hoping that some greater 'law' rules the relationship we have to our possessions. Free markets have gotten us this far, we are told, and they are the path to a better future. My favorite one-liner is the blind acceptance of "Supply and Demand will control profit taking." In a world of infinites, such as government printing presses, this may hold true, but we are not fuzzy math widgets.

There has never been and never will be a free market for anything you can make, sell, or imagine. Markets are and have always been manipulated by people in postions of power. The best we can do is help guide that manipulation. Movement towards a 'Free Market' can typically be redefined as one interested party disregarding its own interests to the benefit of others.

1:29 PM  
Blogger Gord0 said...


When I read your post it seems that you still have faith that if there were just a few more rules, the world would be a better place to live in. I can only admire your optimism.

We live in a society that has an order of magnitude more rules than have ever existed for any previous society. Yet to read your post it seems that we've got it all wrong and the solution is more intervention by our omniscient leaders. You'll pardon me if I'm skeptical.

I'm not even sure what further intervention you have in mind. Would you outlaw all uses of petroleum and all fishing (except, perhaps, for senior members of the government, their families and close friends)? Are you thinking of banning consumption? Banning possessions? I'm not sure that your world would be preferable to the one we're living in.

Regarding your "slightly related rant":

1. I haven't seen a copy of the societal contract, so I can't comment on that document. As you might guess, however, I'm a little bit suspicious of any steps that the government might take to "[gain] control over randomness" or "[guide] our communal future." This sounds a little bit like a euphemism for "removing my freedom."

2. I'm not sure of what the relationship of Americans with their government used to be, so I'm not sure what's broken.

3. I'm not sure who said "Supply and Demand will control profit taking." Whoever said that was probably not at the top of his class in economics. Free markets that allow multiple participants that will produce competitive pricing. Profits are a necessary (and desirable) feature of our economic system.

4. I'm glad to see you share my distrust of "government printing presses."

5. I agree that people will attempt to manipulate markets. However, in my opinion the correct response is NOT to encourage government to "guide that manipulation." Rather, the response should be to ensure that markets are free and open to other participants.

2:26 AM  
Anonymous franko said...

i think the dilemma is that human organization is about deciding what practices that helped us arrive at the present should be continued and which ones should be discontinued, coupled with the consideration of new practices that have yet to be enacted, and trying to discern how the various configurations will behave - this exercise should be as logical as possible, but the best method devised by homo sapiens (so far) is democracy which, while it has much potential, is not perfect

keep up the great comments all,


5:45 AM  
Anonymous jim h said...

Interesting comments. Gary I'm not sure if I was entirely clear in my earlier post so let me expand... and I assure you that the last thing I intend is to cheerlead any economics department. In fact I was quite openly despised by some of the more opportunistic interpreters of the discipline at my old school.8-) In fact I think many economics departments (funded by your friendly neighborhood multi-national) are decrepit cesspools of corporate and political toadyism that aren't worth spitting at.

Economics, like any other field of systematic inquiry began as observation, not prescription. It is affectionately called the Dismal Science because the main drivers of behaviour that early economists observed were fear and greed, primitive emotions that while distasteful to contemplate, tend to pretty accurately isolate the basic drivers behind human economic behaviour. Like most other fields of inquiry, as the data grew and patterns were identified, predictability became tantalizingly close and folks in power became interested. Why? Because if you take some of the stuff out of context, you have yourself a pretty effective political stick to swing. In the "age of reason" anything that called itself "science" was definitely a weapon to have if your aim was political. Think "natural selection", a stick swung hard by Hitler (amongst many others), think "nuclear physics" (another stick still being swung irresponsibly in the name of politics). People "bought it" because, of course, the folks with the big words from the big cities must have the big brains.

When Katy talks about "interference" she is referring to exactly that. When I refer to "moral hazard", I'm talking about the same thing.

Not sure if I understand what Gord0 was saying in his point about supply and demand, but the basic observation is that supply and demand tend to toward a price equilibrium ASSUMING A FREE MARKET. Why a price equilibrium (or stability)? Because if anyone is free to enter that market, and if the profits are unreasonably high (or attractive to greedy people) they will enter it and create more supply thus decreasing the equilibrium price. That is to say, a truly "free market" does temper profits because greedy people will always crowd in. That's an observation of behaviour and outcomes, not a prescription. Of course if there are no profits, people will leave that market because the greedy people become fearful people once the prospect of "easy money" is extinguished.

Now if we "manage" those markets though tariffs or other trade restrictions, it is no longer free and the level of profit is no longer tempered by free participants. Look at the sugar market in the US! So now the market is no longer subject to natural economic behaviour, it has become a political football. Who wins? People who are in a position to manipulate the power of a "captured market". Who loses? The people who used to make their living by understanding no more than the simple nature of supply and demand, weather and fashion and the stuff that most folks can fathom. Once there is sufficient "interference" in the market, ordinary folks can't make heads or tails of it since it is no longer reacting to human nature. We now have a manipulated market driven by a political agenda. That generally tends to hurt "politically unsophisticated" and "politically unconnected" people, and generally speaking, moral people.

When equilibrium pricing becomes distorted through "policy" and the market is not open, we invite speculation and the moral hazard supporting greed untempered by fear. Companies become focused on profit for profits sake at the expense of pride, community, and sustainability. The players no longer have any interest in the future since the temptation of the present is too large. Sound familiar? Look at the business news in the USA any day of the week these days. Greed without fear and the devil take the hindmost.

Unfortunately, most politicians who tout "free trade" and "capitalism" wouldn't recognize either of these if it bit them in the ass. So please don't confuse "economics" with "politics" in the pure sense.

Big government creates more moral hazard because the natural economic environment becomes increasingly polluted with politics and ordinary people become disenfranchised from their natural ability to understand how to make a living. People in a natural economic environment do not shit where they eat. "Government" can force us to do that.

To conclude, I share your long-run concerns, but in my opinion we are better off in conditions where ordinary people make decisions for themselves, not wait for bureaucrats to make policies based on the donations of a commercial corporation or the agenda of a political one.

1:42 AM  

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