Monday, January 12, 2009

Jeffrey Sachs makes a Case for Bigger Government

Jeffrey Sachs is an interesting figure in the world of economics. Besides doctoring around on the economies of Bolivia and Russia, he is responsible for the “Sachs Plan” that has been imposed on Poland in 1990. He basically pushed a young and insecure democratic government into extreme measures of deregulation and privatization, in an example of economic “Shock therapy”. It is hard to say exactly how that could happen to a government that had essentially directly emerged out of a labor union and was as far left as can be, but he seems to have assured the struggling country would obtain substantial financial support from the IMF, which then however was never provided.

After his plan was put into place basically overnight, food prices soared, unemployment rose sharply resulting in strikes and demonstrations all over the country by a population who felt betrayed. In the first two years, Poland saw 30% reduction in industrial production. People were eventually sufficiently fed up with the experiment and the government had to cut back on its plans. Today, Poland is doing economically reasonably well, I am tempted to say despite not because of Sachs' help. Poland's unemployment rate though is still the highest in the European Union. What is most dramatic indicator of the change that Poland had to swallow: from 1989 to 2003 the number of Poles who lived below the poverty line increased from 15% to 59% [1]. I am far from being a supporter of communism and think the transition was a good development, but it could have been done in a better way, more sustainable and less painful.

I was thus pleasantly surprised that Jeffrey Sachs' recent book “Common Wealth” is a very reasonable and moderate account on economic and political development that assigns a place to government and is respectful towards other culture's preferences towards regulation and social welfare. It is nowhere close to free-market radicalism or advocating the need for shock therapy. Jeffrey Sachs has an essay in the current issue of Time Magazine (Jan 19 2009 p. 34-6) titled “The Case for Bigger Government” which reflects this respect towards the role of government even stronger. He writes:

“Even as our economy worsened, many Americans consoled themselves with the belief that at lest we were better off than people in other rich nations. No more. When you compare the U.S. with Canada, Western Europe and Japan, the news is sobering. Our child-poverty and infant mortality rates are the highest, our life expectancy is the lowers, our budget deficit as a share of gross domestic product (GDP) is the highest, and our 15-year-olds rank among the lowest on tests of math and science [...]”

One could add that in the USA “The national direct estimates of the percentages of adults lacking Basic Prose Literacy Skills are 14.5 percent for the 2003 National Assessment of Adult Literacy.” In other words, about one out of seven Americans can't read. Sachs continues:
“A pressing example: our mostly private health system, at $8,000 per American, is twice the cost of Europe's mostly public system, yet with worse outcome. And nearly 50 million Americans lack health insurance [...]

As our budget choices were getting tougher in the 1970s, Europe faced similar dilemmas and took a different course. While Americans rejected new taxes and new domestic programs, Europeans elected governments that introduced higher taxation, many value-added taxes, to cover the rising costs of health care, education, infrastructure, poverty relief and international-development aid. Ultimately, the Europeans restrained excessive growth in the welfare state in order to maintain global competitiveness and rebalance their economies and succeeded in sustaining the public-private partnerships and welfare-state benefits.

The European strategy, with levels of taxation and government spending roughly 8% to 10% of GDP higher than in the U.S., has many successes to show for it: less costly and more reliable healthcare, the elimination of hard-core poverty, solid educational achievements, and social services that ensure better care for children and more flexibility for mothers and the elderly.”

He finishes by pointing out there won't be one solution for everybody but that different countries will prefer different balances, depending on their social, cultural and historical context:
“The U.S. will not mimic Europe for many reasons - size, diversity, tradition and, of course, vested interests - but we an learn from Europe. Most important, we can see how government can be a partner of the private sector, not an enemy. The time has arrived to restore national prosperity and security with a smartly rebalanced partnership between the public and private sectors.”

I would then hope that similarly the Europeans acknowledge they can learn from the USA, to begin with how to mobilize their citizens to politically participate and to identify with the Union.


[1] Numbers: Naomi Klein, “The Shock Doctrine”, p. 230 and references therein.

45 comments:

Ben said...

Shock Doctrine was good, eh? I recently reviewed it on my blog.

It's quite a polarizing book, so I wouldn't be surprised if you hated it.

Bee said...

Hi Ben,

I haven't finished it. I am a bit skeptic admittedly. Though there seems to be a lot of truth in the argument, it is a very one-sided account of events. I will probably have a review too at some point. Can you leave a link to yours? I might look it up then. Either way, the book is a useful summary of data of all sorts. Best,

B.

Uncle Al said...

Economics Nobel Laureate Milton Friedman wrought an inverse US miracle ("Whip Inflation Now"). His Boys From Chicago created Augusto Pinochet (massive executions trimmed decimals). The USSR did no better.

President Obama inherits a serial implosion of leveraged credit, positive feedback unemployment, 60 million retiring Baby Boomers and 30 million Mexicans, a lost war and its $4 trillion direct debt. Slums will go Rodney King.

History disparages economic theorists. Obama will do his best to benefit the most in a diverse, multi-racial, sustainable, compassionate manner utterly orthogonal to empirical reality. An old star's iron core collapse is not derailed by an incremental puff of heat. Photodisintegration obtains, then a supernova.

America's last, best hope is Operation Black Scythe. End the Middle East. Ten years of fuel elasticity can recreate a negative-feedback First World... in your dreams.

Amos said...

His prior proposals (i.e., "shock therapy") having been a complete, total, and utter disaster, I have a great deal of difficulty understanding why anyone would take him seriously now.

In all events, economists did learn a lot from the "shock therapy" experiment of the 1990s. Most crucially, the role proper initial allocations and protections of property rights, and the degree to which the market can penetrate government. None of this is a defense of regulation, in fact quite the opposite, but it was an interesting experiment.

stefan said...

... it was an interesting experiment.

Interesting point of view. Would you tell those people who lost their jobs and dropped into poverty into their face without blushing that they took part in an "interesting experient"? But thanks for making clear to everyone your high moral standards. Economics really neeeds proponents like you.

Bee said...

Hi Amos:

I halfways expected you to comment on this, but interestingly your comment itself is the opposite from what I expected! I thought you'd be defending shock therapy lamenting Sachs as having fallen off faith.

You are right that the failure of these attempts is not an argument for regulations. (I am still not quite sure you have extracted my opinions correctly from my writings, so let me add that I am not advocating more regulations just to make sure.) What this shows however is that the attempt to impose a system on nations against people's will results in disaster. You can't work against people's preferences about how their lives should be organized unless you use military force (as has been the case e.g. in Bolivia), and different cultures and different histories result in different preferences. You can't dictate people a solution that you have derived from a textbook if they don't want it. It's not a stable solution.

Failing to understand this is also the reason why Iraq is such a disaster. All these millions of people had a culture, they had a life, they had and have opinions on how their country should be organized. Opinions that maybe weren't listened to, but instead of offering them the possibility to decide about their own future once the main obstacle was removed, another imposed system was put into place based on the opinion of leaders of a different country.

Germany after WW II is (as far as I am concerned) a brilliant example for how rebuilding democracy can work well. It was a system worked out together with the country, and it was based dominantly on democracy as a foundation and not capitalism. It was a political system they worked out, not an economic one - this would follow. The result has been, and still is, a mixed economy (the Germans call it a 'social market economy' but this seems to confuse Americans) that has been widely accepted and been stable ever since. Why hasn't this recipe been repeated, but instead been replaced with 'shock therapy'? The only answer I can find is religious belief in the merits of rapid privatisation and deregulation with neglect of the actual situation at hand and the inhumane conditions caused. Are you still wondering why I am against neo-liberal ideology? But a few people have made a lot of money with that. The problem is, here as elsewhere, that influence depends on the wealth people have.

I have a great deal of difficulty understanding why anyone would take him seriously now.

The problem is not if people make mistakes, but if they don't learn from them. Unfortunately, instead of openly analyzing and explaining the problems he might have caused, Sachs seems to instead attempt to re-interpret history and put himself in a better light. Either way, I like the analysis he provided in the article. Best,

B.

Amos said...

What this shows however is that the attempt to impose a system on nations against people's will results in disaster.

You can't realize impose the free market against a nation's will, since a fee market is nothing but the will of individuals.

The lesson economists learned from "shock therapy" is a different one. We thought that institutions and laws didn't matter much, because people would just transact to the right allocation of property rights, etc.

What we found out is that its much harder to create non-corrupt institutions than we thought.

Chip said...

A point about numbers. I flat out don't believe that 15% of Americans can't read. I do think the National Assessment of Adult Literacy is right on if you interpret their results as meaning that 15% of Americans read at an elementary school level rather than a high school or better level.

Bee said...

Hi Chip,

Indeed, I was skeptic about the meaning of that number as well. I got this information from this site, I believe the remark about Zimbabwe stems from comparing it to the illiteracy rate from a completely different study (forgot which, but even though that study found a illiteracy rate of 13.7 for Zimbabwe, that of the USA was at .2 or so, ie there is something fishy with that comparison). I think the number of that survey for 'basic prose literary skills' doesn't just count illiteracy in the sense of can't decipher words, but can't extract meaning from writing. There is more information about it at the website I linked to, the sentence is a quotation. Best,

B.

Bee said...

Hi Amos:

a fee market is nothing but the will of individuals.

It still doesn't occur to you that people have an opinion also about whether they want a free market in the first place, does it?

Best,

B.

Amos said...

It still doesn't occur to you that people have an opinion also about whether they want a free market in the first place, does it?

Of course they do. But so what? If they don't want to transact on the market, they don't have to. No-one forces them.

Really, there is always a market. Markets can no more be eliminated than the moon can be made to stop in a sky. The question is to what extent the government will attempt to displace the market.

There will always be people who find one intervention or another desirable. But it is necessarily the case, if the market is being interfered with or displaced, that some set of consensual (Pareto-efficient) transactions, driven by the free-will of those involved, that would have otherwise taken place, will not.

And this is true even if others, or even those people, think that markets are a bad idea.

Margaret Thatcher said...

Hi

Oh boy, all the bogeymen of the left put together. Quite a find, Bee!

I'm about to board a plane so I'll be brief, it would have been better if I had had time to quote sources. Apologies.

Infant mortality: in the US it is computed differently than in other countries which artificially lowers their values vs. those in the US (e.g. excluding from the count premature babies, or babies that die within 24hs of birth, etc). Also, due to the vastly superior health system of the US, many high risk pregnancies are brought to term that in other countries would end in abortions.


Child poverty: in developed countries poverty is an arbitrarily defined cutoff in the scale of incomes. Most "poor" in the US and Europe would be considered rich people in the rest of the world. It is of little consequence if this arbitrarily defined section of the population is slightly larger or smaller in a country.

Life expectancy: the reddest herring of them all. A quantity most people don't even know how is computed and that combines values of quantities at different instants of time (Bee would say "it is not gauge invariant"). It is influenced by a myriad of factors that are impossible to disentangle, yet the left uses it as a proxy for the quality of health care.

Many of the above indexes are obviously dependent on many factors never mentioned, like policies towards immigration, secular trends in birth rates (alarmingly low in several European countries).

US health care system: is the best in the world; for instance check how many people survive after fixed periods of time after contracting various illnesses. This is a direct measure of the health care system and not something that depends on exogenous factors. Many European
countries ration healthcare in ways unthinkable to people in the US.

Budget deficits: fluctuate. Just a few years ago the US had a surplus. In 2004 Japan had a higher deficit as % of GDP than the US. And Germany and France were close. Economically, Europe has approximately not grown in close to 20 years, whereas the US has grown steadily. Europe has become significantly poorer. If the EU were a US state it would rank 47th in GDP per capita.

Educational achievements of high schools: (this one is a bogeymen mostly of the right, actually). The fact is that the US kids score roughly in line with other large developed countries (most notoriously they beat Germany recently). They are surpassed by kids in small countries, which can be considered statistical fluctuations. If you don't agree, think of the following: the kids of certain individual states (Vermont) vastly outscore those of Germany or France, yet no one would consider that a valid comparison. And in higher education, the US is without parallel. With the exception of Oxford and Cambridge no european university is in the top 20 rankings.

Best wishes
Maggie

smekhovo said...

Maggie, you're a fraud.

Tkk said...

The question is not bigger or smaller government. Any government founded on rational grounds can work, if the country fully understood and support the benefits and the price to be paid. (Study Cuba)

But alas, they fail because of corruption and distortion, mainly perpetrated by those in power. The corruption of power is not a matter of economic or political systems, it is a basic human character. It will always happen unless the system is maintained robust enough to stop it.

For 2 decades, the US turned the motto 'big government is bad' from a strategy to combat runaway welfare state (Reagan era) to a political dogma that must be worshiped (Bush 2). They went to the deep end with this ideology. They turned even the good part of government into bad - thus self-fulfilling the falsehood. The result is the entire government has became 'bad' - it works only for the big money elites, who then went on a wild west rampage, plundered and pillaged. Barbarians in suits.

Today, the entire US federal government is marred in profound corruption and must feed itself political opium daily. Until they can't buy anymore opium. This is how the USSR implode, and how the USA will also implode in the coming years. If an upheaval of the highest order is not done to bring the country back from the abyss.

Americans have forgotten a basic lesson. The trick is balanced government, and strict enforcement against corruption. If that sounds a bit like China you're right.

Hay Obama nominated two physicists to his cabinet. Maybe there's hope!

Chitragupta said...

Maggie Thatcher - reading the Hudson Institute talking points, eh?

Plato said...

Just curious.

The other thread had 212 comments and had been narrowed down to just a few( two separate pages reveal differing amounts) Sort of wondering why this was done? Was it to help with comments lineup to the right?

Second thing, I wrote about, has to do with what governments decisions "to do in terms of privatization" and who it really helps?

Using the Architecture of Disaster Capitalism

Some of us fought the government who sought to make sure everyone paid "natural gas" according to the market prices, while these resources were part of the countries heritage as a public company. Could of have propelled this particular sector of the country to ensure that it's own population was taken care of in terms of health care instead of promoting a "for profit system."

Each province in one form or another had governments that sought to privatize.

I with others launched complaints, using the legal process set up in the Public utilities commission to make sure that this process was a fair one.

But in all respects, it was a arm of the government intent on privatization. We could show it's track record, and look to "other utilities" that they sought to privatize and instead, while stopping them in this outright bid to sell, they created smaller companies within it and contracted out services to eventually topple this public company as well.

While it is most certainly clear that we would like to see all borders removed from the way "resources can help societies," it was clear that "capitalism was intent" that they wanted to make sure there were no borders in which to "corner the markets" and raise prices willy nilly.

So now, you look at what calamities will dictate the prices fluctuations and what has now become "the reason" that is most acceptable to you as you look at the markets and feel content?

On another note.

Have you ever wondered why the government decided to use the banks to disseminate that money, knowing full that it would help banks to create "more money to lend" and too, "created interest" that will allow them to profit more? This is based on what it can do to increase it's own wealth? Why would that money not go to ensure that pensions are indeed funded and heath care is really making the health care system in the United states one of the best?

It's not while it can discriminate.

How can you stop profiteering from a health care system that should not discriminate between those who have and those who do not???

People are asleep "very soundly" when they let others think and trust that they( those that will hold power over of your countries resources) will most certainly take care of you. You as a citizen just have to realize what government you are supporting in that democratic electoral system and understand, who is representing who.

I do not want to create division with this thinking, but of making one more aware of what is going on

Best,

Phil Warnell said...

Hi Bee,

I like the post, yet I have to say that I’m not confident the U.S. will go very far towards becoming a social democracy in the near term. That’s not saying that they don’t need to; it’s just that it’s simply not presently or has been ever part of their core values or beliefs to lead them to consider becoming such. Yes they believe in and have a democracy of sorts, where one is offered a narrow range and set of choices. They also believe in free speech, yet in the end primarily the only ones that get to be heard are those having money and thereby influence. They believe in inalienable rights, such as life, liberty and the pursuit of happiness, yet their methodology for attaining and benefiting from them is almost totally focused around the individual, with the exclusion of considering cooperation with their fellow citizens in acquiring them..

Yes for a time they will support measures like the building of new hard infrastructure such as roads, bridges, power/communication systems and alike, yet when it comes to widening access and affordability to health care, education and other social infrastructure I think that will prove to be both a hard sell and a tall order. Almost ironically, I think the only thing that will have them turn the corner on this is precisely what Sachs recommended for Poland, which was shock treatment. That this will only become achievable after more suffering by way of coming down a few notches more. This is not what I wish for them as it truth it affects us all, yet rather what I fear it will require.

So you might ask why I would think this? To know all one has to do is look around and gauge the general attitude about what they see as having caused the current crisis. You’ll find they say it was this person or that person or this company or that company or this agency or that agency. There is no thought given that these entities simply acted in response within the system that for the most part completely allowed for or more so condoned and sanctioned what transpired. In other words there is no introspection as to what happened or how it occurred, only the thought they are victims of villains or enemies if you like. It is true that America often proves to be at its best when it acts to respond to an enemy, only this time it must first be realized this enemy for a large part are themselves.

Best,

Phil

Leon Basin said...

Hey! Great blog. I will make sure to visit this blog often.

Bee said...

Hi Maggie:

I think one can summarize your comment as if the US doesn't lead a statistic there must be something wrong with it. Hope you have a good trip,

B.

Bee said...

Hi Amos:

It still doesn't occur to you that people have an opinion also about whether they want a free market in the first place, does it?

Of course they do. But so what? If they don't want to transact on the market, they don't have to. No-one forces them.


The question isn't whether there is a market or not, but how it is organized. Just not participating in a free market is evidently not an option if that's the only organization available for people's lives. As we have discussed earlier ad nauseum, people do have preferences about how this organization should take place and the way to incorporate them is a political process. That's what you still didn't get. Best,

B.

Plato said...

Sell the rain
How the privatization of water caused riots in Cochabamba, Bolivia

Connie Watson, CBC Radio | Feb. 4, 2003

In South America, private companies have taken over municipal water supplies in at least half a dozen countries, but there's one city where the takeover didn't go as planned.

In 1999, a consortium, controlled by U.S. multinational Bechtel, signed a 40-year deal to increase water supplies and services to Cochabamba, Bolivia. Six months later, rioting Bolivians chased the company out of the country.
See:CBC-Backgrounder

I wonder if "a scientist" can distinguish and combat this ruse in a "new model of economic formation principles," which actually represents all people?

Instead of knocking off it's leaders and destabilizing governments to accomplish that transformation?

You can never realize the scope of the problem when you see Nafta? can have "reactions from forming," then, a formation of the EU, then, talks to begin to unite both(scheduled appointment while Harper was being elected), while there are "counter formations" because of that.

"EU to sends ships" to the fend off the Somalian pirates? What's happening on the global scene?

Removing borders has to be seen in it's true light first, then, what is thought to be individual "is more then one" in defending against an open right to exploit other countries resources under capitalistic freedoms.

Best,

Bee said...

Hi Phil,

I don't quite share your pessimism in this case. For one, they are having their shock therapy now. Deregulation has its drawbacks when it is possible for employees to get rid of employees almost arbitrarily fast, and many people who believe in a Darwinian survival-of-the-fittest mantra will figure that it's in the first place the environment which matters, and they have neglected to make it a friendly one. One would hope that this in turn results at some point in the formation of labor unions to hold against this trend. It is somewhat of a mystery to me why these are so underrepresented in the USA since they are an essential ingredient to a functioning labor market. But besides this, if they don't want a more social state, that's what they want. What the present discussion can be good for however is to show them the options they have and to make clear it is really their choice. After all, the USA still is a democracy, but indoctrination can affect people's abilities to accurately judge on their options. Best,

B.

changcho said...

"It is somewhat of a mystery to me why these are so underrepresented in the USA since they are an essential ingredient to a functioning labor market"

Here's a hint: labor unions are bad-mouthed by the mainstream US press quite a bit. It is extremely rare to see a positive press report about unions (Mmh, who owns the mainstream US press?)

Stefan, I agree with you, very nice reply to Amos.

So, is this book a Mea Culpa on the part of J. Sachs? Does he directly acknowledge any mistakes he made himself? Or is it the case he uses selective memory and forgets all the economic "theory" he preached before?

Phil Warnell said...

Hi Bee,

“For one, they are having their shock therapy now”

Well I certainly hope your right in that what has already transpired will be enough to have them choose other options and slightly modify their course in such concerns. Actually their resistance to forming trade unions is a reflection of the general attitude as I mentioned, where the strength of the individual and their sense of personal freedom is somehow closely tied together.

Many still equate social reform with communism, with McCarthyism thought often as being not much more then a few people of honest intent and conviction going a little bit over the top. Strange when one thinks about it, as it wasn’t all that long ago another of their presidents spoke of evil empire and escalated an arms race to bring the U.S.S.R. to its knees and subsequently finally dissolve. Then only today to find a few short years later that a large part of their consumer products are manufactured and supplied by a nation that has the same political system that they deemed so necessary and fought so hard to destroy. It gives one reason to wonder where their true sentiments lay.

So as it took the Great Depression of 1929 to force largely most of the social change that still survives there today, let’s hope you are correct in your assessment that this current crisis will serve to roll the ball a little further along once more. It is a shame however that only under circumstances of great threat marks the few times when this can have any chance of happening. The other thing I’m wary of is that I hope that once again that America doesn’t return to another of there long time traits and that is in being isolationists at heart. For if that was to rise again and take hold in the current situation one could only shutter as to what the global consequences would be.

Best,

Phil

Plato said...

Non Profits are companies too, that have a democratic system, as well as it's own executives. They have in their foundation, "a constitution" that is written to make it into an "corporate entity" as well.

These can "cross boundaries" as well, and they do:)

Best,

Plato said...

...."Cross boundaries" should read, Cross borders.

John G said...

"Budget deficits: fluctuate."

But the debt built up by all the deficits is way too huge.

This is a well presented insight into how the next phase of the global economic crisis may play out. Franck Biancheri's prediction is that the Dollar will continue to decline in value towards March 09 when the US Government will default on it's debt. As SoTT.net readers will be aware, this will lead to catastrophic social consequences in the US and on the countries closely connected to the US financial system. They predict that this will be followed by a total collapse of the global monetary system during the summer of 09 as all holders realise that their US dollar and denominated assets are worthless. Biancheris' term of the 'Very Great Depression' seems most appropriate.

Bee said...

Hi Changcho,

The book "Common Wealth"? No, in fact Sachs doesn't talk about his former activities at all. But Naomi Klein doea a pretty good tua culpa in her book ;-)

Here's a hint: labor unions are bad-mouthed by the mainstream US press quite a bit. It is extremely rare to see a positive press report about unions (Mmh, who owns the mainstream US press?)

Yes, who owns it? Does that come from the same corner from which 'solidarity' is dismissed as an unwelcome disease on a nation? Best,

B.

changcho said...

"The book "Common Wealth"? No, in fact Sachs doesn't talk about his former activities at all. But Naomi Klein doea a pretty good tua culpa in her book ;-)"

In that case, there is no reason to take Sachs very seriously is there? He is writing in a vaccum so to speak.

Also, the following news story from the BBC may be relevant to this discussion:

Privatisation raised the death rate.

What an 'experiment', eh? People like Sachs really should take responsibility for their past actions.

Bee said...

Hi Changcho,

Thanks for the link. I read a similar report today in a German newspaper. Naomi Klein in her book btw quotes similarly scaring incidends from South Korea after the economic makeover in '98: the suicide rate went up in 1998 by 50% (p.319), the suicides continued "it is now the fourth common cause of death more than double the pre-crisis rathe, with 38 people taking their own lives every day" (p. 333). Both comes with references that I can provide in case somebody is interested. Evidence for causation by economic desperation is anecdotal (people leaving good-bye notes before hanging themselves etc). Best,

B.

Amos said...

The question isn't whether there is a market or not, but how it is organized.

But there is a market for market-organization. Markets with different organizational structures compete with each other.

It is true that there are few options for highly regulated, highly protective markets. But this is a market result.

For example, I really like scuba equipment. If the world devoted 10% of its resources to producing scuba equipment, I'd have lots of really high-quality, great stuff, and I'd be happy as a clam. But the market has, sadly, concluded that this would be a poor allocation of resources. My preference is being taken into account, but so is everyone else's. This is not a "problem," it is one set of preferences being balanced against another, and aggregate social utility being maximized.

people do have preferences about how this organization should take place and the way to incorporate them is a political process.

See above.

Bee said...

Hi Amos:

But there is a market for market-organization. Markets with different organizational structures compete with each other.

I don't even doubt that. But to repeat a question I have asked previously several times in various forms: If you say "there" is a market, where is it? Where do people get to make the choice other than through their polital system?

Another question that is somewhat off-topic here: What exactly do you mean with 'regulation'? I have gotten kind of confused about how you use the word. It is clear to me that restrictions on transactions would fall among regulations in the sense you use it, but does e.g. redistribution of wealth count as a 'regulation'? Can you give me some definition, just to make sure we don't talk past each other? Best,

B.

Amos said...

But to repeat a question I have asked previously several times in various forms: If you say "there" is a market, where is it? Where do people get to make the choice other than through their polital system?

I keep giving you examples, and you keep not responding to them and asking for exampless.... Here are some examples: Condominiums. The ISDA. Securities exchanges. Commodities exchanges and Private housing developments.

Another question that is somewhat off-topic here: What exactly do you mean with 'regulation'? ... It is clear to me that restrictions on transactions would fall among regulations in the sense you use it, but does e.g. redistribution of wealth count as a 'regulation'?

Some regulations may be redistributive, but not all redistributive laws are regulations. Neither social welfare laws, nor differential taxation laws, are regulations. Regulations are laws that govern what transactions are and are not permissible.

Bee said...

Hi Amos:

keep giving you examples, and you keep not responding to them and asking for examples....

I have not ignored these examples, you have just chosen not to understand my reply, that's why I am repeating the question. I have told you several times: who uses these options? That is a question of "who does", like "in reality" and not as "who could" like "in some model". Who a) knows how to and b) has the time to express their political preferences in that way? And that doesn't even touch the question whether it is possible for all circumstances. The big success of the free market lies in the fact that it is simple. If you argue people can express everything they want if they spend and arbitrary amount of time and brain power on it, that isn't going to work. What do people do instead? They vote! Why? Because that's simple. All they have to do is to check a box every four years. Just that that's maybe somewhat too simple. So they end up complaining.

Some regulations may be redistributive, but not all redistributive laws are regulations. Neither social welfare laws, nor differential taxation laws, are regulations. Regulations are laws that govern what transactions are and are not permissible.

Thanks. That is useful. So what you are saying is roughly: If the model of neo-classical economics provides an accurate description of reality, then one should make sure that the system is set up appropriately. That means the role of the government is to ensure the necessary conditions like perfect competition, enforcement of property rights, fair trade etc, but nothing beyond that because every futher regulation would interfere with Pareto efficiency. Thus, deregulation and privatization is the thing to do. Did I get that roughly right?

What then is the role the government has regarding redistributive regulations? (Leaving aside the cost the government itself causes through administration.) Best,

B.

Bee said...

Err, I meant regarding redistributive laws, sorry.

Amos said...

I have not ignored these examples, you have just chosen not to understand my reply, that's why I am repeating the question. I have told you several times: who uses these options? That is a question of "who does", like "in reality" and not as "who could" like "in some model".

I haven't seen you ask this, but the answer is obvious.

Who use condominiums and private housing developments? The tens of millions upon tens of millions of people who live in such places. Not to mention the thousands of developers who have discovered that they can increase their profits by creating such places.

Who uses national exchanges and the ISDA? Besides the members of national exchanges, the hundreds of millions of people who choose to purchase and sell the assets that trade on these exchanges.

They are hardly secrets Bee.

Another example of such a system, actually, is the private university, which in the West generally establish their own internal governance rules.

The big success of the free market lies in the fact that it is simple.

No, its the market's ability to allocate resources to their highest-valued use.

If you argue people can express everything they want if they spend and arbitrary amount of time and brain power on it, that isn't going to work.

No, they spend an amount of time and brain power on it that is commensurate with the importance, to them, of expressing the preference. There's nothing wrong with that.

Thanks. That is useful. So what you are saying is roughly: If the model of neo-classical economics provides an accurate description of reality, then one should make sure that the system is set up appropriately.

Grr.... In the first place, except for certain narrow issues about the mathematics of long-term equilibrium, I am not describing neo-classicism, but contemporary economics generally. In the second, I am not making any proposal.

That means the role of the government is to ensure the necessary conditions like perfect competition, enforcement of property rights, fair trade etc, but nothing beyond that because every futher regulation would interfere with Pareto efficiency.

Or just protect property rights, enforce contracts, and address coordination problems such as public health issues (avoiding the spread of contagious disease for example). That's the classical view. On top of that, a government can regulate consistent with these principles if the victims of regulation are able to obtain compensation from the government ("regulatory takings"). And on top of that, the government can provide for the common defense, tax (even redistributively) and so forth.

Thus, deregulation and privatization is the thing to do. Did I get that roughly right?

Consistent with the internalization of non-pecuniary externalities.

What then is the role the government has regarding redistributive regulations? (Leaving aside the cost the government itself causes through administration.)

What economics says about this is complex. Economics tells us that because of the marginal declining utility of money, some degree of redistribution may lead (all other things being equal) to a net increase in utility. However, economics also tells us that we are going to have a very hard time getting the numbers right, and we are likely to get them wrong and end up with a net-negative. This is particularly because the marginal utility of money declines slowly. At the same time, economics tells us that the thing you'd like to leave out -- the transactional cost -- is enormous, and crucial, and that redistributive taxation is likely to create problematic distortions in the economy as people alter their behavior around the redistributive function of the tax code. These distortions are both a net negative of themselves, and tend to the introduction of extraordinary transaction costs, and generally undermine the redistributive intent.

In sum, what economics tells us is that redistribution -- minimal redistribution -- may effect a net positive, but only if it is both minimal and kept as simple as possible, and otherwise it will be a very large net negative.

But the most important thing happening here is the thing you want to leave out -- economics tells us that transactional costs are hugely, hugely, hugely important. This is the result of something called the Coase Theorem.

Bee said...

Hi Amos:

Humm. Maybe I should have ignored your examples? I presently have no clue what you are trying to say, I must have totally misunderstood your reply. Let me ask my question once again. People do have preferences about macro-variables of the systems they live in. Do I have to repeat one more time what a macro-variable is? Question is: How can they express these preferences on the free market? For example, they want their economic system to run more stable, and fewer dramas resulting from that. For example they want the poverty rate to decrease, the employment rate to increase. Whether that's "efficient" or not. What do they do? They vote. I don't see how living in a condominiums answers the question, not to mention that some people won't even be able to afford it.

The big success of the free market lies in the fact that it is simple.

No, its the market's ability to allocate resources to their highest-valued use.


I really come to believe we have a communication problem. What I was saying the reason for the success is the fact that the market is simple. Individual, striving for profit. What you are saying refers to the outcome.

Grr.... In the first place, except for certain narrow issues about the mathematics of long-term equilibrium, I am not describing neo-classicism, but contemporary economics generally. In the second, I am not making any proposal.

Look, I am just trying to understand your point of view. You started up with defending neo-classical economics. You keep talking as if Pareto efficiency was guaranteed to happen, if only people wouldn't hinder the functioning of the market. These are results that have been derived within a specific model. I thought this model is called the model of neo-classical economics. My apologies if that is incorrect. I don't care how you call it. It relies on specific assumptions about how reality is supposed to be.

Thanks for the explanations regarding the function of the government. I didn't say lets leave out transaction costs because I like to forget them, but just to disentangle the argument. When you say

Economics tells us

You are referring, again, to exactly what model, which assumptions? Best,

B.

John G said...

The main problem with the idea of efficient transactions is that we don't have them. With less heirarchial organizations and actual efficient transactions, things might actually be better.

The main problem as Plato pointed out earlier is that the masses are too sleepy. If you engage in a lot of transactions where one or both sides really don't know what they are doing, then the transaction is not going to be efficient. A bunch of inefficient transactions do not average out to efficient ones. Lots of education is needed (a good role for "science").

The other problem is that there are lots of tyrants in the world both inside and outside of governments. You won't get efficient transactions with lots of tyrants around. Getting rid of tyrants would probably require lots of education for the sleepy masses too.

Whether you want to call this education and its implementation of ideas a political process or a common law process or something else is really just semantics (causing a communication problem as Bee mentioned).

Bee said...

Hi John,

A bunch of inefficient transactions do not average out to efficient ones. Lots of education is needed (a good role for "science").

I don't think you can realistically fix that problem with better education. What I have basically tried to say with regards to this question is that you have to have a system that works with people as they are, and is able to learn if people learn. If you assume an idealistic version of men, you are just going to get a nice utopia. That's the same for free-market ideologists as for communists. Both oh-so-great solutions assume an unrealistic idealisation of humans. Best,

B.

Amos said...

Humm. Maybe I should have ignored your examples? I presently have no clue what you are trying to say, I must have totally misunderstood your reply. Let me ask my question once again. People do have preferences about macro-variables of the systems they live in. Do I have to repeat one more time what a macro-variable is?
The “macro-variable” concept is meaningless, so I’ll ignore it.
Question is: How can they express these preferences on the free market? For example, they want their economic system to run more stable, and fewer dramas resulting from that.
They purchase annuities, or accept lower-risk jobs in exchange for lower pay. But your question is about “the economic system” as a whole, not personal stability, right? The question is decomposable into two preferences, one as to the self, and one as to others. The first preference is resolveable as stated above. The second is a wash against the “other” preferences of others.
Let me give a better example answer to this question that address the “systemic” part: Who do you buy annuities from? Insurance companies! And what is one way to form an insurance company? The mutual!
So as a market solution regarding the systemic preference you describe (which is not completely coherent, but perhaps an answer will resolve it), people often come together to form what are called “Mutual Insurance Companies.” These are voluntary organizations, with rules voted on (or somehow subject to review) by the members. The members contribute by purchasing insurance of various types, including annuities, in exchange for the payment of a premium. In so doing, large numbers of people do, in fact, come together on the market to reduce their shared economic risk.
And I suppose that if what you really care about is systemic risk rather than your own, then you’d be willing to accept inferior insurance terms from a mutual over superior insurance terms from another insurer. I know of no-one who is willing to do this, and therefore propose the hypothesis that to the extent the preferences you describe exist at all, hardly anyone is willing to pay a cent out of their own pockets in favor of those preferences, so they really aren’t deeply held and don’t matter.
For example they want the poverty rate to decrease, the employment rate to increase.
They donate to help the poor, or start businesses and accept lower profits for themselves by extending employment to more persons than the business needs.
I don't see how living in a condominiums answers the question, not to mention that some people won't even be able to afford it.
There are condos at all price ranges these days. In all events, they are an example of people coming together on the market to live under a set of joint rules for themselves and their community.
You started up with defending neo-classical economics. You keep talking as if Pareto efficiency was guaranteed to happen, if only people wouldn't hinder the functioning of the market. These are results that have been derived within a specific model. I thought this model is called the model of neo-classical economics. My apologies if that is incorrect.
I explained in my earliest posts, and several times throughout, that the Pareto logic (which is guaranteed to happen) is not neo-classical. Pareto was actually dead 50 years or so before the first neo-classicist was born. The neo-classical contribution (to what we’re talking about) is the mathematics of long-term equilibrium; the rest is just economics, not neo-classicism.
I didn't say lets leave out transaction costs because I like to forget them, but just to disentangle the argument. When you say

Economics tells us

You are referring, again, to exactly what model, which assumptions?
All non-Marxist economics of the past Century. I have not gotten into the differerent schools, but have focused instead on what’s common to all of them.
As for transaction costs, I do understand what you were trying to do. That temptation is always there, to “simplify” things by taking out the transaction costs.
Except that, in contemporary economics, everything is all about transaction costs.

John G said...

"I don't think you can realistically fix that problem with better education. What I have basically tried to say with regards to this question is that you have to have a system that works with people as they are, and is able to learn if people learn. If you assume an idealistic version of men, you are just going to get a nice utopia."

I did mention tyrants in high places and the pitfalls of the current heirarchial system so yes you need a system that allows more autonomy (not a hegemony) and yes you can't have an ideal version of people in either a moral or intelligence sense.

The education can't be forced but it has to be available for those who could do something with it. A group of 200 or so colinear people with good ideas might eventually get somewhere (though admittedly way too late for the current crisis).

What I'd have in mind is something like the spread of Christianity only with more useful and accurate ideas. The ideas would (kind of like Obama only again more useful and accurate) probably get started and spread via the internet.

Bee said...

Hi Amos:

The “macro-variable” concept is meaningless, so I’ll ignore it.

Very convenient. You had left me with the impression you have a brain. Why don't you use it, instead of assuming if you don't understand what I am saying that must be because it's certainly meaningless?

But your question is about “the economic system” as a whole, not personal stability, right?

Indeed.

The question is decomposable into two preferences, one as to the self, and one as to others. The first preference is resolveable as stated above. The second is a wash against the “other” preferences of others.

There you've done it again. Instead of answering my question (how do people address preference X) you say, the question is decomposable in two parts. The first of which doesn't answer the question and the other one you dismiss because you don't like it. That is besides the point, Amos. Why don't you take a look at the real world and see what people do if they want to have issues addressed like the poverty rate in their country, or the hiccups in their economic system. They vote! Have you heard, your country has a president who has given a nice speech yesterday about what he's going to do. That is how people *in reality* do express these preferences.

Who do you buy annuities from? Insurance companies! And what is one way to form an insurance company? The mutual!

I have no clue what you are talking about. You can interpret that as an expression of my ignorance, but the actual reason why I am saying this is that you ask you how many people in which countries to actually do that, and know what they are doing. How many of the people who have invested in supposedly low-risk fonds had any clue what the actual risk was, or what that would have meant to begin with? And could you have expected them to know? This is just not how the world works. What happens instead? People look at what has happened and they say to their government "I don't want that crap, please do something about it." That's how people express their preferences. You are completely modeling your ideal economic world past reality!

For example they want the poverty rate to decrease, the employment rate to increase.
They donate to help the poor,


We have had that exchange before, so let me just repeat what I said there. It is quite cynical you are expecting people who have dropped below poverty level to hope for donations from the wealthy. That's how civil unrest is born. (Besides this, your reply somehow seems to assume that poor people would not want the poverty rate to decrease.)

Thanks for your explanations.

Best,

B.

Amos said...

Instead of answering my question (how do people address preference X) you say, the question is decomposable in two parts. The first of which doesn't answer the question and the other one you dismiss because you don't like it.

I think I am addressing the question. I’m saying “if you look at it as a sum of atoms instead of as a rock, then its behavior makes sense.”

Why don't you take a look at the real world and see what people do if they want to have issues addressed like the poverty rate in their country, or the hiccups in their economic system. They vote!

People want lots of things. Some of those things, they can’t have. Others, they can have but don't want to pay for. Still others, they can have, but only at tremendous cost to other people.

Who do you buy annuities from? Insurance companies! And what is one way to form an insurance company? The mutual!

I have no clue what you are talking about. You can interpret that as an expression of my ignorance, but the actual reason why I am saying this is that you ask you how many people in which countries to actually do that, and know what they are doing.

An “annuity” is a kind of financial instrument, like a stock or a bond, that you buy from an insurance company. Basically, you pay the company a sum up front, and the company agrees to pay you a fixed sum regularly (usually adjustable for inflation), for the rest of your life.

Lots and lots and lots of people have annuities. Its an important part of retirement planning. Of course, young people, like you and I, generally don’t have them. That’s because at our age, it makes more sense to spend our income on consumption, or to invest in financial instruments that are riskier and carry greater reward potential.

A “mutual” is a form of insurance company that is owned by the policy holders. It’s sort of like a non-profit insurance company, in theory, but not really.

How many of the people who have invested in supposedly low-risk fonds had any clue what the actual risk was, or what that would have meant to begin with? And could you have expected them to know? This is just not how the world works.

People are much smarter than you give them credit for. People understand that risk and reward go together. They understand that they have to save for their latter years, and they generally ask for advice in doing so, anyway.

For example they want the poverty rate to decrease, the employment rate to increase.
They donate to help the poor,


We have had that exchange before, so let me just repeat what I said there. It is quite cynical you are expecting people who have dropped below poverty level to hope for donations from the wealthy.

You’re reflecting the issue. You didn’t ask me about helping the poor. You asked me about people who are not poor but have a preference for the poor being helped!

As for helping the poor… As a consequence of the marginal declining utility of money, and of assymetrical risk perception (which we have not discussed… it’s basically the inverse of marginal declining utility of money, the idea that people care more about being absolutely terribly off), it may make sense for society to have some minimal degree of progressive income taxation for the purpose of providing basic social insurance of a limited sort.

But as a general matter, the best way to help the poor is to increase the size of the total “pie.”

changcho said...

Kind of an old post, this one is. However, I notice that Amos keeps pointing out absolutism from (dare I say) a neoliberal/Friedmann ideological point of view.

Bee, the following links should give you a better idea of the state of this Dismal (so-called) science:

CIP's take

Krugman's take

And this

These are fairly short pieces, but they are very revealing and very much worth reading

Bee said...

Hi Changcho:

Thanks for the links, I will give this a read! Best,

B.