I do not intend the title of this blog post to be negative assessment of this article, 'A Question for Free Market Proponents' that appeared on that blog. Given the narrow scope and area that the article covered in it, it may in some sense be excused for staying away from the adventurism of a broader and more critical review of the subject of 'Free Market Fundamentalism'
Despite the dig that the title of this post may be presumed to take at that article, I am not necessarily making a case for a disapproval of the broad view point of that article. But my disappointment is with the use of examples of markets in blood and capital punishment, which trivializes the issue of the incompetence and fatal flaws of 'Free Market System' whether as a theory, ideology or economic perspective. We have greater problems with the credulity of the majority advocates of this theory than with its doctrinaire ideologues usually called libertarians.
To be fair to that article it did mention some dogmas of FMT like "Market knows best" and "Market makes the best allocation of resources". But it sadly did not go beyond that or even whether these slogans deserve to be unquestioningly accepted as some kind of axioms or not. It seemed to be somewhat tacitly accepting those maxims and then turning around to compare these against the examples of markets in blood and capital punishment.
We have far more messed up and almost completely malfunctioning markets in economic systems than these fringe markets in blood and capital punishment.
The disappointment seems all the greater since it let go off an opportunity of seriously examining this issue of Free Market, whose propaganda has actual effects on our regular life and serious implications for the way in which economic and political systems need to be made to work for the larger benefit of vast sections of people instead of benefiting miniscule minority of the rich, elites and special interests as it does now and most of the time.
The Global financial crisis that began in 2008 has served as a major wake-up call for the advocates of 'efficiency of markets' and 'stability of the capitalist economic model'. That model and ideology has since then been under constant scrutiny, reassessment and attack. Counter-points are now finding a voice in the mainstream market and political space, which would otherwise have been dismissed contemptuously as socialist pique or liberal delusion.
Before we proceed to examine the flaws of Free Market Theory (FMT), let us try to understand the harm and threat its almost uncritical and universal acceptance is causing to the need for better understanding and governance of economic and social systems.
Economic systems are no longer being judged by their consequences on the overall utility and welfare of the majority of the constituents of these systems but by models and metrics like
- growth
- GDP
- productivity
- inflation
- interest rates
- monetary multiplier
- price indexes,
Acceptance of FMT dogma has increasingly led to rising calls for reducing or almost completely eliminating government participation, regulation and oversight from major parts of economic sphere. Many people are seduced by pro-FMT arguments that call for doing away with many components of welfare state, assistance and protections for the poor, elderly, working and middle classes. Many pro-FMT arguments also stir up anti-government hysteria, where among other things there is a tendency to lay the blame for all adverse economic outcomes on the government.
Since it will be difficult to attempt to provide a full-blown critique and take-down of FMT propaganda in a brief post like, I will be taking smaller steps in this effort.
To start out I will lay out the skeptical view of Free Market Fundamentalism that is best captured in this entry from Rational Wiki on Free Market:
"Free market is the idea that the economy works best when the government interferes as little as possible. This concept was first espoused and explained by economist Adam Smith, based on Enlightenment ideals posited by classical liberals in the 18th and 19th centuries, but is more embraced by conservatives and doctrinaire libertarians in the 20th and 21st.
"Free market fundamentalism" is the term sometimes given to a strain of libertarianism that proposes that government can do no right when it comes to commerce, and that market pressure will weed out any bad products or corrupt businesses (the term used is laissez-faire, translating from the French approximately as "let it happen"). Liberals have largely abandoned laissez-faire capitalism as a dead end, believing the idea to be too easily abused by the amoral and dishonest.
It's worth noting that Adam Smith's works, like other texts invoked by fundamentalists, are rarely read in their entirety by those who expound the doctrine they think it outlines. Smith did see a place for governmental regulation in a healthy marketplace. For example, without government regulation, companies such as British Airways would have had free rein to collude with their rivals and fix prices when setting their fuel surcharges,[1] and Microsoft could continue its anti-competitive practices in Europe, thereby allowing it to maintain artificially high prices for its Office products.[2]"
Instead of asking the kind of lame questions on blood and capital punishment that were put to Free Market Propaganda (FMP) by that article, the challenge to be thrown at FMP's are:
- If FM is so efficient and all-knowing, is it capable of setting a fair minimum wage in a system or economy and what criterion and standards if any FMT has of validating the fairness of that minimum wage?.
- Why is the FM unable to substantively reduce income and wealth inequality in economic and social systems?
- Why is FM unable to prevent cycles of recession and boom-bust phases and the ensuing hardships to middle and poor classes?.
- Why is FM unable to provide public goods and services at fair prices?
- If FM is so efficient, why is private education system becoming more and more expensive and unaffordable to most sections of the population?
**If FM is so efficient, why is private education system becoming more and more expensive and unaffordable to most sections of the population?**
ReplyDeleteWell, that is a feature of FM. How else do you create the proles?
In case you are wondering what are proles. Check out Orwell.
http://en.m.wikipedia.org/wiki/Proles
Good point!...Thanks for the link.
DeleteOrwell is on the spot in his assessment of the working and middle classes for their inability to organize and for any effective activism.
He is so right....but his prognosis is so disturbing!
I did not know until recently that even someone like Milton Friedman was not opposed to regulations or taxes. The FM fundamentalists should read Friedman again (or for the first time) as pointed out by this piece below from NYTimes before spewing libertarian taking points from Ron Paul and Koch bros.
ReplyDeletehttp://mobile.nytimes.com/blogs/opinionator/2013/09/26/why-conservatives-should-reread-milton-friedman/
Capt.,
DeleteThis article below has an opposing take on the social/ethical limits rider of MF to freewheeling dealing Capitalism
http://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html
Since I may be heavily influenced by NC radicalism, do not take my word for this. But the doubters' gripe with MF is that much of his overall evangelism of FM negates the lip service he supposedly pays to social and other responsibilities of Corporate entities. Also he may have been pushing too hard the metaphysics of FM that the recognition of constraints pale into shadows as fine-print or an afterthought.
It is not just for FM evangelism that MF is attacked by critics. His monetarism is also game for attack as economics and modeling woo woo.
I found the post from nakedcapitalism rather silly.
DeleteTake this for instance.
** the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders…**
Not to go bankrupt is certainly a key concern of the shareholders. If you go bankrupt you sell off the assets to pay down the debt and the equity can potentially go down to zero. Shareholders clearly would not want that. So "don't go bankrupt" is in line with what the shareholders want. So I don't know what the authors of the blog are complaining about.
Also I do not understand why the authors of the blog takes issue with the following innocuous quote from Milton Friedman.
Delete**He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom**
All the Friedman is saying is that a business on its own should just maximize shareholder value. It is through laws and regulation imposed on it by the state that it is made to behave is a socially responsible manner. I do not find anything objectionable in this quote of Milton Friedman.
Having said that Milton Friedman was a supporter of Reagan's economics policy which was about lowering taxes and reducing regulations. We can blame Milton Friedman for all the misery that followed Reaganomics.
Hi,
ReplyDeleteThanks for writing this post. As a liberal, I agree with most of what you've written, but once I reached the questions, I grew disappointed. I cannot tolerate the free-market fundamentalism of the Right (and the Right's valorization of "Austrian" economics). I also have trouble, however, with the irrationality of the the Left and its acceptance of empirically disproven Marxian economics that has been conclusively put to bed and lambasted by economists such as Roemer, Keynes, and Solow. I wonder if people who praise Marx have actually read him. He's not a bad sociologist, but in terms of his economic theory, he's lousy. (Fareed Zakaria also says this in the Post-American World, which I have coincidentally also cited in the last post). Similarly disagreeable is the left-wing fear of corporations, which is analogous to right-wing fear of government. One wonders if the quality of discourse would improve if macroeconomics were a mandated high school course, covered at least at the level of Mankiw, if not Roemer.
So on to my responses to your questions. (With due respect, of course)
*If FM is so efficient, why is private education system becoming more and more expensive and unaffordable to most sections of the population?*
You are a man of finance and more qualified that I am, but I get the sense that you are misusing the term "efficient." Efficiency of a market only means that prices accurately reflect supply and demand. So the market for private schooling could certainly be efficient if we can explain the price-change with an increase in demand. Rising costs for schools would also shift the supply curve left, which would increase the price as well.
I didn't appreciate CM's suggestion that this was being intentionally done to create a lower class. It's far-left fear-mongering analogous to right-wing fear-mongering about government. Private school boards are not consciously trying to create a class of proles. IF you make an assertion like that, you need to prove it. The reason for rising costs is complex and deserves to be treated as such.
*If FM is so efficient and all-knowing, is it capable of setting a fair minimum wage in a system or economy and what criterion and standards if any FMT has of validating the fairness of that minimum wage?.*
Yes and no-- it depends on what is meant by "fair." You could have a very low minimum wage that allows unemployment to drop swiftly, or you could set a fair wage which would skyrocket unemployment. There is always a tradeoff. Obama's recent raise of the federal minimum wage is expected to cause a large number of layoffs.
*Why is FM unable to prevent cycles of recession and boom-bust phases and the ensuing hardships to middle and poor classes?*
The causes of business cycles are debated. But given that we cannot stop them even with our Keynsian government, it's not a fault of the free market that they exist.
R
DeleteThanks for the detailed response to the post and effort you have taken in going thru the questions framed in that and other aspects of my criticism.
Disagreements and disappointments are bound to happen given the vast and varied scope of the subject and I am not discouraged by such hurdles as this offers scope to go deeper into the issues raised by you like 'Left-wing fear of corporations' or 'Corporatism', 'Cost of Higher Education' etc.
Personally I may have developed 'left-wing' leanings. Though it is also a kind of stereotyping and labelling, but I will let that pass for now. Still I would request you to wait for my detailed clarifications before jumping to the conclusion that this post or my views are an endorsement of Marxian economics.
Who knows I could turn out to be progressive more interested in the critique of capitalist discontents and its reform on welfare/developmental line than a Marxist utopian.
I remain hopeful of a constructive progress of this dialogue.
**I didn't appreciate CM's suggestion that this was being intentionally done to create a lower class.**
DeleteIntentionally done?
Stop putting word into my mouth. When it comes to free market there is no such thing as intention. As you clearly point out the free market will price any product out of certain peoples reach. When the product we are talking about is education then yes the free market does create a less educated underclass.
Hi CM,
DeleteThanks for your reply. I take what I said back, I seem to have misunderstood you. But I still maintain that the high cost of education isn't proof of market inefficiency. Also, it is possible to have a market equilibrium that makes education affordable to all, but we don't have that right now. The reasons for rising costs of education are many-- and in universities, the solution to increasing costs tends to always be to shift the burden to undergraduates.
The expensiveness of private education also seems to be limited to the Anglosphere. Europe and Asia don't seem to have this problem.
But we also need to realize that people don't need a university education all the time to join the middle or upper classes. Trade school graduates-- mechanics, for example-- can make a more than decent living if their business acumen is good enough. Maybe part of the solution is to make a concerted effort to diminish the value of the Bachelor's degree. People who major in anthropology or fields like that and go on to get a job really didn't need that degree in the first place.
**the solution to increasing costs tends to always be to shift the burden to undergraduates.....
Delete.....
Maybe part of the solution is to make a concerted effort to diminish the value of the Bachelor's degree. **
Why not increase taxes on income and use it to fund undergraduate education? Why is that never considered an option? Why does it always have to be passing the cost to the students or lowering the value of the degree? The way I see it the problem is in thinking like business men when solving a social problem.
CM, R
DeleteDo call me out if this sounds like a crazy analogy. But somehow the situation in higher education seems to me like a market for luxury goods and services. If you consider PG degrees, MS etc in Marketing, Finance, Economics, the greater the reputation/pedigree of the University higher the price tags.
The going prices of these degrees may not have much to do with rising costs, but more to do with their supposed track record ( i.e. ability to snag high paying jobs). Other course price tags also move up in chasing these trends. So there could be trend-following rather than cost of rendering a course that mainly determines the price of a degree. This can be argued to be a point that refutes the so-called price-setting efficiency of the private education market.
Also if we consider that many PG's in Marketing, Finance and Economics do not render commensurate economic value (Currency trading, HFT, Derivatives,Marketing piggying-back on already established brand value) for the high and obscene compensation levels that they get in the private sector, that places a question mark on the resource allocation efficiency and utility of this market sector. It can then be argued that this market is simply a slave to incentives and trends in the economy regardless of how perverse and welfare or value reducing they are.
If it is argued that trends and incentives like the above are beyond the control of private education market, how will this market ever tend towards equilibrium because there will always be factors out of its purview and control. Conditions preventing the so-called return to mean or equilibrium can potentially persist forever rendering the hypothesis of a correcting free market invalid or untestable.
Whether there has ever existed any such time or period when any market was in a state of equilibrium is itself a matter of contention and debate.
@ Ranganath-- your response raises interesting questions, and I'll have to think before getting back to you.
Delete@CM-- that costs are passed onto undergrads is an empirical reality I was stating, not something I was suggesting. In terms of lowering the value of a bachelor's degree, I was thinking more along the lines of companies actively hiring high school graduates for jobs that certainly don't need a degree to do. Such jobs aren't necessarily "dumb" jobs-- in fact, many-- like speechwriting-- take a great deal of creativity and knowledge.
The tax approach is currently used by France, I believe. French education is currently very, very cheap. But government financing is tricky. In the case of loans, the students who need them the most are the riskiest to give them too-- you will possibly have a crisis analogous to subprime mortgage lending. In terms of outright grants, I'm intrigued, but want to see numbers-- what would a tax rate need to be like to get everyone into college?
Also, it should be noted that state colleges tend to be very affordable for people in those states.
Ranganath,
Delete**The going prices of these degrees may not have much to do with rising costs, but more to do with their supposed track record ( i.e. ability to snag high paying jobs).**
The paradigm of pricing products based on cost changed long time ago. Every MBA student is taught to price products based on the value of the product to the consumer and not on a cost-plus basis. That is the key to growing profits. Now this becomes a problem for higher education. If we want to view it as a product and want the free market to work its magic then what you will get is sky rocketing prices (ie. cost to consumer) with a significant segment of society left with out higher education. If on the other hand we as a society want higher education to be available to everyone then it has to be treated as utilities with strict price controls if delivered by private entities or just be delivered by the state and funded by taxes.
R,
** In terms of lowering the value of a bachelor's degree, I was thinking more along the lines of companies actively hiring high school graduates for jobs that certainly don't need a degree to do.**
Peter Thiel (http://techcrunch.com/2011/04/10/peter-thiel-were-in-a-bubble-and-its-not-the-internet-its-higher-education/ ) has also suggested this approach as a means to reduce the cost of higher education. While it is admirable to see respectable career off ramps for people who choose not to pursue higher education, I do not see this solving the problem in a significant manner. If the product is delivered to you by the free market it will still price out certain segments of the society. And I think this is really bad for a society that is already devastated by vast income/wealth inequality particularly along racial lines. Perfect scenario for the creation of proles as I said in the first post.
**many-- like speechwriting-- take a great deal of creativity and knowledge.**
Yes. And I suspect one will still be better at this job with a BS in English or liberal arts than with just a High school education.
**I'm intrigued, but want to see numbers-- what would a tax rate need to be like to get everyone into college?**
Would be interesting to see the numbers. I suspect it should not be impossible given that US (I assume we are talking about the US) is the richest society the world has ever seen. Just raise the taxes back to those of Eisenhower era.
Capt.
DeleteA good catch on the weak part of argument about the connection between costs and pricing of PG degrees. I am sure I did not mean it that way. I meant to convey that rising costs do not really explain or account for rising prices of the degrees. Also there can be terminological confusion since when R mentions rising costs of higher education(HE) , he/she may be implying rising prices, while I make a mention of both costs and prices in the equation involving affordability and access.
Agencies that render PG degrees do point to both costs and demand as determinants in the function of HE pricing. But demand which includes skewed, dubious and hyped up perceptions of the marketability and earning potential of these courses looks to be driving the prices skyward in US and UK. The problem for FM proponents should be that while this prolonged period of recession has significantly eroded the marketability and earning potential of these course, this has failed to act as a check on the trend of rising prices. Then it also calls into question the aspect of market signals and one market ie., HE not responding to signals from another market, the job/employment market. So it does looks like all the responsiveness and self-correction is only in theoretical models and not really borne out by actual behavior of these markets.
*while not being totally invalid are subservient to the demands of statistical and modelling ritualism and works as tools of academic elitism. *
ReplyDeleteWith due respect, as a student of mathematics, I also didn't appreciate the labeling of modeling to be "ritualism," or the fact that mathematical economists were called "elitists." Mathematical modeling of finance, and mathematical models in economics, tend to work more often than not. The fact that models blew up in our faces during 2008 is to ignore the fact that they have been effective nearly every other time. Mathematical modeling isn't "woo" and is an empirical, scientific field in most regards.
Having models blow up in our faces is a tendency of all science, as Thomas Kuhn kindly pointed out years ago. But when such things happen, we revise our stances and make new models. Being forced to rethink what we believe doesn't make science ritualism-- it's all a part of the game.
Having scientists being called elitists is a tactic used by the Right, and it's depressing to see people on the Left doing it at as well.
@R
DeleteBefore I try to respond in detail to some of the criticisms of my labeling, I would request that the remark relating to Milton Freidman or economists being not taken out of context.
Economists cannot be termed scientists since economics lacks the rigor of sciences and is hostage to too many unrealistic assumptions and caveats. Many economists do tend to advance the interests of elites and richer classes than they do of the middle and working classes. The eminent ones like MF, Hayek are more of ideologues than economists. Many economic models also cannot be termed as empirical or scientific since many of their assumptions are not realistic and those are not being revised or abandoned when faced with failure in real life situations.
EMH and Rational expectations theories are tell-tale examples of economic theories that do not care about taking real social behavior or empirical results into account. Random Walk or Behavioral models fare no better as empirically valid or reasonable theories.
I will attempt to come to the analogy with Math in subsequent comment.
Hi Ranganath,
ReplyDeleteThanks for responding to my comments. I apologize if some parts of my comments sounded like name-calling. I wasn't calling you a Marxist, I was simply voicing my view about a general trend. Having just finished four years of college, I've had to talk to a disturbingly large number of classmates who don't seem to understand basic economic principles-- on the Right and the Left-- and just wanted to point out that irrationality is not a monopoly of the Right.
Indeed, while I believe in progressive taxation, I am unimpressed by Leftists whose only policy position is "increase taxes on the rich," especially when they seem to have no idea what those tax rates are like right now to begin with. Indeed, at the time my classmates were advocating this, growth was negative, and we really did not need a negative multiplier effect.
Additionally, many people in the Left (not you) don't seem to understand that Marxism is not just the normative statement that wealth should be squared equally. It is also a positive economic theory that makes fundamental claims about how society works-- and that these claims are shattered when it comes to empirical evidence. I sympathize with normative Marxism to the extent that I don't like income inequality. But positive Marxism is inexcusable to adhere to in the 21st century.
So no, I don't believe you are a Marxian, and I agree with you about economists such as Hayek. Indeed, as a math student, the "Austrian school" further frustrates me since it eschews math!
And you are not incorrect about the fact that economics lacks scientific rigor (despite having mathematical rigor in its models). Though I am a believer in certain "dogmatic" economics models-- even EMH despite 2008! -- I can certainly understand hesitation to accept these. The Financial Crisis Inquiry report has an interesting section on the limitations of mathematical models too. Still, it is surprising how accurately one can model the price of, for example, a derivative using C++.
And once again, this is your field, and you have much more experience than I do-- so I appreciate your enagagement with me! (You may remember me as Nice Job on your translation post). Look forward to having this conversation with you!
R,
ReplyDeleteMostly I do agree with your posts. Some points that I really like are the following.
* Macroeconomics 101 should be taught in high schools. Some level of literacy on these matters could improve the standard of discussion and debate and eliminate unnecessary polemics.
* Importance of math modeling. I have no problems on how this discipline is used in finance. It should be used in as many fields as possible. And I do not think that Ranganath blamed math modeling for the financial crash.
** Why is the FM unable to substantively reduce income and wealth inequality in economic and social systems?**
ReplyDeleteThere is new book called "Capital" by french economist Thomas Picketty that got glowing reviews by people like Paul Krugman. The book claims the through out the history of capitalism growing wealth inequality has been the norm. There are only few aberrations to this norm. His solution to the problem is some form of global wealth tax.
PS: I have not read the book. Only read the reviews.
"Capital in the 21st Century" is turning out to an acclaimed work and getting a lot of publicity. His claim on the inevitability and perpetual existence of extreme inequality in capitalism looks like a truism. While the reality of this issue cannot be doubted, yet there is no dearth of denialism or aggressive rationalization of it. Growth and trickle-down theories are the infamous fig leaves of capitalist apologetic about the inequality 'side-effect' of capitalist/free market system
DeleteBut the problem appears to be that post-Industrial revolution, the huge economic success of capitalism has blindsided many people to this propensity of a capital and wealth based system in accentuating and worsening the skewed distribution of income and wealth
http://nyti.ms/1oAAn6o
ReplyDeleteKrugman in today's column takes apart the free market fantasy.
Thanks Capt., for sharing this link. This and more articles like these are really needed and should be evangelized. I think that new emerging middle class in India is not very far behind the American gentry in its bad mouthing of government and welfare economics.
DeleteOther than the problem my wife had with DMV earlier(knowing the reason, it was not completely unexpected), I have found CA's DMV quite efficient and clockwork like inspite of being understaffed and subjected to budget cuts. It is every anti-govt loony's punching bag.
**I have found CA's DMV quite efficient and clockwork like inspite of being understaffed and subjected to budget cuts.**
DeleteYou know, if you sufficiently bad mouth government services and simultaneously cut budgets eventually these services will fall apart. It will sort of become a self fulfilling prophecy. At that point the right wing turd polisher David Brooks will pontificate on NPR "See, government does everything impotently. That is why we should cut spending further and get rid of regulations and unleash the magic of free market". I think this battle is lost. Reagan and Thatcher won.
http://www.demos.org/blog/8/21/14/markets-dont-stop-racism-they-can-perpetuate-it
ReplyDeleteApparently free markets can perpetuate racism.
Ranganath,
ReplyDeletehttp://www.youtube.com/watch?v=0fBQyNiWOuU
Came across this video where an economist present Hayek's secret to economic development. Thought you will find it interesting. Would like to hear your view.