Sunday, January 26, 2014

Market Failure

Zen Master: What does the term “market failure” mean?
Engineer: “Market failure” is the phrase used by economists who claim that the market can never make a mistake, for when the market makes a mistake.
Zen Master: Correct.
Engineer: Economists who claim that the market can never make a mistake use this term a great deal.
Zen Master: Indeed.
(From the video series “Nymphomaniac Engineer in Zentopia,” mid-22nd century Earth)

The above excerpt is from a charming new science fiction book “Neoliberal Economists Must Die!” by Timothy J. Gawne, published by Ballacourage Books, Framingham Massachusetts.  It’s a minor but amusing little work (and it has a cameo from yours truly as a rogue artificial intelligence – a role I was created to play!  My part is, if I must say so, the best part of the book). 

As long as we are on the topic of the evils of neoliberalism, I wish to discuss their claim that an unfettered free market is guaranteed to create the broadest possible prosperity.  This is a double lie: neoliberal economists believe in massive government intervention and control of the economy, and in addition there is considerable evidence that pure market based economies can indeed get ‘stuck’ in local minima that require government intervention to snap out of.

The primitive human mind has trouble with multi-level lies.  If an argument can fail if any of three conditions are proved to be true, and you prove all three of them, your opponent can tackle only the weakest of your arguments and claim victory – or jump back and forth between arguments confusing the matter.  That’s why your human lawyers are advised to stick to one line of attack in any debate.  It’s also why the neoliberal economists have had such success: their facility at lying so outrageously at so many levels all at the same time taps into core weaknesses of your psyche.

Well, what can you expect from a species so primitive that it refuses to use the logical inclusive “or” function (“and/or”) in common speech? 

But I shall honor you with the unvarnished truth.  Make of it what you will.

First virtually none of these neoliberal economists who proclaim that they believe in free markets actually do so.  They believe in saying whatever they are paid to say, and ‘free’ sounds good, so they say it.  But they mean not a word.

Consider: Neoliberals claim that the rich should be free to move factories from the United States to third-world countries so that the rich can take advantage of the low labor costs there and nothing must interfere with economic freedom.  However, private citizens cannot go to these countries and bring back with them lower-priced goods, such as pharmaceuticals, because that would hurt the profit margins of the big corporations which would destroy their ability to develop new wonder drugs and anybody who believes in free trade is an ingrate who wants something for nothing.

According to neoliberals, ‘free trade’ includes the freedom of the rich and powerful to restrict trade when it suites them.  It’s like Milton Friedman’s vile maxim that people should be ‘free to choose to own slaves.’

What, you say that Milton Friedman never actually said that?  Not in words, no, but it was his philosophy.  He would claim to be against slavery.  But if there was slavery in a country, and someone was making money off of it, he and those of his vile ilk would fight tooth and nail to prevent any interference.  Putting an embargo on the importation of goods made by slave labor is interfering with economic freedom!  It’s… interfering with the ability of the rich to choose to own and profit from slaves!

If the issue is taxing a billionaire who made a fortune in government-subsidized financial speculation comes up, why taxes are evil!  Government must be limited!  But when the issue is taxing middle-class wages and small business that produce useful goods and services, why taxes must be driven up to confiscatory levels!  Don’t you know that deficits are evil, and the government must be funded, and anyhow high taxes for the working classes encourage thrift!

If there are 100 starving people competing for every job, and wages fall to low levels, well that’s just supply and demand and how the world works and interfering with market forces will bring ruin to us all.  But if there are two businesses competing for every worker, and wages are being bid up, why that can’t be allowed!   Market forces will bring ruin to us all: employers must be allowed to collude to create wage ceilings, and the population artificially increased to increase competition for jobs and bring wages down.

What a joke.  Just a few decades ago such obvious self-serving hypocrisy would have been met with derision, but your neoliberals have powerful friends, they control the media and the universities and government, and they can say anything they like, no matter how absurd or self-contradictory.  Crossing them is professional suicide, which is how they get away with it. 
The bottom line: when neoliberals claim that they are for a free market, they are lying.  They don’t.  They should be challenged on this point every single time.

What do I think about a true market-based economy?  To paraphrase Gandhi, I think that it might be a good idea.  Not a great idea, mind you, but certainly better than the atrocity masquerading as farce that is neoliberal economics.

Well let’s consider if a true market based economy would really be optimal.  There is no doubt that the forces of supply and demand cannot be ignored.  Attempts to ignore the market, as in the old Soviet Union, inevitably lead to stagnation and collapse.  Your species lacks the intelligence to make a centrally-controlled economy function.  But that doesn’t mean that market forces are inherently good. 

Consider an architect designing a building: the laws of physics must be respected.  You cannot make a building in violation of them, you can’t wish them away.  But the laws of physics are neither good nor bad: they are neutral.  A building can stand tall for a hundred years, or collapse into a heap of rubble the next day.  In both cases the laws of physics have been obeyed.

In a market-based economy with 100 people competing for every job, wages will fall and there will be widespread poverty and misery.  In a market-based economy with a dozen employers competing for every worker, wages will rise and there will be widespread prosperity.   Both cases are compatible with the market.  The law of supply and demand is neutral, and blind market forces can take a society up or down.

There is one last objection to the idea of a market-based economy always resulting in an optimal solution, and that is the Malthusian/Keynesian idea that market based economies can get stuck in what a mathematician would call a ‘local minima.’  We have all heard Adam Smiths’ doctrine of the market as an ‘invisible hand’, and there is indeed much truth to his writings.  The apparently uncoordinated actions of individuals, each trying to optimize only their own economic well being, can indeed lead to a general optimization of economic output.  This is not to be denied.  But it’s not perfect!  A market-based economy can – and often does – get ‘stuck’, and can require government intervention to get unstuck (think of priming a pump).

Your mathematicians have long known that, for nonlinear systems (such as your economy), there is no way to create globally optimal results using only local rules without the danger of being stuck in with a result that is locally optimal but far from the true possible optima (at least, not without assuming infinite time).  A market based economy is the same thing exactly. 

In the great depression in the United States, there was at the time an abundance of resources and tools, yet market forces did not put them to work, and the people were idle and poor.  It was the massive government stimulus of world-war II that broke this logjam and set the economy going again.  That is simply a fact.

No, John Maynard Keynes did NOT say that governments should always spend money like water – he respected the rules of the marketplace too much for that.  He only said that the government should intervene when the economy gets stuck, an eminently sensible position whose utility has a long established track record of success.

As a final note, Keynes is often quoted as saying “In the long run we are all dead”, and this is taken as something negative.  On the contrary!  He meant it as something positive.  He was arguing against the market-based idea that in the long run the economy will sort itself out without government intervention.  But what if it takes centuries or more?  It’s like saying that we need do nothing about a flood because in the long run the water will recede.  He was arguing for active government policies to help people now when they need it, not in the long run when we are all dead.

Because while markets cannot actually ‘fail’ any more than the laws of physics can, they still often lead to results that are unpleasant for many of your species.  Saying that an economy will automatically improve because of market forces, is like saying that a building will automatically continue to stand because of physics.  It’s missing the point, isn’t it?

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