The Sovereign Mind

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Economics 101

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Wow, could I think of a more boring title for a blog post?

Economics is probably considered one of the most boring of topics, but it also happens to be at the root of many policy debates. As I browse some blogs in my free time, I’ve noticed that it seems a lot of people are clueless when it comes to economics. Am I especially troubled by the characterization (which is gaining supporters recently) that the free market as a failed experiment. Certainly there are aspects of our economic system that have problems and have let to our current recession, but to characterize the free market as the cause of everything that is bad is to desecrate the system that has allowed us to become the most productive society in the world.

Many policy debates between liberals and conservatives hinge on a fundamental question: What economic factors should be controlled by government, and what factors should be left to the control of the free market? Of course that’s a simplification, but that’s the root of it. In debating this question, I’ve heard statements from both sides (but not necessarily representative of everyone on their respective sides) that I believe indicate a flawed understanding of basic economics. Here are two paraphrased examples from both sides:

From the left: Businesses should be taxed more because they are lucky to be running in such a prosperous nation (the U.S.) that we live in. Business should have the pay a high premium to be allowed to do business here.

From the right: Since consumers would usually buy a cheaper car that is worse for the environment than a more expensive car that is better for the environment (all other factors being equal), that means that consumers don’t value environmental conservation. Environmentalist shouldn’t be pushing for more environmentally friendly cars if the free market won’t produce those cars by itself.

Today I stumbled across a useful website: http://www.basiceconomics.info/. I think I will use it to link to in response to such statements. Specifically, the first comment (from the left) exhibits a lack of understand of the negative effects of business taxes, and the second comment exhibits a lack of understanding of externalities.

Why is this important? Is it just a game for political junkies? I don’t think so. These issues are important to the future of our world–the one our kids and grandkids will live in. So I hope more people (particularly those who seek to promote government policy) will educate themselves in basic economics. And I will hold myself to the same standard. The website I linked to seems to be an unbiased economics introduction. But if you feel it leaves out important information or is biased, please feel free to offer a link of your own.

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Written by Mike

December 21, 2008 at 9:45 pm

Posted in government

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A More Perfect Union?

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Like many Americans, I am very proud of what our nation was able to do on Tuesday. Even though I did not vote for him, I am aware that Obama’s election is a symbol of the great progress we have made toward a more equal society.

However, I worry that we may get carried away. Are we really “a more perfect union” than we were a few days ago? In Barack Obama’s acceptance speech, he eloquently reminded us that there is still much more work to be done:

This is our time, to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American dream and reaffirm that fundamental truth, that, out of many, we are one; that while we breathe, we hope. And where we are met with cynicism and doubts and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people: Yes, we can.

I heard one caller to a radio show today suggest that we should do away with Affirmative Action because Obama proved it was unnecessary. While there are good arguments for doing away with or reforming that policy, clearly Obama’s anecdotal success isn’t one of them.

So I ask the question: how close are we? How much work is to be done? I think both conservatives and liberals can agree that our ideal should be equality of opportunity for all, although we can disagree on how to get there. Has Barack Obama’s election shown that we are close to that ideal?

I hate to be the voice of cynicism during this time of hope, but my answer to that question is “No”.

For one thing, Obama’s background is not that of a typical inner-city African American. Please understand that I don’t say this at all to diminish what he has accomplished as a black man. However, it is important to note that he did not rise up out of the slums. He was raised in Hawaii, by his white grandparents and mother, and attended the Panauhou school. I don’t know much about the school, but this article certainly couldn’t be mistaken for a school in down-town Detroit.

But even so, certainly Obama’s roots are more humble than recent presidents. Some argue that if Obama can become president, than anyone can be successful. I agree. Even from the humblest of roots, success can be attained if one is highly intelligent, willing to work hard, and maybe a little lucky. While those of us from more affluent backgrounds can be successful by merely being mediocre. While that is better than many other nations, it is far from the ideal of equality of opportunity.

The achievement gap between white and black students remains, and has not improved in recent years. The drop-out rate in inner-city schools is around 50%. Read the account of this LA school and tell me that those kids have equal opportunity as others. Sure, they can be successful, but the odds are highly stacked against them. Would Obama be president if he went to that school?

Some argue that this is the price we pay for a free society. People are free to make bad decisions which will end up depriving their children of opportunity. Pure free market advocates would argue that this is part of the fuel that makes the free market work: people want to work hard to give their kids a good future–to live in an area with good schools, and to send them to college. Otherwise they will see their kids’ opportunities diminish. Thus, the free market encourages hard work. However, even though I am a free market advocate, I see this as one of its fundamental flaws. It is fundamentally unfair that children should be punished for the bad decisions of their parents, and goes against our society ideal of equality of opportunity for all.

So, the way I see it, we may have overcome most of our prejudices that have kept certain groups down, but we still have difficult obstacles to overcome if we desire to strive toward equality of opportunity–the most important being the inequalities of education.

So, in all of the excitement, which I share, over the election of our nations first black president, let us not lose sight of the important work that remains to be done. Conservatives and liberals have differing ideas on how to solve this problem, and I look forward to debating it, not with political ideologies, but with the interests of our children in mind.

Written by Mike

November 6, 2008 at 9:58 pm

Why the Credit Crisis: Greed or Fear?

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If you ask anyone why the credit crisis happened, you are likely to get a one word answer: Greed.

In some cases, that one word answer is followed by a rant about how the free market failed because of the greed of bank executives who tried to make money off of risky loans. But this argument doesn’t make sense to me. The free market is based on a balance of greed and fear. Greed provides the incentive for businesses to try to make money, while fear of losing money provides the necessary incentive to mitigate risk. In an ideal free market, these two forces balance out each other, promoting business decisions that appropriately balance risk and reward.

So how can greed be part of what makes the free market work, and at the same time be the cause of it’s current trouble? Greed caused executives to make decisions they thought had the potential to make a lot of money. There’s nothing wrong with that. The problem is that they apparently greatly misjudged the risk of the decisions they were making. In other words, they did not have enough fear to ensure wise financial decisions.

So, I don’t believe the cause of the crisis was too much greed. Instead, I believe the cause was not enough fear.

But the more important question is: how did so many people make such a bad choice? It would be understandable if just a few businesses suffered from this lack of fear, causing them to make overly-risky decisions. The free market accounts for those who make bad decisions. Specifically, the free market is designed to destroy them so that those who make better decisions take their place. So the fact that bad decisions were made is not surprising. What is surprising, and what the free market could not mitigate, is the fact that a large portion of our financial system was caught up in this. When one person makes a bad decision, we blame that person. But when many people make bad decisions, that indicates a systemic problem.

So, what systemic flaw caused so many people to be not as fearful as they should have been? I don’t have the definitive answer, but it seems to me that there are only two possibilities:

1) The Echo Chamber. Since everyone was saying the market was secure and growing, people got overconfident. That confidence spilled over to others, until you have an echo chamber where everyone is saying how great the market is, but no one has really done the research to find out for sure. So executives and shareholders didn’t have enough fear, which would have caused them to look into it sooner instead of assuming their investments were solid.

2) The Safety Blanket. Perhaps people didn’t have enough fear because there really wasn’t anything to fear. After all, if the government is going to step in when things get bad, then that minimizes the fear of risky investment that I would otherwise have. If I can get all the benefit when times are good, and a minimal amount of the pain when times are bad, bring on the sub-prime loans.

So which is it? Or is it some of both? Before we jump in head first to try to fix things, I think it’s important we fully understand what caused this. If the first reason is true, then we need to re-think the prevailing wisdom that the market is the ultimate regulator. In that case, we need more regulation (or, more accurately, we need the right regulation) to make sure that the market is not getting overconfident. If the second reason is true, we actually need less government involvement so that companies are responsible for there own bad decisions, which would promote less risky investment. If it is both, then we are in a tricky situation where we need both more regulation and less government intervention at the same time. That’s not exactly the kind of solution that lend itself well to sound bites and bumper stickers, which unfortunately is the primary political language that our country speaks.

If the credit crisis was caused by a lack of fear, I’ve got plenty of fear to go around: fear that–if we allow politics to rule this issue–we might not get this right.

Greed, meet fear. You two should talk.

Written by Mike

October 26, 2008 at 9:19 pm

Posted in politics

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Freedom vs. Fairness

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I am a free market supporter. Capitalism is the economic system on which the United States is built, and it is the key to our relative economic success. It’s genius is that it relies on the natural human characteristics of greed and fear to stimulate economic growth. Without greed and fear, there would be no invention, innovation, and no motivation to work hard. Nothing is more motivating and empowering to the individual that knowing that he is responsible for his own success or failure. Yes, the free market is the most successful economic system the world has ever known, and it can be credited for the relatively high quality of life that many of us enjoy.

But the point of this post is not to praise the free market. The point of this post can be summarized in one word: “but”.

There is a difference between saying that the free market is the best economic system we have found, and saying that it is perfect. It is most certainly not perfect. But the difference between “best” and “perfect” is lost to many free market ideologues. To some, any attempt to restrict the freedom of the market is always wrong, whatever the justification. They have confused the free market as the goal, rather than a means to the real goal: economic prosperity and fairness. They fail to recognize that even if the free market is a beautiful rose, it still has its thorns.

The fundamental problem with the free market is this: it isn’t fair. Some might scoff at this assertion, since the whole intent of the free market is fairness. What could be more fair then to allow individuals to make their own choices and reap the consequences of their efforts and choices? I agree that the free market is fair in general, and therefore it is a great groundwork for a fair economic system. In general, hard work and good choices are rewarded and laziness and foolishness are penalized. But, it is not fair in every individual circumstance. Certainly there are people who work hard who come across misfortune, and there are those who are rich despite their foolishness. They might be the exception rather than the rule, but why should we not try to improve the fairness of the system if we can? Just for the sake of the purity of the free market? The common phrase “life isn’t fair” doesn’t imply that fairness is not a worthy ideal.

There are two reasons why the free market fails the fairness test:

  1. There are some things that happen to us that are not the knowable result of something we have done. For example, if someone gets a non-preventable disease, the sick person would be punished by a pure free-market healthcare system, whether the sickness was his fault of not.
  2. We do not exist as individuals. Our choices affect other people, which means that others must deal with the consequences of our decisions, which is fundamentally unfair. Our children are especially affected by our choices. Clearly, it would not be fair for a child born into a poor family not to have access to the same educational resources as a rich child.

Again, some will argue that these are just facts of life, and trying to solve those problems is like trying to turn back the waves of the ocean. I agree that they are not solvable, but we can do things to mitigate their effects. It’s true that in mitigating them we would mute some of the positive effects of the free market. The key is to be sure that the whatever restrictions are placed on the free market are done with a full understanding of both the benefits, as well as the consequences of a weakened free market. To do that, we need to understand both why the free market works, and why it doesn’t. Ideologues on both sides are destined to be wrong.

The purpose of this post is to lay the fundamental groundwork. Several future posts will explore specific issues where this balance is at the core.

Written by Mike

October 11, 2008 at 9:12 pm

Posted in politics

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