Sunday, March 20, 2016

Free Market and Federalist Confusion

I have made it pretty clear that I believe in minimal, local government, and believe economics should be left in private hands1. And the reason for both is pretty much the same. Both federalism and free market rely upon keeping government intervention to a minimum, while ensuring what intervention is found necessary is applied at as local a level as possible, so as to allow for alternate solutions -- or none at all -- in other locales. It is not a unique position, though I am surprised to find how few absolutely consistent believers there are in both2.

However, when I discuss these topics, or when I listen to critics attack them, I am struck by the way that both critics and proponents often share common mistakes concerning how these policies work, or what their benefits would be.

First, let us look at the free market.

The most common, and most mistaken, belief is that the free market produces optimal outcomes3.  There is no system which produces ideal outcomes, which is why comparing a system to perfection will always produce a long list of "flaws". What the free market does, and what other systems fail to do, is produce the best possible outcomes. Now, these outcomes are not perfect. Nor are they achieved instantly. The free market can take time to correct poor allocations, it can take time to adjust to new situations, and, in some cases, it may be slower in responding than alternative systems. However, over the long run, taking everything into account, the free market produces the best outcomes among those produced by all systems. It is not perfect, but then again, nothing is. But to pretend it is somehow a machine for producing optimal solutions is to hold it to an impossible standard, and to make easy criticisms that it is "failing" when it simply is not perfect.

Which leads into my second, related, mistake. This is the belief that the free market will always resolve a specific problem better than the alternatives. In truth, if we narrow our vision to address only specific issues, sometimes another answer may resolve that specific problem better. For example, if your worry is that medical insurance is not widely available, socialized medicine does solve that more rapidly than the free market. However, in so doing, it creates a host of other problems, such as shortages and poor allocation of resources. But for a single, specific problem sometimes other systems resolve them more rapidly, but at a great overall cost. Only the free market produces solutions which, over time, maximize the possible satisfaction. They are not ideal, as I said above, but are the best possible solutions.

Then there are errors on the other end of the spectrum, both those who give too much credit to the free market, but too little. These are the nominal conservatives who accept the free market, but would impose some "common sense"4 regulations5, or would "rein in" speculators6, or "curb the abuses" of "big oil"7 or cap CEO salaries8, or limit free trade, maybe enforce "fair trade"9. In other words, the populist and protectionist wing of the Republicans, along with a handful of others who, though not going so far, still believe the market needs regulation.

The problem with all of these positions is they overlook one of the greatest strengths of the free market. Unlike those imaginary benefits, these interventions are trying to resolve assumed problems the market itself does fix, and fix without the need for intervention, at least so long as government behaves consistently10, respects contracts11 and enforces property rights12.

All of the objections above rest upon the belief that the free market is akin to interventionist governement, that is, that its function depends upon "good people" being in charge13. The reason many conservatives want to impose an SEC, or salary regulations or  rescission periods and the like14, is that they believe, left without oversight, the free market will gradually be taken over by the greedy and unscrupulous who will exploit and abuse the rest of us, and thus regulation is needed to prevent abuses when the "wrong people" come to power.

But this misses the main point of the free market. The mechanism of the market is such that -- provided the government protects minimal individual rights -- the basest of our drives inspire us to the greatest efforts to benefit others. To put it more simply, if you are greedy, the only way to obtain the wealth you want is to satisfy the wants of others. Likewise, in the realm of employment15, the free market ensures those seeking to obtain the most wealth will, of necessity, pay their workers the most equitable wages, as well as watch out for their safety and so on16. Similarly, companies will want to provide safe and worthwhile products, f only because their reputations are assets of considerable value17.

Some may object and say the free market did not ensure this in the past, but I would disagree18. In some cases, especially during the formative years of American industry, there was anything but a free market. Our railroads, for example, were cases of the most egregious government patronage, coupled, in some places, with local efforts to "shake down" owners of rail, shipping and other transport firms19. In these cases, it is absurd to speak of the failure of the free market, as no free market existed.

I will grant, by and large, in many industries, parts of the 19th century were close to a free market. Granted, banking, shipping and other fields remained excessively regulated, but many industries were mostly free of government. So, why were there so many problems? Why were wages low? Why was safety so poor? Why were shoddy or dangerous products produced?

The answer is, that, for the time, given the consumers and the capital available, that was what the market wanted. I said the market tends toward the greatest satisfaction, but that does not mean ideal. If you live in a time much less careful about safety, with uniformly low wages, it makes sense to produce cheap, flimsy and less safe goods, as that is what consumers can afford. It would have made no sense to produce expensive, durable goods, as the market was too small. It is only now, with increasing wealth, that the vast majority of us can worry about product durability and safety.

Wages were a similar issue. Wages may have been low in factories, but ere perfectly in line with wages paid unskilled or low skilled farm hands, liverymen, longshoremen and so on. We forget when we complain of low wages, or child labor, that even lower wages predominated outside of the industrial cities, and children had worked in all but the wealthiest families since the dawn of time. (Many still work today on farms and the like.) The industrial revolution and free market were not responsible for low wages or child labor. They eventually resolved both, it just took time and societal changes to make it happen.

However, in the present era, we seem determined to eliminate any problems, even potential problems, as soon as they are recognized, without allowing time for the system to work itself out. Rather than allow for the market to adjust, using laws only to prevent actual frauds and theft, we tend to jump on the bandwagon the moment there is an outcry, and regulate blindly, often making things worse, rather than better.

Let us look, for example, at banking. Early on in the colonies, there was a tendency for unscrupulous souls to abuse the difficulties in redeeming bank notes to create small scale inflation, issuing far more bank notes than reserves could support, depending upon isolated locations and the general difficulties of travel to prevent them from being redeemed20. However, because that was an era when the state was generally reluctant to jump in and regulate, the market had time to adjust. At first it was a number of ad hoc solutions, such as out of state holders of notes pooling their bank notes and hiring agents to redeem the lot for gold. But, over time, more formal solutions arose. Regions developed clearing house banks, which required specie from all regional banks, and which could then both redeem notes, and handle interbank transfers. In time, membership in such clearing houses became seen as the sign of legitimacy and banks unwilling to participate saw their notes either refused or traded at a significant discount, which meant, eventually, being driven from business, as they found themselves unable to pay sufficient interest to keep depositors.

The modern era is quite different. Though to blame it solely on politicians is dishonest. No doubt there are activist politicians with an agenda, but most politicians subordinate personal views to political expediency, and with good reason. You see, the realm of politics is very much like competition for survival as envisaged in the more ruthless of social Darwinist theories. Those politicians succeed who give the people what they want. I grant, some very smooth politicians might convince the voters that their own agenda fits in with the public's demands, but that does not eliminate the fact that the public demand for something has to be there int he first place. Thus it is with our current environment. Yes, some politicians may use public demands to "do something"21 in order to enact their own agenda, but the public still must first demand they act. And that is what makes our era quite different from many in the past. In the past, I will grant, the public may have from time to time insisted on government action, but in other era has the public met every problem, even the slightest inconvenience, with such demands. The public may have wanted the state to put down riots or deal with floods and earthquakes, but only in our era do people go to the government when they can't get a refund for a defective toaster22.

Which is why so often we hear calls for government oversight and regulation, and claims from even nominal conservative that the market cannot run itself, it needs regulation. The problem with such claims is, in general, the examples they choose are not examples of where the market was allowed to work and failed, but rather examples where the first few baby steps of a new market proved far from perfect and the government immediately stepped in and took over. Or, in a few cases, anachronistic argument from eras that are alien enough that we believe claims that make little sense.

Let us look at three of these. First, the stock market, an all time favorite for those seeking government oversight. Second, the pharmaceutical industry. Third, the FDA and the regulation of foodstuffs in particular.

The stock market is a good example of the government jumping in before allowing the market to work out its own issues. Admittedly, stock sales had existed for quite some time before the birth of federal regulation, but largely in a very small scale way, and, even then, the market was fairly swiftly bound by any number of state laws. Thus, there never was much of a chance for the market to self correct, or for it to begin to develop free market mechanisms to ensure a fairly smooth operation. Instead, we were saddled early on with heavy handed regulation. Which makes the claims for the need for government regulation even more peculiar, as all the many stock frauds and swindles, all the crimes we ascribe to the stock market, were committed while regulation was strong. Thus, we can see that regulation does not stop such abuses.And yet, time and again, we hear unless it is regulated the stock market will be filled with corruption, while other industries free of such regulation operate with much less crime and deceit23.

The favorite example for the need to regulate the pharmaceutical industry -- and at one time the poster case for tort reform24 -- was the use of ethylene glycol as a solvent for sulfa drugs, resulting in a number of poisonings. However, while offered up as proof of the need for government regulation, it is a actually a bad example. First, because the market was not free at that time, the FDA had already come into existence and drug manufacture was already partly cartelized as a result. In a free market, such an error would doubtless be, if not the death knell, then certainly a massive setback, for the company making such a mistake. But by that time, there was no longer a free market in drugs, and so the harm was blunted and Massengill continued to function and profit. Thus, the outcry was not against a rogue company in a "wild west" market, but a cartel member in a regulated market. And, of course, the solution was not to ask whether cartelization through regulation worked, but to argue the laws were insufficient and to pile on more regulation. As with the stock market, the assumption seems to be oddly one sided. If there is a problem in a free market, the answer is regulation. But if there is a problem in a market already regulated, the answer is that the current regulations are insufficient. In short, regulation is a one way door, there is never a situation which would call for less regulation, only more.

Now let us look at the FDA itself. Of course, as we all were taught in high school, the FDA was created largely in response to outcry brought about by muck raking journalists and writers such as Upton Sinclair. Now, before we go on, let me see a show of hands of those who think "The Jungle" is in any way accurate... If you raised your hand, slap yourself in the forehead. Does anyone, anywhere think this depicts real human behavior? It is akin to the other 19th century novels which depicted equally bizarre behavior in distant lands. So long as he presented it as "in the slums" and "in the factories" which were as alien to his middle class audience as China was, he could claim anything, and did. And yet, on such a foundation there arose a public outcry for largely unneeded regulation.

States had traditionally regulated foodstuffs to some degree, though even that was largely unnecessary. And, yes, corruption did exist. However, no one explained how moving regulation from the states to the federal government would solve that particular problem. Especially since regulators and inspectors largely came from the same pool of people as once supplied the -- ostensibly easily corrupted -- state officials. But the era was one of centralization and belief that "federal" meant trustworthy, and thus the FDA was born.

But why?

Granted, food safety of the turn of the twentieth century was not what we would prefer it to be today, but that ignores a number of factors, including gross anachronism. The early twentieth century was a different time, much less wealthy, and much closer to our agrarian roots than today. People had fewer issues with eating what later would be called offal. Organ meat, scraps and bits were acceptable if the price was right. Likewise, some foods we would consider too old were considered perfectly fine for human consumption at the time25. So it is completely unfair to look at the past and imagine we can apply today's standards. And yet, by and large, the market worked, even without state regulation. People took some care in selecting food, as did sellers. And should a provider prove to have supplied something tainted, for the most part people avoided his goods. As with any other good, people used trial and error and voted with their dollar to get what they wanted. No need for the state to become involved.

Obviously, these are but brief looks at much more complex concepts, but I would argue that, despite the claims of many, the free market can safely be relied upon to protect itself. If it not perfect, it does not produce ideal outcomes -- no system does -- but as far as ensuring the consumers get what they want, the free market is inferior to no system. Given a stable, consistent government, with protection against force, theft and fraud, the free market produces the best possible outcome in the most cases possible. It may not be perfect, it may actually be outperformed in some specific situations by some alternate system, but overall it is superior, and that is the best argument I can imagine. While it may fall down, it also self-corrects over time, and, taking the results as a whole, it produces the best outcomes of any system conceived. And all that by being the most minimal system possible.

Then again, perhaps that last bit explains a lot. After all, the free market is nothing more than allowing people to go about their business, provided they respect the rights of others. It is the baseline of all trade. Any system has to be some regulation piled on top of the free market. And so, when we say the free market produces superior outcomes to any alternative, all we are really saying is that regulations tend to produce inferior results, that telling people to do other than what they want tends to make everyone less happy and efficient. In short, freedom produces the best possible solutions. Not perfect, not without problems and flaws, but better than the alternatives.

Is that really so surprising?

As this essay seems to have run a lot longer than I thought, I think I shall let it end here, with our discussion of the free market, and move the discussion of federalism, and the many mistaken beliefs about it, into a second essay.

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1. See "The Benefits of Federalism", "Conservatism, Incremental Change and Federalism", "Power and Disorder", "Redundancy as a Protective Measure", "Adaptability and Government", "Inflexibility and Bureaucracy", "Why Freedom is Essential", "The Free Market Solution", "How To Blame The Free Market", "In Praise of Contracts", "Contracts and Freedom", "Symmetry and Asymmetry in Government" and "Negative and Positive Rights".

2. Technically, as I discuss in "Reforms, Ideal and Real", I do not support an enforced free market, or even enforced minimal government -- say for example, a universal decriminalization of drugs. As I am consistent in my federalist beliefs, I would want to see the localities to have the ability to enact laws in as wide or narrow a manner as they wish. However, I believe it would be best were they to keep these laws as narrow as possible, to use as little power as they can, and, also, over time, I believe the minimalist ideas would win out over the alternatives. But I will be discussing some of these topics later in the essay.

3. This seems to be more common among critics than supporters, though supporters often seem to imply it without stating it explicitly. (Though some do go that far as well.)

4. See "Common Sense, Guns and Regulations" , "The Lunacy of 'Common Sense'", "'Seems About Right', Another Lesson in Common Sense and Its Futility", "A Look at Common Sense", "Res Ipsa Loquitur", "The Shortcomings of Pragmatism", "Pragmatism Revisited", "Pragmatism Revisited, Again", "On Extremists, Moderates and Polarization", "The Plural of Anecdote is Not Data", "Rules of Grammar and Pragmatism", "The Problem of the Small Picture", "Keyhole Thinking", "Impractical Pragmatists", "In Defense of Zero Tolerance, or, An Examination of Law, Common Sense and Consistency", "No Dividing Line", "The Consequences of Bad Laws", "Questions of Law and Questions of Fact", "The Rarity of 'Common Sense'", "Common Sense,Philosopher Kings, Arbitrary Law and Dictatorship" and "The Problem with Common Sense Solutions".

5. See "Et Tu, Town Hall?", "In Praise of Contracts", "Contracts and Freedom", "The Case for Small Government", "Competition", "The Basics", "Greed Versus Evil" and "Denying Reality".

6. See "Another Shakedown", "Absurdities on Oil", "Authoritarian Oil Talk", "Fighting the Wrong Fight", "Fighting the Wrong Fight, Part II", "Greed and the Price of Oil", "Obscene Oil Profits?", "Oil Company "Profits"", ""True" Prices", "Those Darn Speculators" and "In Defense of Speculators".

7. See "Imperfect Competition, Abstraction and Anti-Trust", "The Difference Between Public and Private, Or, The Real Monopolies and Cartels", "The Problem of Antitrust", "Consumer Protection, Cartels and the Failure of Regulation", "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", "Price Gouging", "'True' Prices" and "Technology and 'Natural Monopolies'" regarding price "gouging" in general, and  "Greed and the Price of Oil", "Obscene Oil Profits?" and "Oil Company "Profits"" concerning oil in particular. Also, see "Confirming My Argument on Peak Oil", "A Brief Thought on "Peak Oil"", "I Am Going to Say Something that Doesn't Make Sense", "The Consumption Curve", "Peak Oil Re-Run", "A Brief Comment on Oil", "Why I Doubt Peak Oil Predictions", "Rejecting "Peak Oil"", "Why Peak Oil is Laughable", "A Thought on Oil Reserves", "Greed and the Price of Oil" and "Bad Economics Part 1".

8. See "A Little More On CEO Salaries", "Why Do They Earn So Much For Playing a Game?", "Moral For Me, But Not For Thee", "Greed", "Greed Part 2", "Symmetry and Greed", "Perverting Self Interest" and "Government by Emotion".

9. See "Beware Populist Deception", "Protectionism Right and Left", "Jobs, Jobs, Jobs, and More Jobs", "Fear of Trade", "Free Trade, Employment, Outsourcing, and Protectionism", "Another Look at Exploitation", "Computer Games, Immigration and Protectionism", "Cheap Lighters, Overseas Dumping and Monopolies", "Post Hoc, Ergo Propter Hoc", "Unfair Advantage and Foreign Trade", "The Problem of Established Perspectives", "Two Sided Processes and Claims of "Unfair" Outcomes" and "Fear of the 'Big'". Also, on the topic of the term "fair" see "The Most Misleading Word", "Luxury and Necessity", "Res Ipsa Loquitur", "A Question of Fairness", "Protean Terminology", "One More Meaningless Word and Its Consequences", "Confucius, Aedes Aegypti, Pluto, Sub-Species, Conservatives and Republicans", "Misunderstanding Arbitrary Definitions", "Weasel Words and Hollow Words", "Semantic Games", "Misleading Terminology", "Smoking Versus Sex -- Want and Need Take Two", "Can We Ban the Word 'Scarce'?", "Government by Emotion" and "Selfishness as Reason - 'Wants', 'Needs', 'Fairness' and Other Guises for Arbitrary Decisions".

10. See  "Predictability", "The Consequences of Bad Laws", "Traffic Lights, Predictability and Conservatism", "Inflation and Uncertainty", "In Praise of Contracts", "Contracts and Freedom" and "Juvenile Culture and Totalitarianism".

11. See "In Praise of Contracts" and "Contracts and Freedom".

12. See "The State of Nature and Man's Rights".

13. See  "The Right People, The Wrong People and "Just Plain Folks"", "The Wrong People", "A New Look at Intervention", "Perverting Self Interest", "Racketeering Through Legislation", "Power and Disorder" and "Transparency, Corruption and Reform".

14.  See "The Gadarene Swine Fallacy".

15. See "Employment A to Z", "More Thoughts on Wage Disparities", "Capitalism and Its Consequences", "Competition", "Another Look At Exploitation", "Fairness and the Free Market", "Exploited Labor", "Capital Investment", "Exploiting Workers?", "Two Sided Processes and Claims of 'Unfair' Outcomes", "How Wages Work".

16. See "Who Is Safer?", "Worker Safety" and "Oven Mitts and Safety Regulation".

17. See  "For Your Own Good", "Business Licensing and Regulation", "Inspections, Regulations and Bans", "Why "Hope for the Best, Plan for the Worst" is Bad Policy", "GMO Revisited - As Well as Hormones, Soy, Phytoestrogens, and a Host of Other Food Scares", "Gun Control, The FDA and Regulating the Law Abiding", ""Better Safe Than Sorry" Usually Leaves Us Even More Sorry, And Much Less Safe", "The Problems With "Safe and Effective""and "The Problem With Regulation".

18. See "A Timeline Part One", "A Timeline Part Two", "A Timeline Part Three", "Mistaken Perceptions of the Industrial Age", "Child Labor and the Industrial Revolution", "A Passing Thought", "Rethinking the Scopes Trial".

19. See "Killing the Railroads". On patronage in general see "Patronage", "Patronage Versus Choice", "The Road to Violence","My Censorship Is Your Discretion", "The Other 99%", "Subsidies and Censorship", "The Secret of Success, or, Why Government Fails", "A Question for Artists of the Left", "Power and Disorder", "Chaotic Government", "Government Funding and the Creation of Strife", "Missionary Zeal and Human Discord", "How the Government Corrupts Relationships" and "The War of All Against All".

20. A few states even helped such "wild cat" banks by passing laws making redemption by out of state note holders more difficult. But that is another issue.

21. See "Doing Something", ""Doing Something" Revisited", "Doing Something Revisited, Again", "With Good Intentions", "In The Most Favorable Light", "Grow or Die, The Inevitable Expansion of Everything", "The Right People, The Wrong People and "Just Plain Folks"", "Madmen, Tyrants and Big Government", "What We Deserve", "The Written Law" , "Don't Blame the Politicians", "The Single Greatest Weakness", "The Difficulty of Principle", "Damn the Torpedoes!", "The Problem of Professional Politicians, or, The Impossibility of a True 'Ousider' Candidate".

22. OK, perhaps a bad example, as arguably this could be fraud which is a legitimate government interest. My point is, even the most trivial issue, say "false advertising" or worries that billboards make children buy too many sugary foods, bring about calls for massive government response, and that is pretty much unprecedented in our history. In most of history in general, for that matter.

23. Before anyone mention 1929 and its sequels in recent times, those are neither the fault of the market or regulation. Most modern stock market crashes are the outcome of excessive banking regulation and government inflationary policies. A few were exacerbated by other policies, such as the government fondness for encouraging subprime lending, but by and large they are monetary, not regulatory, phenomena.

24. The topic of liability and torts is too elaborate to discuss here and deserves a post all its own.

25. Strangely, this is coming full circle, as eco-types complain about us throwing away "perfectly good food", and advocate for selling wilted and bruised and somewhat off foodstuffs to "save the planet". In short, what would once have landed you in jail, or at least made consumers suspect your produce is now being lauded as socially responsible. Odd how things come back sometimes.

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POSTSCRIPT

I found a quote in an earlier essay ("Competition") which seems quite fitting for this essay:
The free market does not automatically produce the best outcome, what it does, and does well, is ruthlessly remove failed attempts, while inspiring countless more. It is not so much the invisible hand pushing us in the right direction, it is the lure of wealth driving a slew of new attempts to get rich coupled with the "invisible scythe" brutally removing all those that fail. Those few survivors are what push us toward improved efficiency.
It does quite effectively describe what is best about the free market, as well as pointing out how many who praise the free market overlook its most important -- if most ruthless -- element, the willingness to allow firms to fail.


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