Supernatural Abilities of a Free Market?
baraka
Posts: 1,268
After reading several opinions by some posters here on various topics, most recently the health care issue, free markets seem to be the solution to all of our problems. Whatever the issue, the private sector (free markets and their magic) beats government every time. But I'm not so quick to place blind faith in the markets. There is nothing magical about markets per se, they can perform very badly in some circumstances, imo. I believe competitive markets can work very well, but even then most markets have no concern with equity, only efficiency, and sometimes equity can be an overriding concern.
It seems to me that markets need very special conditions to be present to work best. There can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and many other conditions I'm sure I'm overlooking. In other words, the incentives that the market provides must be consistent with perfect competition in practical applications. So, if the incentives present in the marketplace are inconsistent with a competitive outcome, how can we assume the marketplace will be anymore efficient than the government?
I guess what I'm getting at is markets don't work just because we 'get out of the way.' Without ensuring the proper incentives are in place, there will be problems, waste, inefficiency, higher prices than needed, etc, a lot of the things most complain about the gov't. I feel there is nothing special about markets that guarantees companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned. If projects (current government services) are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, why would we expect an ideal outcome just because the private sector is involved?
I know this is getting long so I will just end it with the notion that deregulation or privatization may move outcomes further from the ideal competitive benchmark rather than closer to it, depending on the characteristics of the market in question. Thoughts?
It seems to me that markets need very special conditions to be present to work best. There can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and many other conditions I'm sure I'm overlooking. In other words, the incentives that the market provides must be consistent with perfect competition in practical applications. So, if the incentives present in the marketplace are inconsistent with a competitive outcome, how can we assume the marketplace will be anymore efficient than the government?
I guess what I'm getting at is markets don't work just because we 'get out of the way.' Without ensuring the proper incentives are in place, there will be problems, waste, inefficiency, higher prices than needed, etc, a lot of the things most complain about the gov't. I feel there is nothing special about markets that guarantees companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned. If projects (current government services) are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, why would we expect an ideal outcome just because the private sector is involved?
I know this is getting long so I will just end it with the notion that deregulation or privatization may move outcomes further from the ideal competitive benchmark rather than closer to it, depending on the characteristics of the market in question. Thoughts?
The greatest obstacle to discovery is not ignorance,
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
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HERE IS THE BIGGEST FLAW IN YOUR ARGUMENT:
WE DON'T HAVE A FREE MARKET.
We have a highly manipulated market.
The word "highly" should be in size 7 font, red, and bolded, but i get yelled at for making big words.
Do you not see the fallacy in railing on about how free markets can be dysfunctional when our country has not even had a free market for over 100 years at this point?
The Federal Reserve is the ULTIMATE distortion of free market economics. Most of you want to keep your head in the sand about it because as soon as you see those words ("Federal Reserve") your little Tin Foil Hat Police Alarm goes off and you run for cover.
However the very real truth is you can not possibly assess anything in America as being due to "free market forces" when you have an entity which continualy reduces the real wealth available to the public and funnels it to banking institutions which then redistribute it with priority to the very same companies that you complain are violating the free market.
Well.
They aren't.
It is the Federal Reserve which is doing it.
They are simply holding out their hands and saying, "Yes thank you sir, may I have some more?"
What part of this Jefferson quote is not easily understood?
It is NOT a problem with "free markets" ... it is a problem with terribly manipulated markets which guarantee capital and funds to companies which otherwise would be much harder pressed to come by that wealth ... wealth that rightly belongs to the people but has been stolen through inflation and moraly repugnant debt accumulated by a government no longer held accountable to the people and their taxes directly.
Do you understand this?
Do you understand that we can not judge what is wrong with the markets until we remove the largest violator of that concept?
Do you not understand that if you had even half of the wealth that has been stolen from you over your lifetime alone, you would be able to pay for your healthcare with no problems?
Do you not understand that if the government were not allowed to inflate (devalue) your currency through unconstitutional methods, even without the return of your wealth directly, the cost of the medical care which you are seeking would not be "valued" so highly? Most of that "value" is nothing more than inflation. It is a figment. The prices are high because there are many times more "dollars" on the streets than there should be.
But none of them have gone to you or me. They have gone to the military, and to Wall Street.
:(
Let no one talk about Free Markets and their ills in this country ever again until we actualy have a fucking Free Market to complain about.
At that time, we can discuss what regulations are necessary to keep the natural capitalistic tendancies in check.
However, until that time, know that the biggest problem facing our democratic market place is that it is not democratic. It is totalitarian.
If I opened it now would you not understand?
I think what is needed is more rules and regulations, not less.
Have you read the shock doctrine? I'm about half way through, it's a real eye opener to whats been going on for the last 30 odd years, since free market capitalism came to south America.
South Africa is a good example of whats wrong with it. Mandela got screwed when he got into power. The markets controlled every move he made.
The economy has polarized to the point where the wealthiest 10% now own 85% of the nation’s wealth. Never before have the bottom 90% been so highly indebted, so dependent on the wealthy.
I've never presented myself as a blind supporter of the Federal Gov't. I think that is the difference. And I have stated numerous times here that there something for everyone on the political spectrum to be offended by. I have a whole list of concerns myself if you are interested.
What is your definition of a 'free market?' The expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Again, to me, deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it. Like I said, it depends upon the characteristics of the market in question.
Not really............I'm 'railing on' about those that think the genius of the market is the solution to all our country's ills. But let's talk about this 'free market' atmosphere from 100 years ago............Do you think we were better off then? Would you disagree that we have evolved as a society since then? Didn't we try laissez-faire capitalism then? How did that all work out? Shantytowns, racism, company towns, union-busting goons, monopolies, corruption scandals, a punishing business cycle, filth in our food, child labor, etc, etc, etc. And what was the solution to these problems? Government regs maybe? Wanting to go back to the 19th century is like the Russians wanting to go back to communism to me.
Well, I would like to talk about it, since I started a thread and all, See my concerns above. Also, what is your opinion on the deregulation of the power industry in the 1990's? How did that work out? However, I'm really interested in your statement below.
Regulations? How can a market be free with regs?
btw, Drifting, I appreciate your concerns about the Federal reserve, however, I don't want this thread to be hijacked with this issue alone. This thread is about blanket deregulation and privatization across the board. For example, do you believe there are industries that are not naturally competitive industries, that require the assistance of the gov't?
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Sounds like an interesting book. Made me think about something I read about the informal markets in Peru a while back, not the drug trade, but the unregulated vendors who constitute most of Peru's housing, transportation, and retail industries. They don't pay taxes and they are largely unaffected by government regulations, if I remember correctly. They are cut off from the protection of the courts. Prudent large business deals can not be made because contracts can't be enforced. This greatly limits who you can deal with and how big you can grow your business. Consumers don't have protection against fraud, or unsafe or unhealthy business practices. I'm no expert on this however.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
I'ma keep this short.
a. i think we do agree mostly
b. my only concern is when people start trying to pile more "solutions" on to a pile of already bad ones, when the glaringly obvious giant problem is that our wealth is being funneled off and redistributed in a extremely-anti-free-market fashion by a super-corporation called The Federal Reserve.
If one of your primary concerns is the redistribution of wealth in the "captitalist" system, one of your primary rectifications should be the elimination of the Federal Reserve which is the vehcile by which this redistribution occurs. It is not some vauge notion of "Free markets" that is doing this redistribution, it is the very specific concept of a central bank as applied with fiat money.
Now,
you want to go down the huge slipperly slope of discussing government regulation en masse?
I'm not up for that argument today.
I will say this though: for every convenient regulation that you are to assume will help someone, know that it probably ends up hurting someone else. For instance, you mandate a minimum wage, it helps someone get more money from "the man", but then "the man" turns around and fires that employees coworker to make up the difference.
Beyond that, for every "good" regulation put in place, there are 3 or 4 "bad" ones.
As far as deregulation goes concerning the power industry, i can't say i am in the know. I will say that more often than not when you hear a term applied by the government to indicate that it is for the benefit of the people, it is most likely to be pure doublespeak.
Media "deregulation" is a prime example of that. It was not deregulation at all. If anything it would have best been described as RE-regulation. They just shifted the rules around a bunch, made it even better for the mega-corporations, and they called it de-regulation.
So,
its all great to argue this stuff,
but when you let the government in to do anything, industry usualy finds a way to pervert that process to their benefit.
That is why i am constantly shifting the argument back to something fundamental like the Federal Reserve. Because you get rid of that, you get rid of a LOT of problems. And no lobbyist can pervert the abolishion of an institution.
If I opened it now would you not understand?
Markets have negative externalites; consequenses that don't affect the two (or more) entites involved in the transaction. This has resulted in global warming for example.
Also markets with unusual demand curves, such as energy and health care where the demand is inelastic, are vulnerable to supply side manipulation. Note that the biggest profit margins are in big pharm and big oil; and these areas are also some of our biggest problems.
A market system with government to step in where there are inefficiences (Keyensian economics) has been the base of all successful economies. Too much government control and the endpoint is communism. Too little and there is wealth inequality and the destruction of the middle class. This is most crappy latin american economies (developed and heavily influenced by the United States right wing). Perhaps this market failure has ignited the current socialist reaction that we are beginning to see in that region.
Nice post SundaySilence and I pretty much agree. While I agree that there are many industries that work perfectly well when the gov't' gets out of the way', there are also some that are not naturally competitive industries. You mentioned some in your post above, power industry & health care.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Everything you've said here is largely correct, IMO. Unfortunately, you've peppered this post with "best" and "good" and "interest" as if those terms have some kind of universal meaning. Furthermore, you seem to be under the perception that government intervention negates market function. That's like suggesting suicide negates natural selection. But overall I don't really take issue with this post.
How are the power & healthcare industries "not naturally competitive"?
I think I need to go take a cold shower because I agree with you. While reading the OP I had big lights flashing in my head saying "WE DON'T HAVE A FREE MARKET".
Here's the issue, and it's the same in all sciences. Economic theory comes from "vacuum scenarios". It's like saying the pull of gravity is 9.8m/s squared. Sure, in a vacuum. But in reality, there are other forces working on an object and nothing falls with that exact acceleration. So when we assume that a free market is efficient, we're looking at a perfect scenario. In reality, there is no free market economy. Farm subsidies alone make ours and Europe's economies incredibly guarded.
To the OP, I can tell you've taken some econ theory/history. Something that stuck with me from my econ studies is this: Economists generally believe in free markets, and are therefore generally against any or all government intervention (keep markets completely free). Historically, however, economists have been effective only working as part of the government. There is an inherent catch 22 in studying/implementing economic theory. I also believe there's a catch 22 in capitalism in general, as it has an "efficient" level of unemployment. I believe our system should create enough jobs for all.
"Sometimes I think I'd be better off dead. No, wait, not me, you." -Deep Toughts, Jack Handy
Since the word "our" is possessive and the only economic system you actually possess is your own labor, you have a lot of work to do to create 6 billion jobs.
Or by the above sentence did you mean "I believe someone else should create paychecks for all"?
Seriously? Arguing semantics? By "our" I refer to "our" collective country. The USA. I believe we all possess this country equally.
I am not saying any single person needs to do anything. I do hope to one day create jobs. Six billion may be a stretch, but sixty isn't. And that's not bad. I'm not sure what you're even arguing here. Do you think we need unemployment. All I'm saying is that if:
We are going to embrace a system that necessarily creates unemployment,
that we need to,
have a system of some sort in place to counteract that effect.
Is that so bad?
"Sometimes I think I'd be better off dead. No, wait, not me, you." -Deep Toughts, Jack Handy
All arguments here are semantics. There's nothing wrong with arguing semantics.
Why do we "all possess this country equally"? Are you part of this country? Do I own you equally as much as you own you?
I certainly think we need unemployment so long as people have skills that are of no value to their neighbors.
Do you have a problem embracing life as it necessarily creates death?
That needn't be bad but it all depends on the means you use to go about it.
This is a tough one for me to explain, as I'm no expert, but, let's look at the power industry as an example. The idea of creating large national markets to buy and sell electricity makes more sense as economic theory than it does in reality (as in physics), because it consumes power to transmit power. That is just one variable that prevents it from being 'naturally competitive.' There were the issues in the deregulation of power in California and the mass blackout a few years ago. I grew up in the Southeast and by contrast, we retained traditional regulation and cheap, reliable electricity. There is a fairly fixed demand for electricity and generating capacity is tight, so companies that produce it enjoy a good deal of power to manipulate prices. I'm reminded of the Enron scandal that slammed Californians for a crazy amount of money (I believe it was in the billions but I would have to look that up.)
If the projects are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, how can we expect an ideal outcome just because the private sector is involved? There seems to be examples of where it has failed, like the one I mentioned above. And what about cronyism limiting the participants in the marketplace? How can we expect an outcome that maximizes the public interest?
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
There's certainly no advantage to taking a monopoly owned by the government and creating a monopoly owned by private enterprise, as is typically the case in so-called utility "privatization" efforts. A government-owned monopoly is almost always better than a private monopoly, but anytime you have the need for either you will likely find, in the events leading up to such a monopolization, the foolish hand of government steering people towards a single provider.
So please do not confuse shortcomings of market dynamics with existing conditions created by governmental tomfoolery. If you, as a government, connect every building in your town by physical wires that can only come from a single provider, do not then turn around and complain about monopolies in the power business.
Furthermore, if you create regulations such that only one hospital can operate in your town or one drug company to dispense your pills, do not be so silly to complain about monopolies in the health care business.
You can't! That said, "ideal outcome" is probably a meaningless term, so who cares?
Please do not complain of market "cronyism" and propose government as a solution. The irony there is thick.
And I have no idea how one measures "maximized public interest". If you can offer some kind of approach to that, I'm all ears.
'Largely correct' isn't a typo is it? If not, cool...........
But you couldn't agree without a little jab.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Not a typo at all.
My quibble is that the words you used have no definition, purposefully.
My thought? You work for the Obama campaign
That is what I'm asking. From my example, it appears that when the gov't was involved there were less issues. Deregulation made things worse. Ten years ago, most public utilities WERE regulated monopolies. They were guaranteed a fair rate of return, based on their capital investment and costs. So the government compensated them for building spare generating capacity and maintaining transmission lines. Regulators, of course, sometimes made mistakes and the industry oversold technologies like nuclear power. Even so, in the half-century before deregulation, productivity in the electric power industry increased at about triple the rate of the economy as a whole.
I'm not arguing that it was NOT a gov't monopoly. I'm arguing that some industries, such as the power industry, does not function properly in a 'free market' and that it seemed to do better under the previous conditions.
Can you offer a better approach? If so, then I'm all ears..........
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Really? Then I haven't been compensated for my work.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Hehe...the pre-"privatization" days are no more worth of celebration than the post-"privatization" days. They ensured generations of artificially lower costs, excessive consumption and stagnated innovation.
I absolutely can offer a better approach. Want to deregulate power? Then you best start by tearing down every publicly owned power line in your town, crediting back the investment to each consumer and then inviting providers to take their case to the people.
And you think deregulation and throwing it out there to the free market is a better solution? I just recalled another problem with deregulation........under deregulation the local utilities no longer had an economic incentive to invest in keeping up transmission lines. Antiquated power lines are operating too close to their capacity. The more power that is shipped long distances in the new deregulated markets, the more power those lines must carry.
Are you being extreme to make a point? Because the above seems like a delusional view of economics. But what do I know...........let's tear down all the public power lines.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Absolutely! However, handing it over to a single provider and then regulating the hell out of them and the consumer is not really "deregulation".
This all depends on the situation. Many "deregulation" plans put power line ownership outside the reach of providers. Many providers also knew that governments would step in if they failed.
Regardless, in a market-oriented environment local utilities would have every incentive to invest in transmission lines where the value achieved from those lines being operational exceeds the cost of keeping them operational.
I'm not being extreme at all. At least no more extreme than the fools who put them there in the first place.
Do tear them down. You'd be surprised how many solar panels would go up in their place. You'd be surprised how neighborhoods would build out systems that encouraged competition as opposed to making it impossible.
But at the same time people might have to spend their own money and 4-5% of the population would suddenly be powerless and no one would stand for that.
I believe during the wave of deregulation that culminated sometime in the 90's, the integrated utilities that once generated power in its own plants were broken up and transmitted and sold at retail. It unleashed a new breed of entrepreneurial generating and trading companies. But, the prices the local utility companies could charge consumers remained partly regulated. I believe the idea was that local utilities, no longer producing their own power, could negotiate among competing suppliers for the best price and pass the savings along to the consumer.
I had a thought while I was eating dinner a few minutes ago......there is a very long lead time in the construction of power plants. The free market can't easily predict weather conditions or peak demands, it can't suddenly add new capacity, can it? Electricity is, of course, a necessity. If scarcity suddenly materializes because private entrepreneurs cut construction costs, they still win by raising prices. Consumers can only conserve so much. They simply have to pay whatever the electric company charges. How is price competition meaningful in a deregulated system when different power companies increasingly all buy in the same wholesale power market and charge essentially the same prices?
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Not really. It generated a bunch of activity amongst politicians and existing power companies already in low-margin government controlled businesses looking for a new way to generate lots of new revenue.
That was the idea, yes.
It takes a very long time to add power capacity. That does not mean it cannot anticipate demand, however.
Hehe...if that were true, none of us would be here.
You've forgotten something: the ability of the consumer to produce their own energy.
It's quite easy for free market participants to horde diamonds to drive up the cost. Not so easy to do with electricity unless you completely lock the consumer into a single technology out of their reach.
Are you denying that deregulation in the power industry broke up the integrated utilities like Con Ed that once generated power in its own plants? Because that is what happened. And I've stated several reasons in this thread why that was a bad idea.
Electricity deregulation actually took the power system away from the people and handed it over to for-profit corporations. Again look what happened to the folks in San Diego when it was deregulated. It was a disaster.
Sounds good in theory, but not in reality. See my previous posts on the issue.
:rolleyes:
So, what is stopping folks from producing their own energy now? How would that work out for those in the bigger cities that live in high rises, etc? It isn't as simple as just producing your own energy.
Look, while it is undeniably true that the free market makes many valuable contributions, it is as imperfect as any other human institution, and this includes gov't. But there are industries that the free market is simply not capable of . And there are certain industries that have been complete failures when the 'genus of the market' has been applied. Hell, the airlines just came to mind. Market forces are neither good or bad, they just are. It is true that an economic system which ignores their existence (such as communism) is doomed to failure. But to believe that markets are the solution to all of our problems is delusional. I said this in my original post (or one of them) but I'll state it again, rampant privatization based upon some misguided notion that markets are always the way to go (I edited out the word 'best' just for you;)), privatization that does not proceed by first ensuring that market incentives are consistent with the public interest, doesn't do us any good. And I haven't seen any evidence to suggest, for example, that an industry such as the power industry is a naturally competitive market. I've actually only seen evidence to the contrary.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
Thanks for your input, SilverSeed. Oh, I have no formal schooling in economics other than basic college courses. I really have no idea what I'm talking about
Interesting comment about economists working with the gov't.........so, would you say that ALL economists are against gov't intervention or is that just a school of thought?
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein
I never really took economy lessons (well I did, in high school so it isn't worth much), and this is something I never quite understood : adam smith's invisible hand. How can we blindly believe that an largely imperfect "science" will produce consistent results over the years?
Economy is not based on any "hard science" like physics, pharmacology and stuff like that. I think most tools used are mathematical models that may or may not work (how many nobel economics were just plain wrong in their predictions?). We'll gladly take for granted a theoretical interpretation of psychology + sociology + basic mathematics and use these conclusions as arguments to create and drive our societies? That, I never understood.
And this pertains to the topic of the thread, how? If you have an opinion on deregulation, feel free to express it. I am interested in and welcome different perspectives. If you disagree with my OP, feel free to express your perspective.
btw, just because my board name is similar to 'Barack' doesn't mean it has anything to do with him. It has nothing to do with him, actually.
but the illusion of knowledge.
~Daniel Boorstin
Only a life lived for others is worth living.
~Albert Einstein