Basic Truths and Common Sense

I woke up from nap with this thread writing itself.   This happens frequently to me when when I’m trying to reconcile ideas that look separate and unconnected but I know intuitively that isn’t true. I just haven’t found the way to make the connection. This latest dream tapestry came from what seems like three distinct sources.  The first inspiration was a conversation from The Confluence.  The second kick came from a rude comment from an even ruder blog.  The third click came from my basic market structure lectures to my freshman survey classes where I have to teach economics to non-business majors.  This means I teach economics concepts without much use of graphs and math so you have to tell a lot of stories to get your  point across and be very down to earth about things.  It makes me really work my brain so I can explain complex concepts in intuitive ways.

So the thread at the Confluence was about what  is ‘crude populism.’  The rude comment was about me being at times seemingly ‘Keynesian’ and at other times a ‘rabid free market libertarian’.  The primary concept that I’m leading up to in my survey class is  ‘market failure.’  There’s actually a middle path between these concepts and we’re about to go down it.  The connecting point is market failure and its root source as well as the source of resolution.  The source of market failure can frequently be the government.  It can also frequently be something with in the market itself that has nothing to do with the government.  Either way, to deal with the market failure,the government must find the root source and remove it.  This means creating laws.  Sometimes, this means removing government intervention.  Other time it means adding it.  I’ll give you some examples here in moment, but stay with me on those points because I’m going to tie it to American populism in its varied forms.

The most recent form of American populism in this country comes from Ronald Reagan.  A previous form of American populism came from Huey Long.  They were both very skilled at speechifying the masses into jingoistic furor, but with very different views of what the government’s role in messes were. Reagan’s speeches were full of the “government is always the problem.”   Here’s example one, the first Reagan inaugural address.

Here’s the part of the speech that describes the Reagan brand of Populism.

These United States are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflation in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and the fixed-income elderly alike. It threatens to shatter the lives of millions of our people.

Idle industries have cast workers into unemployment, human misery, and personal indignity. Those who do work are denied a fair return for their labor by a tax system which penalizes successful achievement and keeps us from maintaining full productivity.

But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.

You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we’re not bound by that same limitation? We must act today in order to preserve tomorrow. And let there be no misunderstanding: We are going to begin to act, beginning today.

The economic ills we suffer have come upon us over several decades. They will not go away in days, weeks, or months, but they will go away. They will go away because we as Americans have the capacity now, as we’ve had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom.

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.

This is the philosophical basis of the tea parties of Michelle Malkin.  The line goes like this, there is this gang of elitists sitting in government taking our tax money and creating problems with our jobs to help their buddies and themselves.  Let’s get them!  We’re little businesses! We’re little people!  We’re the solution !  They are they problem!

Here’s some highlights from the life of  Louisiana Governor Huey Long, the Kingfish. He’s another politician associated with populism.  Notice his breed of populism is quite different.   Listen to his speeches.  This line is one that grabs me.

How many men ever went to a barbecue and would let one man take off the table what’s intended for ninetenths of the people to eat? The only way you’ll ever be able to feed the balance of the people is to make that man come back and bring back some of that grub that he ain’t got no business with!”

Long’s type of populism puts the government squarely as the root of the solution and not the problem.  This is another type of populism that is the philosophical catalyst spurring the pitchforks and torches aimed squarely at the AIG bonuses.  Huey attacked the corporatist that he saw as distinct from the government.  So, the line here goes, there is a gang of elitists taking our money and creating problems for our jobs.  Let’s grab the government and go get them!  We’re little businesses! We’re little people!  We’re the solution but we can’t really do much unless the government is there to help us get them!  But, let’s get them!

So yes, the problem can somewhat be boiled down to the government is the elitist problem for populist Republicans.  The government is part of the solution to the elitist problem for populist Democrats.  These are both ideological oversimplifications and I’m going to use simple economics to show you why.  We can see that both can be true when you study market failures in economics. They aren’t completely irreconcilable viewpoints.

According to Adam Smith (poor used and abused Adam Smith) there is this laissez-faire mechanism that is the best way to get results out of a mutually beneficial exchange between a buyer and a seller.  The result is great and perfect!  That is if all the stars line up.  In the case of economic markets, it’s when the market doesn’t have any frictions, asymmetries, or bad government policy. This market has to be regulation, tax adam-smith-pound-noteand subsidy free.  It must be made up of lots of little buyers and sellers (neither of which can manipulate the price by manipulating the quantity).  The products sold in that market must be essentially SO similar that no one cares who they buy that product from; they only care about the price.  Also, doing business has to be very easy so setting up a business in this market is easy and conversely, it is very easy for a business to go bankrupt in this market.  Every buyer and every seller has to have access to all the possible information about the market, the product, and the participants in the market.    So, let’s see, wanna guess how real that is?

Yea, exactly NOT at all.  It’s a perfect market and it gets a perfect result and it’s the case that being laissez-faire is the perfect response.  A government can ONLY muck up a market like this.  Most economists agree that only in the most pristine and unregulated and unsubsidized agriculture markets there might be a possibility of having a perfectly competitive market.  So, what really killed me once I got to the level of economics where I had to mathematically PROVE  these things, was that this was a perfect model because you can get the same mathematical result if this was a perfectly Government PLANNED model.  The first model is called perfect competition and is basically the Republican holy grail.

che-guevara1232976553The second model is called the principal agent model.  Essentially, that model assumes that a perfectly benign and omniscient government planner who knows what every ones wants and needs, will mete out products judiciously, will plan out production with perfect ease, get it all right and get it done with out a corrupted bureaucracy handling the markets. Right, that’s basically a PERFECTLY PLANNED economy or a Marxist set up that would tug at the hearts of  Fidel or Che.  And yes, you know exactly that the chances of  seeing that in the real world are about zilch, nil, nada.

So, both these extremes would bring about the same, perfect result.   We actually prove that perfect competition is the perfect outcome by showing it achieves the same out come as a perfectly planned, government ran economy.  Weird hmmm?

We say they are perfect because under each, the most stuff produced possible is produced, at the lowest possible cost, with  the utmost efficiency so nothing is wasted and everybody gets what they want based on the price that they decide on.  Either one would work if the real world wasn’t so darn real.

Well, the rest of market structure lectures are based on showing how the world  never gets those pristine models and there are other more germane models of imperfect competition or conversely terrible central planning!  I talked about the antithesis to the perfect competition model today.  That would be monopoly (NOT government planning mind you) but MONOPOLY which is the goal of every profit loving corporation on the planet.  They scheme, buy senators, sabotage rivals, steal from rivals, advertise, and financially innovate themselves into being a monopoly unless the government stops them with its antitrust legislature.   They love market concentration and they love being able to manipulate price and quantity.  These imperfect market forms are the antithesis to Adam Smith’s world and even in Adam Smith’s famous book talks about the need for the government to stop them.

So, in one real world example, the agricultural markets, we have markets that actually would act pretty well without price supports, subsidies, tariffs and quotas, but the government gets in to protect the seller and they turn into nightmares.  We then have market failure due to government.  Unfortunately, farmers have pitchforks too as well as pet senators.  In the case of monopolies, duopolies, or oligopolies (which are all models of intense concentration), we have markets fail if the government DOESN”T get in and do something.  Monopolies fight and fight and fight to stay monopolies because they make those profits that make every one swoon.  They have executive perks and bonuses that would make Marie Antoinette blush because they are so big they can manipulate the market price and quantity.  This is something that is NOT possible in a perfectly competitive market.  (Don’t ask me to pull the graphs and equations out to prove all this, it would take semester and you’d end up being glassy eyed.  Just buy it when I say the best mathematical minds in history proved all this awhile ago and you could too if you really wanted to embrace a lot of proofs, lemmas, and theorems.)

UPDATE: (I’ve added some examples of markets that are concentrated that have control over their markets and usually can make some extreme profits as a result.  They also try to manipulate laws and other rules of markets to their advantage by ‘rent seeking’ which we commonly call buying your regulator or politician.)

Examples of Concentrated Markets that are close to Monopolies: Microsoft, your local Utility company

Examples Concentrated Markets close to Oligopolies:  the Oil Companies, Banking,  Insurance Companies, Telecoms, Airline industry, Automobile Industry

Retail companies tend to be less concentrated:  Restaurants and clothing stores.

So, what am I saying?  Am I a rabid free market libertarian that should’ve voted for say, Ron Paul?  Am I suggesting getting rid of market failure in the health market would be best if  we just would adopt a single payer plan (a highly regulated government monopoly)  so I really should’ve voted Green and for Cynthia? Well, see, that’s where it all comes together, right here.  In economics, it’s situational, it’s not based on dogma.  You look at the market, you see if you’re getting the results you want which comes from either the  perfect competition case or the principal agent case.  If it’s not getting the best results, you ask why?  Some times, it’s the government’s fault.  I could take you on a ton of adventures in agricultural markets that would make you think I was a rabid free market libertarian. But some times things in the market get to the Monopoly side and some time it’s the government that did it, sometimes not.  You have to take each case as it comes.  So, this is where sometimes I can join a tea party, but other times I’m ready to grab the pitchfork and torch.  I don’t operate from an ideological standpoint that says there’s always one source of a problem.

You have to look at each market failure.  You have to figure out where the problems come from THEN you have to figure out how to get something done that makes its results as efficient as possible.  What this takes is people that will put down ideologies and operate from pragmatism.  What it also takes is a functioning justice department (something we haven’t had for ages),  office holders and regulators that aren’t capture by the regulated, and a really strong leader (like Teddy Roosevelt).  Then we can decide who to go after and do it with good results for every one.  Okay, microeconomics lecture over, you can wake up now.


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4 Comments on “Basic Truths and Common Sense”

  1. 1539days says:

    I sometimes like to blog about economics in very general terms. My opinion is that unregulated capitalism is indistinguishable from communism. Look at the example of “if you build a better mousetrap, the world will beat a path to your door.” Ideally, the person who has the better approach gets the patent and sells the idea to everyone who wants it. Or they go into business themself. In reality, the mousetrap guy has huge startup costs, gets shut out of shelf space in the major stores, he sells his patent for a song and the big mousetrap company burns the plans and uses advertising to convince people that the old mousetrap is good enough.

    I think we have had an unsustainable level of obligations for the last couple of decades and we’re creating more at an accelerated rate. To get close to the Adam Smith ideal, the government would have to stop approving most of the larger mergers which is already in their power. Notice this president hasn’t brought up “too big to fail” or mark to market suspension or anything that might negatively impact his source of campaign funding. We’re getting the worst of capitalism and communism at the same time.

  2. Steven Mather says:

    dakinikat,

    P. & M. Kettle prove Geithner right and Krugman wrong.

    SM