Wednesday, August 29, 2007

While I was visiting with Perry, he harangued me a bit about free markets. I'm not sure why, but it got me to thinking. One thing he pointed out was an *actual* moral hazard, which is real: it used to be the case that in New York, you could buy catastrophic coverage for health insurance. But then they passed a law saying you couldn't discriminate on the basis of pre-existing conditions, and so people could buy that insurance *after* they were diagnosed with some expensive condition, and so of course all the insurance companies immediately stopped offering it.

This is not like the usual moral hazard of health insurance, which is complete nonsense: the idea that people will, on average, get more health coverage if it's free. In fact, going to the doctor is a pain, and it's also scary, and, hypochondriacs excepted, people tend to avoid it. So it's a non-problem, and using this problem as a reason to justify not having universal health care is just insane. But people do it.

And of course, one of the things I really wanted to talk to Perry about was the LISP project we're working on. Whose entire purpose is essentially to cure what both Perry and I consider to be a market failure.

The "Free Market" is a construct. It's not the natural state of things. The natural state of things is an ecology. It's the bacteria thing I was talking about a few posts back. People tend to gravitate toward the things that produce the most value for the least effort. It's not just human nature - it's how ecosystems work.

So the crappy Acela railcar I'm on is crappy because a ton of money appeared in an unlikely place, with no real competition, somebody was awarded the contract, and they proceeded to deliver the worst value they could for the highest price, generating the greatest profit.

Perry would say "just let the free market take care of this." But the free market isn't special. What happened with the Acela train was a failure of a socialist system. But the free market fails too, because it's operating in the bacterial culture, just as socialism is.

The point of the construct that is the free market is to constrain people's activity to trading. The ideal of the free market is that two people each have something that the other wants. Each values the other person's goods more highly than what they have. And so they engage in a transaction, and both participants feel enriched by the transaction.

Unfortunately, this is the ideal, not the norm. It's no more likely than the situation where you have a competitive bid on a government contract, and all the bidders act in good faith, with the goal of delivering good value for the money. It can happen, and it does happen. But just like the free market example, when it happens, it happens because the actors involved want it to happen, and work to make it happen. If the actors involved want to maximize profits, then in either case, you get failures.

For example, consider the case where there is a surplus of unskilled labor. Everybody needs to eat, unskilled laborers included. So where there is competition for unskilled jobs, you wind up with a situation where the person purchasing the labor has a lever to use against the person who is offering it: give me your labor at the lowest price possible, or I will hire someone else.

This is a market failure. The unskilled laborer has no choice but to engage in the transaction. It is not the case that they can say no to this offer. And now the person hiring them has power over them.

A free marketeer apologizes for this by saying "if the market for unskilled labor is so crappy, why not learn a skill?" But learning skills is hard. And not everybody is a brainiac. And people lie. Perry was telling me about how the world of chemistry research is overpopulated because grad students are free labor, and chemistry is labor-intensive, and so chemistry departments try to attract as many grad students as possible, so as to get as much free labor as possible.

When these grad students get their PhD's, they find themselves in a job market that is so overpopulated that there is virtually no chance of them getting a decent job. And they have four to six years of college loans to pay off. So they are unskilled laborers, with no choice but to take whatever work is offered.

This is probably the most fundamental failure of the free market, and it is one that free marketeers do not like to talk about, because the cure for it causes its own set of problems. If you set up a system where peoples' basic needs for housing, health care and food are met, then some people who can't get skilled labor in their own profession will subsist on the dole until a job opens up. And so a lot of necessary unskilled labor gets left undone, because the price of the labor is too high. And so the economy becomes unable to support the cost of the dole. And you wind up with cycles between free market and socialism, which you are in fact seeing in Europe. Right now free marketism is on an upswing, but don't be surprised if socialism makes a big comeback in the next twenty or thirty years.

Anyway, the point is that because the base state of things is the bacterial culture, not the free market, and not socialism, coming up with an economic system that meets peoples' needs without creating market failures is a Hard Problem. It is not solved by the free market. It is not solved by socialism.

To summarize it differently, the free market takes advantage of a basic human failing: desire. People want things. So if you can set things up so that in order to get them, they have to create value, then more value will be created, and the overall wealth of the world will increase. Desire *hurts* socialism. Because everybody gets their basic needs met, and because there's a lot of money in the system, people don't work as hard, and people who are greedy are as likely to try to steal from the system as they are to produce value. This happens in a market economy too, but at least in a market economy desire produces something good as well as something bad.

So in order to transcend the weaknesses of the free market and of socialism, a substantial number of members of the society need to stop acting like bacteria and start acting like an organism - treating the common wealth as their own wealth. Treating everyone's welfare as if it were *exactly* as important as their own.

And indeed if you look at the successes of American culture, most of them have to do with that discipline. Likewise with cultures around the world, of course. What matters is not so much whether the culture's economy is fundamentally capitalist or socialist, but rather how many people in the culture think like bacteria, and how many value the common good. So attempts to create a utopia by tweaking the economic system are doomed - it's not the economic system that's the problem.


Blogger Will Shetterly said...

There weren't bidders on the Acela? I'm shocked. I assumed it was crappy for the usual reason things are crappy under our privatized system: it was built by the folks who said they could charge the least and still give their shareholders a nice profit.

Which is exactly how capitalism works, and should maker free marketers very happy.

Wednesday, August 29, 2007 3:16:00 AM  
Blogger Jym said...

=v= It's way more complicated than that. The part-private/part-public nature of Amtrak seems to combine the worst features of both approaches. It is run by a business, as a business, and is expected to benefit from the benefits of the free market (benefits as imagined by Nixon-era ideologues), plus a little subsidy. The little subsidy becomes the topic of a high-profile budget drama every year.

Meanwhile it must compete with modes that are nominally private enterprise (cars and airlines), but which are in fact propped up with far heavier public subsidy than Amtrak (roads, road maintenance, law enforcement resources, oil subsidies, oil wars, airport building and expansion, second- and third-order costs from increased damage to health and the environment, and the occasional industry-wise bailout).

A more pragmatic approach would be to look at the train systems that work and figure out why. None of them, it turns out, are bound to Nixon-era or even Libertoonian-era ideology, and are often coupled with a broader approach to ground transportation that has other modes paying a greater share of their actual costs.

Monday, September 03, 2007 10:19:00 PM  
Blogger Jym said...

=v= Pardon my typo: industry-wide, not industry-wise. I would never argue that the current arrangement suffers from wisdom.

Monday, September 03, 2007 10:21:00 PM  
Blogger Ted Lemon said...

Aren't the Brits now wrecking their rail system by privatizing it? I noticed public transit in Birmingham was insanely expensive by my standards (which, admittedly, are something along the lines of thinking that it should be free).

Anyway, the trouble with the whole subsidy thing is that while you are correct about how Amtrak is run, there's no way to run the public highway system the same way - it's paid for partly by use taxes, and that's why people aren't offended by the subsidy - no doubt they think it's entirely paid for by the use tax. Perceived fairness is difficult to circumvent.

Anyway, I think the biggest argument in favor of the "trains are cheaper" view is that despite the presence of the highly-subsidized national highway system, a tremendous amount of product still is carried on rail. If rail were genuinely more expensive than highway freight, that wouldn't be the case.

Tuesday, September 04, 2007 12:47:00 AM  

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