economics thread

[demagogic_schizoid]

Hypothesis: - The existence of state interference in an economy is a sign of inefficiency in said economy, because if optimal allocation of resources existed then there would be no need for it.

Therefore the maintenence and expansion of state spending can only serve to perpetuate said inefficiencies, leading to an eventual correction, which will be more painful the higher state spending is.

Even if the cause of the initial misallocation of resources was in some cases market failure and not state spending, the evidence of market failure is not in itself enough to garauntee government success at solving the problem, and in fact the market would eventually provide the answer to its own failure better than the state could, considering that state spending in itself is both an indicator and a cause of inefficiency.

An example of market failure is "assysmetrical information". Let's use the example of the credit market; lenders cannot know the intentions of the borrower in advance, however the they do understand that they can't raise interest rates without limit to compensate for the risk of default. Therefore, they may find it more profitable to keep interest rates below the market-clearing level and refuse loans to small or unproven borrowers about whom they have little information. In this way, small but efficient business may be discriminated against while large, less efficient ones may benefit. I accept this.

However, can government intervention solve this problem effectively, and if so, how? Is it better to not intervene, to let the "invisible hand" work, and wait for the smart lender to come along who will spot the opportunity that his rivals are missing, and take the risk of lending money to these sectors of society which previously were denied credit? After all, is capitalism not constantly expanding, are lenders not in constant competition to outdo each other, and would an opportunity for potential profit be ignored for long in a genuinely free market?

Structuralists may see the market as rigid and inflexible, but was capitalism not actually built on constant risk-taking in a search to be a step ahead of ones rivals? continuing the example of the credit market, once one lender had made a profit from lending to these previously excluded groups, would other lenders not then compete with them to give these people a better offer in order to shore up a larger section of the market for themselves?

In light of this, is state intervention in the economy justified, and if so, how?

EDIT - I realise we had the "justify fiscal liberalism thread". But this is different, as most of the replies in that thread didn't really deal with economic questions.

[Lee]

There are so many problems with government intervention there is not enough time to go through them. Here is one to ponder though, even if somewhat crudely expressed for brevity:

A failure to recognise this problem lies at the root of most "society is an organism" fallacies, and so it is best understood with a comparison to an organism, ourselves. The typical intuition relates the brain to government, the hands to manufacturers, the legs to logistics, the heart to the church and so on... and there are similarities to be drawn.

The problem is the conspicuous lack of brains in government. I mean that literally. There are just not enough brains. The government could be populated by some of the brightest brains to ever grace the earth and there still would not be enough brains. There will always be more computational power among the people being governed than the people in government, so the decision on how to allocate resources will suffer.

It is a matter of resolution. To make smart choices you need a high resolution "report" of the world. For example, imagine you are buying a car and are stumped between two alternatives, but you only have low resolution reports of either car to look at. There is simply not enough information to make the necessary discrimination, so making the best choice is simply a matter of chance.

The billions of brains scattered among the governed people have collectively a very high resolution report of the world, but as information is passed up and down from government the resolution is lost (as well as time wasted). The limiting factor is the computational power at the point where the decision is made, in government. The commands coming from government seem blunt, unsubtle, inefficient and sometimes counterproductive.

This problem does not cripple the organism, such as ourselves. For example, regarding vision, there are more neurons in the information processer than in the information gatherer. The system is capable of efficiently using the information it receives to make useful choices, it does not suffer from this bottom heavy distribution of computational power.




All this is quite besides the problems of politicised incentives, the the limits government place upon the growth of knowledge, or even the immorality of it all in the first place. There is just so much wrong with the whole idea, the more you think about it the more absurd it seems that anybody could ever have thought otherwise.

[firch]

The unfettered market was seen to have failed in the great depression of the 1930s.

If the invisible hand only intervenes after several hundred thousand highly educated people have perished from deprivation how is that less wasteful?

[Lee]

The unfettered market was seen to have failed in the great depression of the 1930s.

If the invisible hand only intervenes after several hundred thousand highly educated people have perished from deprivation how is that less wasteful?This is an interesting myth that has been perpetuated down the years. As yet, I have yet to hear one coherent theory behind it. I get the feeling that people are so willing to find something horrendously wrong with capitalism that it's just irresistible. There is a depression in a mostly capitalist society and that is proof enough, no further argument needed or study given, capitalism must cause depressions. End of argument.

The government caused the depression by mismanagement of monetary policy, and deepened the depression with persistent price control policies intended the exact opposite to what they achieved. The eventual recovery was despite the government, not because of it.

There are particular situations in which the market is not "ideal," these are often called market failures. The mistake is to think government will do any better, indeed government failure is almost guarunteed when we look at the history of intervention.

The market, unlike the government, is very good at solving these "market failures" given enough time and technological advances (whcih themselves depend largely on the market). This is unlike government failures, which will be subsidised at the expense of everyone for decades, with little or no progress or improvement in service, propped up by special interest groups who weild disproportionate power over politicians.

[talin]

Even if the cause of the initial misallocation of resources was in some cases market failure and not state spending, the evidence of market failure is not in itself enough to garauntee government success at solving the problem, and in fact the market would eventually provide the answer to its own failure better than the state could, considering that state spending in itself is both an indicator and a cause of inefficiency.

The question then is how long will it take for the market to sort out the problem?

[firch]

The question then is how long will it take for the market to sort out the problem?
Precisely. When all economies in the world linked as they now are they resemble the control responsiveness of a jumbo jet compared to a light aircraft.

In order to keep the global economy on course inputs need to be made ten months before their effects are felt, now if you just leave it to the market the control inputs at it were would be made after the effects rather than before them.

Key to the global economic control are the respective interest rates of the central banks around the world which if those were left to the market we would have the potential for another 1930s style depression.

[demagogic_schizoid]

Firch - firstly I think your point about the Great Depression isn't quite what I'm looking for. I don't know much about that era, but lets say that the Wall St. crash was caused by market failure, simply for the sake of argument (although Lee has actually dealt with this quite well). Now, what you haven't done is use theory to explain WHY government intervention would have greater success at allocating resources efficiently than the market and prevent those people from starving better than the market could.


Precisely. When all economies in the world linked as they now are they resemble the control responsiveness of a jumbo jet compared to a light aircraft.

In order to keep the global economy on course inputs need to be made ten months before their effects are felt, now if you just leave it to the market the control inputs at it were would be made after the effects rather than before them.

Key to the global economic control are the respective interest rates of the central banks around the world which if those were left to the market we would have the potential for another 1930s style depression.

But surely if many of the trade barriers between different parts of the world were removed this would no longer be neccessarry, so is your example of "market failure" not in fact one of government failure. For example, could the problem you are describing actually result from the fact that governemnt policy can heavily influence the economy of any country in the world, therefore distorting the market and making it more unpredictable and inconsistent than it would be without their interference? Also as technology and communications increase this would seem to be less of a problem, and especially so considering that the globalisation of the world economy goes hand in hand with improvements in communications, therefore making it hard for one to outpace the other.

[Zergling]

I agree with the beginning view that government involvement in the economy is a sign that there is some problem in the economy, but the rest of the arguments don't automatically follow from it. What government spending means is that some problems has appeared, and that no other system or group has come along to solve it, the other systems may have had problems from other government ineffeciencies, or may simply be poor systems for solving a problem.

Even with no market controls, governments are still considered important for dealing with crime, and possibly military issues. Each of these costs money, which requires some way for governments to make money, and all methods effect markets in some way. (Crime in this case may also be taken to include things such as stealing, intimidation, contract enforcement, all of which are important to keep markets running from what I've heard.) Markets also seem a poor way to get good basic research and education done, these may not have profit potential in any way except long term for businesses, which seems to leave governments or private groups with donations to get these done, and governments can provide a more constant supply.

It also in general seems very, very iffy to trust markets to everything, simply because one system in general very, very rarely is able to accomplish it's goals without some hitches that need to be solved in some other way. The argument that regulation is not useful because people don't fully understand economic systems also applies in reverse, we do not fully understand economic systems, so some holes could easily be lurking in them that the system is not prepared for.

[HilbertSpace]

I think that one of the key difficulties coming out of a history of government intervention is the clouding of the ability to see alternate paths for realization of necessary social services - two easily identifiable ones being law enforcement and the military.

One of the reasons I was so in favor of the voucher program for education is that it maintains an established subsidy for what is seen (correctly or not) as a social responsibility, but begins to introduce the potential for market efficiencies. Of course, it neds to be administered in such a way that those efficiencies can come about (as a counter-example we can look at state-level privatization of services like Motor Vehicles, where contracts are often filled by forces other than a market meritocracy). It might not be the ultimate solution, but it can start people thinking about alternate (and market-driven) paths.

[Zergling]

It might not be the ultimate solution, but it can start people thinking about alternate (and market-driven) paths.

The key test needs to be whether it works, though, not whether it introduces markets with the assumption that markets automatically equal improvements. (they do provie improvements in a lot of areas, but not in others, and other problems may come from combination of markets and other things.)

[demagogic_schizoid]

The key test needs to be whether it works, though, not whether it introduces markets with the assumption that markets automatically equal improvements. (they do provie improvements in a lot of areas, but not in others, and other problems may come from combination of markets and other things.)

You can argue that the state should pay for a country's infrastructure, law and order, military etc. on the grounds that govt. has a comparative advantage in these areas, as these are resources that it would be unworkable to regulate who uses them, so a monopoly is inevitable as otherwise people could refuse to pay for a service but would still benefit from it. You could also advocate education and health being the domains of the state and being paid for by taxes on individuals on the grounds that private companies benefit from an educated and healthy workforce (as do individuals, ie we all need doctors and teachers), but you cold not regulate which companies get to employ these individuals, and maybe it would undesirable to exclude certain individuals from enjoying these services for various reasons, eg humanitarian reasons and economic reasons - a healthy, educated workforce is good for the economy after all. Therefore individuals and companies could benefit without paying. However, I don't see where else this reasoning applies, and, furthermore, when the government intervenes in other areas of the economy, the administration cost leads to resources being diverted from these areas where the govt. does have a comparative advantage.

[HilbertSpace]

The key test needs to be whether it works, though, not whether it introduces markets with the assumption that markets automatically equal improvements. (they do provie improvements in a lot of areas, but not in others, and other problems may come from combination of markets and other things.)

The question is - what areas are you seeking to improve?

Markets dynamically allocate resources across efficient channels. Wasteful uses are replaced by less wasteful ones because, even if they are defended by true believers, those believers will run out of money before the rest of the market does. In the case of the education voucher program, the belief is that parents will choose more often than not to send their kids to the better schools. Those schools will receive more money and prosper, while the other schools will eventually go under. It also helps to level the playing field between private and public schools, because parents sending their kids to private schools had to both pay their property taxes (to support the public schools) and pay tuition to the private school. It leaves in place the idea that people without children are required to financially underwrite the children of other families.

[Zergling]

What I'm talking about in both cases is when an idea is tested, how well it works.


I'm not making these arguments just to be against markets (Put me in a group with strong voucher opposing people and I'd seem to be arguing that markets will solve everything.) The only issue I have is that there is a lot of theory for why certain programs will work, but as often as not some problem comes up in practice that screw up the system. If vouchers, environmental regulation, utilities, etc. are tested under a market based system and work well (in the case of education, get as many people as possible a good education, though different types are hard to compare, in ulilities terms, get people good water, electricity, etc. cheaply with little blackouts or other such problems.), than that system is the one to use.

[HilbertSpace]

What I'm talking about in both cases is when an idea is tested, how well it works.


I'm not making these arguments just to be against markets (Put me in a group with strong voucher opposing people and I'd seem to be arguing that markets will solve everything.) The only issue I have is that there is a lot of theory for why certain programs will work, but as often as not some problem comes up in practice that screw up the system. If vouchers, environmental regulation, utilities, etc. are tested under a market based system and work well (in the case of education, get as many people as possible a good education, though different types are hard to compare, in ulilities terms, get people good water, electricity, etc. cheaply with little blackouts or other such problems.), than that system is the one to use.

To identify the problems, though, you need to objectively identify the causes of the failures. Any system implemented tends to be a philosophically mixed system.

[demagogic_schizoid]

What I'm talking about in both cases is when an idea is tested, how well it works.


I'm not making these arguments just to be against markets (Put me in a group with strong voucher opposing people and I'd seem to be arguing that markets will solve everything.) The only issue I have is that there is a lot of theory for why certain programs will work, but as often as not some problem comes up in practice that screw up the system. If vouchers, environmental regulation, utilities, etc. are tested under a market based system and work well (in the case of education, get as many people as possible a good education, though different types are hard to compare, in ulilities terms, get people good water, electricity, etc. cheaply with little blackouts or other such problems.), than that system is the one to use.

Ok, but taking into account my hypothesis and the arguments I've used later to defend it, is the position logically sound? This is what I'm interested in. As for putting it into practice, well in politics policy makers often settle for compromises, for "second-best" policies, in order to have popular backing for decisions, to make implementation less painful etc. - with a view to eventuially acheivng the ideal. So the "theory vs practice" argument is not really the issue. The actual implementation of the policies can be carried out differently in different places depending on the specific factors involved. I just want to know if the theory makes sense, because it would hardly be worth testing it if it doesn't.

[demagogic_schizoid]

ok what about the argument that the more an actors assets can be affected by govt. policy, and the more restrictions there are on the actor transferring their assets from one sector to another, the more incentive there is for them to lobby the relevant government departments dealing with their sector, and therefore the greater the temptation and incentive for politicians and government officials to make deals with special interest groups? Is this another logical argument against state interference in the economy?

[Architectonic]

The question then is how long will it take for the market to sort out the problem?

Quicker than the government. The government has had over 100 years of experience with monetary policy and still can't get it right.

The only reason why government is needed is to define and enforce property rights (including rights over oneself - not to be assulted/murdered/raped) - now the key flaw is that property rights cannot be perfectly/fairly defined in the real world. Secondly, the government is not separate from the market, it is part of the market - and as such it can make markets more or less efficient.


To identify the problems, though, you need to objectively identify the causes of the failures. Any system implemented tends to be a philosophically mixed system.

A better way of phrasing that is any system implemented is required to be a philosophically open ended system for it to be able to trend towards efficiency.


ok what about the argument that the more an actors assets can be affected by govt. policy, and the more restrictions there are on the actor transferring their assets from one sector to another, the more incentive there is for them to lobby the relevant government departments dealing with their sector, and therefore the greater the temptation and incentive for politicians and government officials to make deals with special interest groups? Is this another logical argument against state interference in the economy?

This is an outcome of limited/restricted political freedom. It could be an argument for an increase in the amount of political freedom provided to individuals. Reverting to a market based system can be one way of increasing political freedom on many (but not all) issues.

[demagogic_schizoid]

This is an outcome of limited/restricted political freedom. It could be an argument for an increase in the amount of political freedom provided to individuals. Reverting to a market based system can be one way of increasing political freedom on many (but not all) issues.

No, the argument is that limited economic freedom=limited political freedom.

[Architectonic]

No, the argument is that limited economic freedom=limited political freedom.

I would agree that limited economic freedom is often the same as limited political freedom, but this does not follow from your argument. I would suggest that to maximize political freedom, decisions need to be made on the lowest level of government as practicable - in many cases that is down to the individual level.

Your argument was not terribly clear. You were making the assumption that the actors can lobby directly and get favored treatment. (political freedom is already limited)

Basically your argument is as follows:

Assumption 1: Political freedom is inherently limited
Assumption 2: Economic freedom is inherently limited

Then limited economic freedom is likely to lead to more restrictions on political freedom, which is likely to lead to more limited economic freedom (deals with the government). In a sense, your argument is circular.

[demagogic_schizoid]

I agree that limited economic freedom is likely to result in limited political freedom, but this does not follow from your argument.

Your argument was not terribly clear. You were making the assumption that the actors can lobby directly and get favored treatment. (political freedom is already limited)

Basically your argument is as follows:

Assumption 1: Political freedom is inherently limited
Assumption 2: Economic freedom is inherently limited

Then limited economic freedom is likely to lead to more restrictions on political freedom, which is likely to lead to more limited economic freedom (deals with the government). In a sense, your argument is circular.

No, the argument is that if you limit economic freedom, then people need to lobby because they are not masters of their own destiny. The less economic freedom there is, the more neccessity there will be for special interest groups to lobby. Therefore the less economic freedom there is, the more an actors success will depend on their ability to lobby effectively. A small minority consisting of wealthy capitalists and the bureaucrats in the relevant govt. departments will usually be the primary benefactors from this. I can explain why using a post I made elsewhere. It won't fit perfectly but I'm tired and you can I'm sure discern the relevant bits:

Collective action works against workers. In any group, collective action is hard to organise, because although it might be rational for all the individuals to come together and further their own interests, it is not rational for any one individual to bear the cost when others don't. If enough individuals are prepared to bear the cost needed to organise collective action, then it's rational for any given individual to get a "free ride" off the rest. If not enough are prepared to do so, then it's rational for any individual to refuse to bear a cost which will not have any benefit because no-one else is prepared to pay their way and make collective action work. Small groups are easier to police and easier to organise, plus communication is better ins mall groups and it's easier to asure people it's worth them getting involved. Employers are a smaller group than workers, so employers have an advantage on this front. Unequal groups also have an advantage, because in an unequal group, the richer actors will have an interest in shouldering the cost themselves whether or not the poorer ones do, because they recognise that they have a lot to lose otherwise and that it's worth their while because they gain a lot from their position. In equal groups, no-one actor feels it's worth their while to shoulder the cost more than any other. Employers are usually more unequal than employees, for obvious reasons - the differences between the size of two business is likely to be much greater than the paychecks of two workers in the same job. Again, employers have an advantage. Therefore the best thing for workers is to avoid collective action.

[Architectonic]

You are still making an assumption about the system of democracy used. (Which has an effect on ones level of political freedom.)

[demagogic_schizoid]

You are still making an assumption about the system of democracy used. (Which has an effect on ones level of political freedom.)

I am assuming there is a state, that's all. It doesn't matter what level of political rights the population is garaunteed, because if lobbying occurs by it's very nature different interests groups are competing, and the government is the arbitrator. At some point, therefore, they will have to favour one party over another, unless the system is going to be in a constant stalemate. Therefore groups which lobby more effectively will have more power in the political system. This is why the less govt. intervention there is in the economy, the less potential there is for corruption.

But I suppose I was too hasty in my comment about "political freedom". I guess politcal freedom is not really the issue here - for example as I've shown states with great political freedom garaunteed on paper may also be able to override the wishes of the majority of their people, or coerce them into situations which they would prefer to avoid. I suppose, on reflection, I am in fact talking about personal freedom, not politcal freedom.

[Architectonic]

Representative democracy is not the only type of democracy that can exist. And indeed using individual representitives or even polticial parties means that you are already giving up some of your political freedom.
I agree that even with some sort of direct democracy, someone still has to make some judgement on which issues and possible solutions should be voted on. But this system can potentially be much more transparent.

A state will exist regardless of whether you have a formal rule of law or not. Any other definition of state is questionable.


for example as I've shown states with great political freedom garaunteed on paper may also be able to override the wishes of the majority of their people, or coerce them into situations which they would prefer to avoid.

I must have missed those posts of yours. But I disagree - if political freedom is maximised, then the government can't override the wishes of the majority by definition.

Do not use the USA as an example. Because much of the freedoms that citizens of the United States currently have, is a result of the market system being in existance, rather than (current) democratic system. Indeed, as Hustler and others have explained, at the present time, voting in the United States doesn't actually give you much extra freedom at all. If US citizens had more political freedom, then you might see a different picture.

[Purple-Silver Fox]

The choice between market and government is a false dilemma. There are many more types of actors than atomized individuals and monolithic governments (corporations, hospitals, ngo's, labor unions, etc.). They all have their own goals, dynamic and internal organisation that is not directly derived from the individuals in it.
Likewise, there are many types of governments and many types of markets. Differences in governments is obvious, differences in markets less so because there is only one left at the moment. But a market with a negative interest rate, without fiat currency, etc. would be significantly different.

[demagogic_schizoid]

The choice between market and government is a false dilemma. There are many more types of actors than atomized individuals and monolithic governments (corporations, hospitals, ngo's, labor unions, etc.). They all have their own goals, dynamic and internal organisation that is not directly derived from the individuals in it.
Likewise, there are many types of governments and many types of markets. Differences in governments is obvious, differences in markets less so because there is only one left at the moment. But a market with a negative interest rate, without fiat currency, etc. would be significantly different.

can you use economic theory to explain this post? to me it reads like imagination.

[Purple-Silver Fox]

can you use economic theory to explain this post? to me it reads like imagination.Not everything can be fitted into the box labeled "economic theory" without a hacksaw.

[demagogic_schizoid]

Not everything can be fitted into the box labeled "economic theory" without a hacksaw.

But you could try and engage with the points made in the thread. All you seem to be saying is that there are circumstances when the theory may conceivably not apply. This isn't very helpful.

[Purple-Silver Fox]

What I'm saying is that the assumptions that economic theory uses are rarely present, with as consequence that it has little predictive value.

[demagogic_schizoid]

please could you elaborate? Here I'll help you out:


The choice between market and government is a false dilemma.

This goes against conventional wisdom. IT would seem to reuqire some justification, particularly bearing in mind the arguments to the contrary contained in this very thread.


There are many more types of actors than atomized individuals and monolithic governments (corporations, hospitals, ngo's, labor unions, etc.). They all have their own goals, dynamic and internal organisation that is not directly derived from the individuals in it.

Of course, but the individuals within them will still seek to acheive their own goals. Government is not a benign social planner if this is what you are arguing. Officials and employees will seek to maximise their utility, usually through pay rises and promotion. They may be strictly overseen by the government, but the government itself will have it's own goals. These vary, but the goal of the typical politician is to remain in power. I realise that there are other motivations when they are nearing the end of their careers, for example. Therefore, even if closely overseen, these government agencies will be poltiicized. As for NGO's, well I haven't really touched on them here. How do you think they relate to my hypothesis?


Likewise, there are many types of governments

I took this into account.


and many types of markets.

How do you define these differences?


Differences in governments is obvious, differences in markets less so because there is only one left at the moment. But a market with a negative interest rate, without fiat currency, etc. would be significantly different.

The point of this thread is to start with a strong hypothesis and then adjust as new information and theories become available so I can be left with, ideally, the answer of how an economy should be run (or not). It's ultimately about solving the problems the world faces today. I don't see how this market you describe would come about. My hypothesis was quite clear in that it assumes that the most efficient allocation of resources will occur in a government with the least amount of state interference. Of course this is idealistic and in reality policy makers often have to settle for second-best alternatives. This is fine. It does not nulliffy the point of having an ideal to eventually aspire to. However your statememnt here would appear to contradict all this. Could you expand?

[Architectonic]

The choice between market and government is a false dilemma. There are many more types of actors than atomized individuals and monolithic governments (corporations, hospitals, ngo's, labor unions, etc.). They all have their own goals, dynamic and internal organisation that is not directly derived from the individuals in it.

I mostly agree with this - a 'state' can potentially exist on all scales, each with its own set of dynamic values.
I assume when you say 'not directly derived', you mean only derived in a complex (read: difficult to predict) way.


Likewise, there are many types of governments and many types of markets. Differences in governments is obvious, differences in markets less so because there is only one left at the moment. But a market with a negative interest rate, without fiat currency, etc. would be significantly different.

I'm right with you until the last sentence. I don't think that a market without a paper currency or a negative interest rate (why bother having a universal currency if it is not stable?) is so different - because most people would simply (attempt to) substitute something else with a stable value. Or something will increase in value relative to the value of other items they may require in the future. That's basically what people (attempt to) do now.

[Xenophon]

Does anybody else find threads like this incredibly painful? It seems that everybody feels that they are some kind of expert on market dynamics, when in actuality it is probably the most complex system in existence. I have a theory that most economists are full of shit, and people who aren't economists who think they are, are even more full of shit.

Inevitably each of these threads boils down to the free-market capitalists vs. the socialists, with both sides spewing unsupportable crap all over the place. From a systems perspective (I don't pretend to know economics much beyond my general systems knowledge), I think it is insane to think that the economy is a stable system without regulation. For a system to be unstable without regulation, it needs only ONE unstable node. It's absolutely absurd to think that any economy could survive without the government providing laws/infrastructure etc. I view interest rate regulation as a natural extension of that, in general when a system has a wild fluctuations (in any variable), its pretty much a sure sign that the system is unstable. The government has gotten very good at smoothing out those wild fluctuations.

Of course, on the flip side, it is just as absurd to suggest that the government can control every variable in an economy. It is far to complex for something like that. Though, I do believe in the power of control systems, and I believe as more information becomes available, we can make the regulatory systems much more efficient, dealing with unstable nodes quickly and efficiently.

Sadly, I think that even with government regulation, the market is unstable. We have a set number of "economic indicators" that we use as our outputs of the economic system. The regulation system serves to stabilize those outputs. However, there are plenty more indicators that are not taken into account, which seem to be very unstable. In a systems perspective, we would call these unobservable nodes, and even if they are not part of the output equation, they can cause the system to be unstable.

If you study systems, you realize that the response of the system is completely dependent on the inertia of the system. It has been 90 years since the great depression? That is nothing when compared to the inertia of the world world economy, and to think that we have a stable economy would be extremely naive.

[demagogic_schizoid]

From a systems perspective (I don't pretend to know economics much beyond my general systems knowledge), I think it is insane to think that the economy is a stable system without regulation.

The question is, does the regulation cause more harm than good, and if this isn't always the case, how do we differentiate where it does from where it doesn't. In other words, where does the government have a comparative advantage? I was hoping the thread would go in that direction. It makes sense to me to start off with a strong hypothesis, and then see it whittled down through constructive criticism into something that makes sense. It seems to me that the government has a comparative advantage in prviding infrastructure, law and order, health, and education. I can't think of anything else. However I think the best way to reach this conclusion is to start with a strong hypothesis (either very pro or anti free market) and then keep testing it until you get to the eventual balance.


If you study systems, you realize that the response of the system is completely dependent on the inertia of the system. It has been 90 years since the great depression? That is nothing when compared to the inertia of the world world economy, and to think that we have a stable economy would be extremely naive.

The idea is that the greater the regulation, the more inert the economy is. This makes sense to me, as regulation necessarilly places limits on individuals freedom of action, when surely it is in that individuals own interest to use their assets as efficiently as possible.

[Conan]

It's not an issue of comparative advantage. It's an issue of externalities, where the true costs and benefits to society are not internalized in individual decision making. For example, because pollution does not figure into profit, firms don't have any incentive to pollute less unless these incentives are put in place by the state. Another example is technology, a public good. The benefits to society of innovation are tremendous, but there would be inadequate incentive to come up with society-benefiting ideas if these ideas could simply be used immediately by all without the innovator being adequately compensated. Its the simple but legitimate argument for the need for some state intervention, to take into account these positive and negative externalities, and provide proper incentive and disincentive where feasible in pursuit of optimal social welfare.

[Xenophon]

The question is, does the regulation cause more harm than good, and if this isn't always the case, how do we differentiate where it does from where it doesn't. In other words, where does the government have a comparative advantage? I was hoping the thread would go in that direction. It makes sense to me to start off with a strong hypothesis, and then see it whittled down through constructive criticism into something that makes sense. It seems to me that the government has a comparative advantage in prviding infrastructure, law and order, health, and education. I can't think of anything else. However I think the best way to reach this conclusion is to start with a strong hypothesis (either very pro or anti free amrket) and then keep testing it until you get to the eventual balance.
The problem is that the economy as a system is extremely complex, and there are so many variables that are difficult to measure, and even more difficult to interpret. That does not at all mean that they are stable variables, it just means that it is difficult to determine the effect that a control input will have on them. However, I think it is fairly safe to assume that any stabilizing input in general will increase the overall stability of the system. This is not necessarily always the case, but I think that it is true in the vast majority of situations.

The idea is that the greater the regulation, the more inert the economy is. This makes sense to me, as regulation necessarilly places limits on individuals freedom of action, when surely it is in that individuals own interest to use their assets as efficiently as possible.
From a technical standpoint, this statement doesn't make sense. Inertia is a property of the system, not of the control input. The inertia determines the response of the system to an input, it is not actually effected by the input (in general, there are a few exceptions). A good stabilizing control input makes something appear to have more inertia, by smoothing out the response to disturbances. Just as it takes more force to move a large inertia, it takes more force to move something with a good stabilizing control algorithm. I think what I am getting at, is that it is better to have a slow but stable economy, then a fast but unstable one. Unstable systems generally oscillate, and when we are talking about the economy, the high points are generally absorbed by the few rich people, while the lows are devastating towards the poor.

[demagogic_schizoid]

The problem is that the economy as a system is extremely complex, and there are so many variables that are difficult to measure, and even more difficult to interpret. That does not at all mean that they are stable variables, it just means that it is difficult to determine the effect that a control input will have on them. However, I think it is fairly safe to assume that any stabilizing input in general will increase the overall stability of the system. This is not necessarily always the case, but I think that it is true in the vast majority of situations.

But you are viewing it from the outside, as this daunting system which has to be managed, controlled etc. Economics is not that complicated, all these theories are just abstractions we use to be able to better understand and develop what really is basic human interaction. If A and B want something, then at some point, C will produce it, because it's to his advantage. If B does not have the wealth to purchase what C is producing, then A (or someone who does have the wealth) will notice this need for wealth, and use it to his advantage by employing him to do something he doesn't want to do. As this happens on a wider scale, some problems will arise as I've dealt with in this post, however in the post I've also specualted as to how people will work the answers themselves. My basic reasoning is that supply and demand will most closely resemble each other without government intervention. As I have admitted, and Conan has pointed out, there are areas where it is right and proper for the government to ge tinvolved. However I feel we can specifically identify these, and tell the govenrment to stay out of the majority of areas where it's presence does more harm than good.


From a technical standpoint, this statement doesn't make sense. Inertia is a property of the system, not of the control input.

Free markets are not rigid and inflexible, because people, acting as either employers or producers constantly strive to meet demand in order to survive. The more you centralise the decision making process, the less this can happen (or the more demand is ditrorted by govt. subsidizing the production of goods which no-one wants and therefore diverting resources away from those which people do) and the more inert the market becomes.


I think what I am getting at, is that it is better to have a slow but stable economy, then a fast but unstable one. Unstable systems generally oscillate, and when we are talking about the economy, the high points are generally absorbed by the few rich people, while the lows are devastating towards the poor

But yet, centrally planned economies are the ones where the poor end up worse off. This is because they stifle wealth creation. Also, a centrally planned economy is MORE unstable than a free market, because decisions are left more and more to the unstable minds of a few "experts" who you apparently distrust so much. In a free market, power is not centralised, and the unstable actions of any one unpredictable individual cannot have such a great effect on the economy as a whole. In a free market, people get into comfortable, mutally beneficial arrangements with each other, it is not in their interests to be unpredictable or unstable, and those that are will be denied credit and investment and will not survive as businesses or retain their jobs as employees. Therefore instability itself is weeded out by the market.

[Architectonic]

demagogic_schizoid, what do you feel are the key requirements for a well functioning market?

We'll work from there...

[Conan]

Does anybody else find threads like this incredibly painful? It seems that everybody feels that they are some kind of expert on market dynamics, when in actuality it is probably the most complex system in existence. I have a theory that most economists are full of shit, and people who aren't economists who think they are, are even more full of shit.


Yeah, but I don't think this excludes your own statements.

[demagogic_schizoid]

demagogic_schizoid, what do you feel are the key requirements for a well functioning market?

We'll work from there...

Human beings motivated by self interest, but prepared to abide by laws to enough of an extent that those laws aren't rendered irrelevant. Of course the odd exception isn't too much of a problem, it's to be expected.

[Xenophon]

Yeah, but I don't think this excludes your own statements.
I agree completely. My knowledge of systems is pretty much limited to boxes on springs. Any conclusions I make require huge leaps of faith.

[demagogic_schizoid]

I agree completely. My knowledge of systems is pretty much limited to boxes on springs. Any conclusions I make require huge leaps of faith.

My personal opinion is that you overcomplicate economic systems in your mind (not wishing to be presumptious about what you think, just going on your posts). Think of a free market like you think of an ecosystem. Animals numbers regulate themselves. In one way it is very complex system because looking at it from the outside no-omne person could recreate an ecosystem. But, left to their own devices, the animals will not be able to fuck up the ecosystem. Of course humans can, because we have the ability to look at the wider system and attempt to play God. However if we don't, if we let the market simply function as it should, then it will regulate itself as an ecosystem does. One year you have too many rabbits, then they begin to starve because there's too much competetion for food, and the next year, numbers are back to normal. If you have a shortage of rabbits, there's more food for the ones that are alive, so eventually they reproduce to get to the optimal number of rabbits again. They aren't conscious of this. It doesn't matter. You can look at rabbits and tell me they are too stupid to competently maintain an ecosystem. But this is to miss the point. It's the same with a free market. If prices go too high, demand will drop, producers will go bust, and only the ones who offer competetive prices will survive.

[Zergling]

But you are viewing it from the outside, as this daunting system which has to be managed, controlled etc. Economics is not that complicated, all these theories are just abstractions we use to be able to better understand and develop what really is basic human interaction. If A and B want something, then at some point, ...... employing him to do something he doesn't want to do.

Mosts systems are combinations of simple interactions (fluid flow is just molecules attracting/repelling each other, galaxies are just material attracting other material with gravity, clouds are just particles in air, beauracracies and courts are just a set of people following certain relatively narrow jobs.), system complexity and problems in all these come from the complicated ways things interact. An economy works out the same way.


As this happens on a wider scale, some problems will arise as I've dealt with in this post

The same with almost all other systems (including the ones mentioned above.) Getting the system to work the way it is supposed to work, and do something useful involves figuring out complexities, and understanding better how the whole system works.



however in the post I've also specualted as to how people will work the answers themselves. My basic reasoning is that supply and demand will most closely resemble each other without government intervention. As I have admitted, and Conan has pointed out, there are areas where it is right and proper for the government to ge tinvolved. However I feel we can specifically identify these, and tell the govenrment to stay out of the majority of areas where it's presence does more harm than good.

Supply and demand will most likely equalize out faster under a complete free market system than with government control, however, other measures of the success of economy come into play (quality of life, pollution, health, etc.), and the best government policies for these areas may come through influence in the economy.





But yet, centrally planned economies are the ones where the poor end up worse off.

I don't think anyone here is arguing for fully centralized economies, as those have been shown to work much less well at just about everything than modified free market economies. However, partially centralized economies, with different types of policies, and different amounts of relative government spending and involvement, have all done well (Different western/central europian countries, Europe, U.S., Japan, some other fast growing East Asian ones.). The arguments most likely come from the goals of the person making an argument for an economy.

For many areas of the economy and policies, the devil is in the details (A tax break for buyinbg M&M's is probably less useful than spending the same money on research on farming methods in a number of ways.) so without particular programs or areas in mind, it is going to be hard to say anything particular about total government spending.

[Xenophon]

My personal opinion is that you overcomplicate economic systems in your mind (not wishing to be presumptious about what you think, just going on your posts). Think of a free market like you think of an ecosystem. Animals numbers regulate themselves. In one way it is very complex system because looking at it from the outside no-omne person could recreate an ecosystem. But, left to their own devices, the animals will not be able to fuck up the ecosystem. Of course humans can, because we have the ability to look at the wider system and attempt to play God. However if we don't, if we let the market simply function as it should, then it will regulate itself as an ecosystem does. One year you have too many rabbits, then they begin to starve because there's too much competetion for food, and the next year, numbers are back to normal. If you have a shortage of rabbits, there's more food for the ones that are alive, so eventually they reproduce to get to the optimal number of rabbits again. They aren't conscious of this. It doesn't matter. You can look at rabbits and tell me they are too stupid to competently maintain an ecosystem. But this is to miss the point. It's the same with a free market. If prices go too high, demand will drop, producers will go bust, and only the ones who offer competetive prices will survive.
I agree, however, natural systems generally have wildly fluctuating limit cycles. If this happened with the economy it would be disastrous. Half the country would be starving every 20 years.

[Architectonic]

Human beings motivated by self interest, but prepared to abide by laws to enough of an extent that those laws aren't rendered irrelevant. Of course the odd exception isn't too much of a problem, it's to be expected.

I would have prefered a more complete system that stated a series of rights/laws as well as the basic axiom (which you mentioned) that humans will be motivated by self interest and those closest to them.



Anyway, you are currently making the following assumptions:

1.
Laws/Rights (especially property laws) can be well defined.

2.
The laws will be followed/enforced to a significant degree.

3.
That sufficient information is available so that the decision making process can occur in a relatively efficient manner.

Questions:

Who/how are these laws derived?

Is it necessarily possible to always define property in an efficient/clear cut manner?

Who owns the atmosphere? The government? How are the boundaries defined?

Even if we have clear boundaries, we still need an unambiguous way of accounting for costs when laws are infringed: how are penalties enforced?

For example, Lets just say I own a house near the beach which has a nice view of the beach. Part of the reason why I bought it is because it has this nice view. Say a developer comes along and builds a large apartment block between my house and the beach, blocking my view. Could this infringe on my property rights or not? Should I be compensated and how is this determined? Or should the developer have a free reign? How can you decide the best way of defining the property rights?

Another example, education. In some ways, the provision of education by the government is analagous to an employer providing greater training to its employees. The result is a greater return from the labour and thus a greater revenue. We'll assume for the moment that participation in such a society is voluntary. Wouldn't this suggest that the outcome is still relatively efficient, despite the fact that a collective 'government' is involved? - There is a key assumption there that I have already mentioned in a previous post...

What about intellectual property laws?

Esteban has already hinted at two issues that arise because the answers to these sorts of questions are not so clear cut.

The answer is we need a system that continually asks questions - one that is inherently open-ended. I feel this is a point missed by some people (http://en.wikipedia.org/wiki/Hoppe).

Some reasonable level of political freedom is required. Studies based on various fields including behavioral economics, complexity theory etc can also make suggestions on how these issues can be dealt with - and which level of government should deal with the issue.

[Architectonic]

demagogic_schizoid, for a more grown up version of the conception of liberty I suggest:

http://plato.stanford.edu/entries/liberalism/

[meanlittlechimp]

Hypothesis: - The existence of state interference in an economy is a sign of inefficiency in said economy, because if optimal allocation of resources existed then there would be no need for it.

Therefore the maintenence and expansion of state spending can only serve to perpetuate said inefficiencies, leading to an eventual correction, which will be more painful the higher state spending is.



I agree with your sentiment for the most part but what would you say for collusion or monopolistic practices? Also what about developing economies that sometimes need protection or government aid to get fledgling industries off the ground? Are there any other exceptions that you can think of?

[Architectonic]

I agree with your sentiment for the most part but what would you say for collusion or monopolistic practices?

Some people are of the belief that most true monopolies/oligopolies only exist as a result of government action... (if the market is so small, such that it can only sustain one or two competitors, then this is not a true monopoly because they cannot capitalize on that monopoly)

[demagogic_schizoid]

I agree with your sentiment for the most part but what would you say for collusion or monopolistic practices? Also what about developing economies that sometimes need protection or government aid to get fledgling industries off the ground? Are there any other exceptions that you can think of?

there's room for anti-monopoly legislation, in fact many pro-market governments have taken on monopolies, such as Thatcher reforming the brewing industry by preventing the number of pubs which any brewer could own (and you can't get a more serious example than beer lets be honest).

As for protecting fledgling industries, I don't really know the theory on this. However, I'm reading a book which outlines the Washington Consensus for Latin America, and they approve of this practice, as long as they only protect industries in areas where they will potentially have a comparative advantage somewhere down the line and be able to cut out the subsidies once they get off the ground. So as long as it's public sector investment as part of a viable and specific outward orientated development plan (ie dependent on predicted demand for that particular export) and not an attempt to replace imports, then it's usually considered acceptable.

[demagogic_schizoid]

Some people are of the belief that most true monopolies/oligopolies only exist as a result of government action... (if the market is so small, such that it can only sustain one or two competitors, then this is not a true monopoly because they cannot capitalize on that monopoly)

I worked at Shell, and it is to all intents and purposes a bureaucracy, not a business. I was overpaid and under-worked. Now I don't know really how the oil industry works, but it seems to be one of the ones with the highest levels of state involvement, so I often wonder if this is more than a coincidence.