Tuesday, January 10, 2006

What hath the free market wrought?

(Don't miss my preceding entry, The rule of law, "overpriced," market clearing, and information in markets, which gives good background to this entry.)

Reader Michael Bolig had sent me someone's false accusations against the free market. Actually I'd already seen them here, having noticed a little traffic coming from that site. Michael had posted the link to my entry last night, where part of my discussion was the superiority of the free market over central planning.

Here's a line-by-line response:
The market is capable of generating an enormous amount of wealth, no doubt.
As opposed to the state-driven slavery and poverty of central planning? I'll take the free market any day.

But here are some things an unfettered, free market CANNOT or HAS NOT done:

* The market did not anticipate or resolve the use of child labor in this country and elsewhere. It created it.
This is complete ignorance of cause and effect, both in history and economics. Child labor existed has existed since the dawn of man for one reason: societies were so poor and could produce so little that parents needed their children to work. Modern history books omit that before factories and other manifestations of urbanization, children performed back-breaking labor on the family farms.

In a recent e-mail to Don Boudreaux of Cafe Hayek (I originally said "told," but he's a much smarter man than I am, so I can't really "tell" him anything), of course no one wants children to work. If we had the power to create an ideal world, we would have no adults work, either. I will refrain from saying children should work or should be prohibited from working. Instead, I will recognize that some societies need their children to work. Do you want to eliminate child labor in the Third World? Then you will condemn families to starvation, or at least increased poverty, because the parents alone cannot earn enough income.

Shall we then try to pay them higher, "fair" wages? That nonsensical approach ignores the reality of finite money. Because their buyers (including we Americans when we import) can purchase only so much, doubled wages mean that only half will remain employed. Tripled wages mean that only a third will remain employed. This is why the minimum wage does not work, because some will receive more money while others are left unemployed. There is no escaping the reality of finite money.

In my mother's home country of the Philippines, one need not travel too far outside Makati (Manila's business and entertainment district, equivalent to Manhattan) to see cardboard cities, and the harsh reality that a lot of children must work so the families don't starve. It wasn't too long ago that American families faced the same thing. My father was only 11 when the Depression hit. Though he didn't have to work in a factory, at least that would have paid more than the often futile attempt to sell apples on Schenectady streetcorners.

* The market did not anticipate or resolve the demand for slavery. It demanded free labor and created it.
Clearly this person doesn't understand what the free market is. The free market prohibits the use of force, which is what slavery needs to exist. The free market requires individual freedom, property rights and purely voluntary transactions, so it in fact is completely opposed to slavery.

As a matter of history, it has almost always been government that either began or supported slavery. In the West it was Spanish imperialism, because the conquistadores had no regard for indigenous people's rights. Since they were military agents of their country, it was government that began the practice of slavery. Then the British continued the practice, encouraged by their government's issuance of various charters and other incentives to do business in the American colonies.

After the colonies gained independence, the U.S. federal government specifically blessed slavery, even long after it was abolished by every other Western nation, which all did so without bloodshed. Prof. Thomas DiLorenzo in his book The Real Lincoln pointed out that South American nations, which I describe as forged in the fire of Spanish slavery, still abolished slavery peacefully. Only the United States has had to fight a war to abolish what was federally blessed slavery, and why? Because government had given its blessing, making slavery such an established institution that the free market could not destroy it.

Update: let me clarify, in case some of you might be wondering. I definitely know that the Civil War was not fought specifically to "free the slaves," but my phrasing is because the abolition of slavery was a result of the North's victory. If you're familiar with The Real Lincoln, you'd know one of DiLorenzo's themes is peaceful secession: the question was not just if states have the right to permit slavery within their borders, but whether they can leave the Union at will. And long before I read his book, "states' rights" was quite emphasized in the Utah public schools I attended.

Yes, that's right: allowing the free market to work would have destroyed slavery. DiLorenzo explained the simple economics: slaves just aren't very good workers. Supposedly you only have to clothe them a little, feed them a little, and house them in the worst of conditions. However, you won't get a lot out of them. You'll incur greater costs hiring a free worker, but you'll get far more from him: it's spending a little more to get a lot more production. You won't have to waste time beating slaves or chasing after runaways. A private worker who doesn't work hard enough or doesn't show up at all, on the other hand, can be fired.

Let's not forget that the slaves were typically sold by fellow Africans who had captured them. But they were not taken prisoner specifically to sell, but because they were captured in war. Again, that's not the nature of the free market.

* The market did not anticipate or resolve the polution and burning of Boston Bay or the creation of thousands of superfund sites. It created them.
No doubt this person also believes that guns kill people. Actually, people kill people, and it is people who create the pollution. Before Superfund sites, before our modern industry that gave us wonderful technology to improve our standard of living, we faced far greater pollution threats from our own sewage. Recall how Drew Barrymore was ecstatic at being able to "poop in the woods" or some such tripe, which continues today in places like India, where rivers are used for sewage, drinking water, bathing, and disposal of human ashes.

Only a century ago, instead of worrying about pollution from automobile exhaust, we worried about diseases from horse dung. Nobody cleaned it up, so it typically stayed in the street, where it would dry into dust and be carried away by the wind. Humans have always had to worry about pollution, even in the most "natural" conditions that we idealistically liken to Eden.

The Superfund sites themselves are very dangerous, but it's like the old joke: a man tells a doctor that it hurts when he does a certain action, so the doctor replies, "Then don't do that!" Very few people live near such dangerous sites, and because of the wonderful wealth that the free market created in the U.S., those affected were able to find other places to live.

* The market did not anticipate or resolve acid rain or the hole in the ozone layer. It created them.
As the years have shown, acid rain is far from the Armageddon that environmentalists predicted. Which is better, slightly more acidic rain that in reality affects relatively few people, or a lack of industry that results in a low standard of living, and thus highly polluted rivers because of a lack of sanitation? You can't have it both ways.

That man has created the hole in the ozone layer is one of the great environmental myths. Just like global warming, it's been around long before heavy industrial activity. Hint: solar radiation, which, in conjunction with natural occurrences like volcanoes (Pinatubo is near my family's hometown), also causes more global warming than human activity.

* The market did not anticipate or resolve the Great Depression. It created it.
Completely untrue and just plain wrong. As Milton Friedman demonstrated decades ago, the Federal Reserve, whose very function is contrary to the free market, triggered the Great Depression by reducing the money supply (sometimes said to have been by a full third), after the Fed had spent much of the 1920s inflating the money supply to create an artificial boom. Then J.P. Morgan and other cohorts attempted to sustain the unsustainable by trying to save the stock market. Stocks should have been allowed to plummet so that they would reflect their true value, but the bankers refused to let the free market work.

For further reading on what really happened before and during the Depression, see here, here, here and here.

* The market did not anticipate or create the 40-hour work week, the two-day weekend, safe working conditions, and employer-provided health care, pensions, or defined-benefit plans. It fought them.
Absurdities. The modern work week is the product of a society's wealth, not government. Government can mandate that, health care, pensions and all the safe working conditions it wants, but without technological advancement, it can issue regulations until every bureaucrat is blue in the face. And how do we achieve technological advancement? Not just the free market, but pure capitalismZ.

Shorter work weeks, better working conditions, and benefits like health care, are in fact products of competition. So again, this person is completely wrong: the free market will produce benefits. Companies will offer greater incentives to attract the best people, so that they can maximize output, which allows them to offer even more to retain the best employees.

What resolved all of the terrible sins of an unfettered, free market? Government partnership with business and labor and the mixed economy they (we) created. Period.
What utter elephant dung! It has always been big government and its chartered "business allies" (which are not the free market) that tyrannize and enslave people, maintained a feudal system for centuries against free market principles, and make people unemployable with myriads of regulations.

Folks like Bolig either forget or choose to ignore the inherent pitfalls of extremism. His economic policies are just that, and they run counter to the economic practices that here to date have made our nation so strong.
I hate to break the news to this person, but it's the "unfettered free market" that is the sole reason for American prosperity, not government. But if he'd really like to extol the virtues of government, why doesn't he mention the homes that people are forbidden to build, just because of some small "endangered" animal that isn't even native to the area? What about the traffic congestion created by government, which forbids the construction of new roads?

My friend Charlie told me that the "wetlands" controversy still continues in Utah after God knows how many years. This 120-mile highway would do wonders for people who must commute along I-15. But opponents criticize the plan as "cutting a terrible swath through world renowned wetlands and fertile farmlands, contributing to automobile-dependency and sprawl." World renowned? How many people outside Utah would consider the wetlands that, and how many people outside Utah even know there are any wetlands at all? In the six years since I left Utah, I myself had forgotten. And, Charlie reminded me, the wetlands were created by man; after all, Utah was principally a desert. How about the fertile farmlands? There's plenty elsewhere in the U.S., so much that we're the world's greatest food exporter. What the people of Utah need is more space to drive, not grow crops.

I wonder what names Bolig will resort to calling me now?
Worshipper of the state, as Bastiat put it, would be quite apt.

Any possible proceeds (and that's a big if) from ANWR won't come online for a good ten years. That doesn't help is this winter. It also doesn't help our air and water ten years from now.
Completely wrong. First, let's all be clear on the fact that the proposed drilling site is a very small part of ANWR. This area happens to be so barren that it's properly compared to the moon, and with no vegetation there, no animals live there. There are animals elsewhere in ANWR, just not where we're going to drill. To claim that wildlife will be affected is akin to opposing repavement of Central Park Drive because it will affect the wildlife at the Bronx Zoo.

Second, the current price of anything is always a reflection of current and future supply. If people think future inventory will be limited, they will buy more today to stockpile. That's why the price of petroleum and gasoline rise the moment there's a hint of a supply shock. (Read this for more on how higher prices force people to conserve, and simultaneously encourage people to supply more).

We don't even have to start drilling in ANWR: global crude prices will start falling once Congress merely approves the drilling. Prices won't come down by $20 per barrel, but they will drop because people will know we have a reliable future supply.

To those who oppose drilling in ANWR but call Middle East oil "a threat to national security": you would put a few expendable reindeer above national security? I myself don't consider imported oil an inherently bad thing. I explained in this entry why "energy independence" is not a strictly desirable thing. If you're worried about Muslim nations getting more money to finance terrorists, fine, but in and of itself, there is nothing wrong with importing anything. Why make something yourself when you can buy it for a cheaper price?

If we're truly worried about sending money to Saudi Arabia that gets diverted to terrorists, then ANWR's supply (about two full years for the U.S.) can replace about eight years' worth of imported Saudi Arabian oil. The Saudis, especially with how the royalty spend money like water, would likely be willing to negotiate certain reforms long before that time is up.

I agree - I think tax breaks for anything is poor public policy and contributes to making our tax code incredibly arduous and untenable. If we decided we need something collectively, then we should raise the revenue up front and pay for it. If we (government) cannot afford it, we shouldn't buy it. The market rewards debt-free players. Clinton showed us that in the late 90s.
I explained a while ago why specific tax breaks ("incentives") are the wrong way to cut taxes.

The economic growth in the 1990s had nothing to do with Clinton's "economic policies." It was the time of a great economic boom, spurred by leaps in productivity -- all factors far beyond Clinton's influence, let alone. The only two things Clinton did for the American economy were NAFTA and agreeing to the Republicans' 1997 tax cuts, which did help, but they enhanced the boom, not created it. Clinton's "economic policy" of balanced budgets is another economic myth: the federal budget was never balanced until the very late 1990s (and even then it needed Social Security revenues to mask its deficit), when our economic growth was unsustainable and we were headed for recession.

The market rewards those who act prudently, including borrowing. Look at the American economy in the 1980s: huge budget deficits, but the low tax rates encouraged people to invest, and that grew the economy faster than the need to borrow. If you can borrow $1000 and turn it into $2000, are you going to refuse just because you must pay back a total of $1500? Why turn down $500?

And not only does it penalize a government in debt (us taxpayers are paying billions of dollars in interest now, folks, courtesy of Republican leadership), but it penalizes the everyman by way of increases in interest rates. The more money government borrows, the more expensive it is for everyone else to borrow it. Supply and demand applies to the dollar as well.
Part of the reason I am a supply-sider is that I believe it is permissible for a government to borrow for prudent things. As I explained here, government borrowing does not carry the disincentive of raising taxes. We may "burden" our children with repaying the money at interest, but our policies in the present time will grow the economy such that they can easily afford the debt service payments. Is it such a bad tradeoff that your children will pay back $5000 a year in principal and interest, when you've increased their salary from $50,000 a year to $70,000?

The last two statements betray a lack of understanding of real-world economics. "Rubinomics," the notion that government borrowing "crowds out" private borrowers, does not exist in an open economy with any creditworthiness. Foreigners, mainly China, Japan and South Korea, are more than willing to sell us inexpensive goods, then lend us a good portion of what was once our money. It's not only U.S. creditworthiness, but because so many foreigners are competing with each other to buy U.S. Treasury bonds, that we're not really paying a lot of interest for the amounts borrowed. Take a look at current yields, and they're astonishing in the face of repeated Fed interest rate hikes.

What's worse - Democrats who pay their bills, or Republicans who borrow and spend?
By far, Democrats who insist on tax hikes to cover their profligate spending, which only stifles an economy while providing goods and services with wasteful efficiency. When a nation has the ability to borrow from people who are crawling all over each other to lend to you, it's stupidity not to take free money. However, I have assailed conservatives many times for unnecessary, unconstitutional spending.

3 Comments:

Anonymous Michael Bolig said...

Thanks Perry - as always, I managed to learn something new. Thanks for helping out! Next time I'm in NYC I owe you a diet pepsi.

Wednesday, January 11, 2006 8:20:00 AM  
Anonymous Brad Warbiany said...

Great post, Perry. One correction, though.

Completely wrong. First, let's all be clear on the fact that the proposed drilling site is a very small part of ANWR. This area happens to be so barren that it's properly compared to the moon, and with no vegetation there, no animals live there. There are animals elsewhere in ANWR, just not where we're going to drill. To claim that wildlife will be affected is akin to opposing repavement of Central Park Drive because it will affect the wildlife at the Bronx Zoo.

Ever pulled out Google Earth and taken a look at this area of ANWR? There is vegetation there (at least during the summer). It is a plains area filled with basically large puddles and bogs in the summer. I wouldn't be surprised if there is at least a little wildlife in the area. It only looks like the moon in the winter (yes, that is probably 8 months of the year up there).

Granted, I still think we should drill there, because the area allowed for drilling is only a small area of the aforementioned boggy marsh. And given the conditions, it's really not someplace that anyone, ever, is really going to live. There is a small Eskimo city just at the coast a couple of hundred miles away, but that's the only "civilization" anywhere near there.

Wednesday, January 11, 2006 9:16:00 AM  
Blogger Perry Eidelbus said...

Well, Brad, I've never used Google Earth for that location (though I use the program). From what I've read, accounts from people who have visited there (both Alaskans and non-Alaskans), there really is minimal "plant" life in the proposed drilling site...not enough to qualify as "vegatation" unless you want to count all non-animalia, non-viral organisms. It's just so barren that there's no "environmental impact" to speak of -- maybe on the order of breaking sandbags in Death Valley.

Sunday, January 15, 2006 10:53:00 PM  

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