Originally posted by: Narmer
Originally posted by: Tango
Originally posted by: Narmer
I used to watch the economic debates and side with the purists, those who claim that free-trade is good because of comparative advantages blah blah blah...
But the problem with that theory is that there is a fundamental flaw: We are equating the two (or various) sides. What theory forgets to take into account is that human beings are irrational, hence excess can play a big part of the picture. Therefore you cannot have open trade/borders between a rich nation and a poor one. Why? Because the poor nation's justice system is relatively weaker, hence property rights may be meaningless. Other problems may be endemic corruption that skews resources, productivity, and other assets of a nation. For the rich, it creates vast opportunities to exploit and maintain the status-quo. We see this problem playing out in North America with Mexico and the United States but not with the United States and Canada. We also see it in quality control issues in China, which has been vetted for decades by the rich there and across the globe for it's many "comparative advantages." Well, what incentives do the rich have in changing the Chinese system when it's worked so well for them? Is the Chinese government willing to sacrifice all the jobs flowing into their country by focusing on the other deep flaws within their nation, thereby possibly putting them out of power? My guess is that they will, at best, go very slow.
What about those that argue that a rising tide will lift all boats? Well, it may but so long as things remain unbalanced, the lifting will take far longer than economists assume, and that could lead to unrest.
So then who's to blame for the mess? There are too many to count. However, economists should not go around espousing the advantages of globalizations and free-trade if they 1) can't vouch for the other pillars of a civilized society, namely the judicial system with its responsibility for property rights and 2)refuse to seriosuly research the topic of irrationality in economics rather than making it out to be antagonist of their theories.
Wow, indeed I thought you would side with free market purists...
But, those running around screaming "free market always and forever" are not really economists. They usually are either IMF consultants, politicians or internet forum trolls. Economists know that the theory is susceptible to many determinant variables when applied in the real world.
The most common example of free market theories that didn't work in practice is what happened in many developing countries when they opened their markets during the 90s and early 00s. Theory predicted that their lower production costs would determine products that would compete wonderfully in developed countries' markets.
Instead, what happened taught many emerging economies a lesson about comparative advantages theories in practice: they are NOT one-period games. What happened was that many western companies decided they could afford to lose money for a couple of years, and started producing under cost. Not only agricultural products produced in developing countries were not selling well in developed markets, they were actually losing to foreign competition in their home markets!
After a couple of years, big multinationals went in and bought the land from those small farmers who basically could not afford to lose money for another year. As a result: opening the markets determined those with a clear comparative advantage to lose their very means of productions and become employees of foreign companies.
Of course, other countries have later been much more successful, basically by ignoring the IMF and opening their markets gradually and sometime imposing joint-ventures with local companies to foreign investors and companies determined to enter their markets (which of course was called un-capitalistic by many who failed to see how this was in fact the only way to maximize their long-term profits).
But Globalization does have a lot of advantages. What is doing for Russia, Brazil, China and India is nothing short of stunning, and other countries are joining every year the ranks of the successful stories of those who opened their markets to international trade. Last year an African country was the fastest growing in the world, most of it coming from its increasing exports.
The single most determining parameter is the quality of institutions. You are right: economics can't do much if the country's judicial system is completely corrupt. But opening to trade and foreign direct investments tends to make it better. You can't have a revolution overnight.
On one thing you are wrong though. There is nothing irrational in how some actors fight against this process and try to maintain the status-quo. It is well known that they will. It's what is best for their own profit.
Good post. By irrational I meant human nature, which includes corruption.
Now what do we do about the maxim that the private sector always equals more efficiency at lower prices? I think that maxim works well within a private-private relationship where the partners have an interest in keeping costs down. But a public-private relationship (like the government having the private sector do things it used to do) should lead to higher prices because 1) the government may be corrupt, 2) the private side of the equation is composed of voters and 3) there is little oversight because the money being spent belongs to a third party (the taxpayer) who entrusts it to gov't employers. As we've seen with the Iraq war profiteers, things can get out of hand.
And how do we balance a welfare society (both corporate and social) with a free-market society?
Well, that a 100 Billion dollar question! The private sector theoretically is the most efficient vehicle of economic growth. The underlining assumption is that competition will force prices down. Of course there are several things that might distort this equation, like cartels or de-facto monopolies. Note, however, that more efficient not always equals lower prices for consumers, as government subsidies might allow shares of a society not able to afford a service/good to consume it.
Again: the real world is not a single-period world. Things have consequences in the future. You might end being better off using less efficient policies if you envision the more efficient policies to neglect such a considerable part of the society to have long term negative effects.
Your considerations are all relevant. Corruption is always present, no matter what country, party or industry we are talking about. But that's quite easy to cope with. You know, it's illegal.
The most relevant conflict of interest in my humble opinion is that about politicians. And i's hard to cope with because it's not illegal. As private actors they will maximize their profits, and those include being re-elected by voters.
Now... how can we expect politicians to support unpopular policies, knowing a considerable part of their electors would basically cut their support because of this? It's very tricky.
Not to turn this into the same old anti-government thread, but what is clear to me for example is that the current administration is basically spending money knowing that the next one will be in charge of raising taxes to balance the budget. It's not their problem, because they are not seeking re-election (not the same men anyway), so it's quite cool for them to postpone the hot-potato until it goes into someone else's hands.
But the inefficiencies are not exclusively linked to the public sphere of business. Think of what drug producers can get away with in this country. Insurance companies must pay, so
drug makers change basically whatever they want. Nobody has an incentive to cut prices, because you get a blank check and you can fill it with the amount you like.
When Brazil was offered a deal by some American drug makers, their health care minister turned it down in favor of generic drugs made in India, saving more than 50% on the bill.
This was impossible in the US because big drug makers are protected against foreign competition from generic drug makers.
The Iraq war profiteers in my opinion are kind of an extreme case. The way military things work are always weird. It's a very sensible field where pure economics seldom apply. The relationship between a government and the guys providing its defense equipment is always perceived as too critical not to close an eye (or two) on inflated expenditures. Of course some of it was also plain corruption, but some of it depends on the industry. The reason why the US violates agreements on tariffs on steel for example, to shield its industry from Euro and Chinese imports depends on how steel is perceived to be a critical industry in times of war. You don't want to find out your steel industry requires 5 years to get back on track the day you really really need to start doubling the production of warships.
On economic term, what's really bad about Iraq is that a huge amount of money will be spent on a war instead of many other things that would promote future growth. In economic terms, Iraq is throwing money out of the window. Of course on political terms you might still see it as necessary (I don't, but that's just an opinion).
But again, to try to answer your question, well knowing we have wildly diverging opinions on many issues: you achieve a balance when you try to realize the long-term implications of your policies, and support the most rationale ones trying to disregard your immediate personal gains/losses. And that's hard. You can't ask politicians to make "the best thing for the country" even if it goes against their immediate private interests, if you as an elector are not ready to do the same.
I believe this country is too skewed in term of income inequality. And I don't say this in terms of moral beliefs. I say it in economic terms. Poverty causes degradation. Poverty causes ignorance. Poverty causes crime. And degradation, ignorance and crime cost a lot of money in the long term. The same dollar on your savings account or in the bank account of a big corporation works in two very different ways. You are much more likely to use that dollar for things that promote better welfare for the whole system, such as paying a mortgage, sending your kids to college, buying a book or starting a business. The corporation is much more likely to use it for buying Russian bonds, building a factory in India or paying a nice dividend to its shareholders (when not spending it for corporate jets fuel).
That's why I am not that impressed when I see the US GDP growing, because at the same time the country's GINI index grows as well. A very affluent middle class creates more future wealth than a handful of extremely rich corporations. Especially if you consider the US GDP is 76% composed by private consumption. There must be a balance between healthy producers and healthy employees/consumers. The more people have access to consumption, the more resilient your economy will be in recessionary periods of your business cycles.
Same thing for health care (I know you'll disagree). What I like of universal health care is less desperate people. Desperate people do desperate things. And desperate things cost money to the society. People in jail cost money. People unemployed cost money. People not going to college (or sending kids to college) because they must use the money for drugs cost money. Of course universal health care
can be inefficient. Question:
must it also be inefficient? There's a difference between
can and
must. I see a very efficient universal health care system working in Germany and France, a mixed system in Switzerland with stellar results.
Question: would you support higher taxes if you believed this taxes would in the future generate more wealth for the country? Every dollar spent on education (if well spent) raises the chances that the
next big thing will be invented here, instead of China, Germany or India. Again, it's not a matter of moral beliefs, but of immediate gratifications Vs. future streams of income.
So (and sorry for the long post) use your voting power, a power I do not have (not being a citizen). Decide what economic shape should your country have in the present and in the future. And vote those who deviate from this vision out of office.