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Monday, November 8, 2010

False Gods I - "the Market(s)"

Recently, I have heard a number of conservative political and business figures allude to the importance/desirability of not doing anything to interfere with the free and unfettered operation of our Nation's market or markets in goods and services.  Although I am a big fan of the "market", if these people mean that the best market is the one with little or no regulation, I must conclude that they are either evil or demented.  They seem to be implying that the "market" is some form of Supernatural Force for good, and that we will all do better if we only follow its dictates, and that attempts to restrict the operations of markets is bad, and that it must [like the Hypno-toad] be worshipped.

The "market" is not a God, but it (or they) can be viewed as a force of nature.

Markets are not creations of the Divine will;  God does not determine how they will act in any given situation.  Nor are the actions of the market necessarily "good" or "just" or "inevitable" or "according to some Divine plan", terms  which might normally be used to describe God determining that some particular thing should occur.  Rather, markets, at least as we know them, are creations of men.  I do believe that in a general sense, they are also an inevitable byproduct of Human societies (although I'll leave that one to the Anthropologists). 

The basic rules of any market are supply, demand, risk and reward.  I agree that we ignore those rules at our peril, and that erection of systems of social/economic  engineering that do ignore those factors is both silly and dangerous.   

To continue with my "force of nature" analogy - My first thought was of a river that provided necessary water to farms and towns along its path.  Without the river, we are, well, screwed.  But  if we do nothing to control or regulate the river, we may have both frequent floods and droughts.  So we have learned over the years about the desirability of building dams, levees and reservoirs.  We have also learned that it is better for anyone downstream if the people upstream do not dump a lot of raw sewage and bad chemicals directly into the river.  Do dams, levees and reservoirs cost money?  Sure?  Do they "limit" the operation of the river? Sure.  Is the upriver business or town more expensive to run because it now needs a water treatment plant?  Yep, at least in the short term.  Are there likely to be unintended and unforeseen bad effects?  Yep.  Yet we, I hope, would all agree that some regulation of some rivers is a good and even necessary thing to prevent natural or man made disasters, and to increase the long term productivity and prosperity of those who live along the river. Markets, if left unchecked, have a strong historical pattern of booms and busts (or floods and droughts).  It is generally thought that such booms and busts are to at least some degree an inevitable byproduct of a capitalist system, but that it is our collective best interest to try to avoid the worst excesses of these patterns, and to do so through governmental action.

I think another very useful analogy is to compare the market to earthquakes or other "natural" disasters.  Because it is subject to earthquakes, California has specific and "stronger" building requirements (and even education/knowledge requirements for structural engineers) than other, more geologically placid states.  Does this increase the cost of, among other things, building a tall building in California?  Sure.  I like this example because the real push right now seems to be by those who want to keep the Government from legally acting to limit excessive risk because limiting risk also will reduce possible profits (again, in the short term, which is all these people seem to be able to focus upon)  If we eliminate laws against Securities Fraud, or even refuse to fund the S.E.C.,will some companies be able to make more money by engaging in "dubious" practices?  Sure, at least until the public stops buying securities because it's too risky.  If we (as we did until the late 90's) require banks to be either 'commercial" or "investment" (but not both), will we reduce the opportunities of those banks to make even more money?  Sure.  (That's why the Banks lobbied so hard for so long to repeal the Glass-Steagall Act, a law that worked really well for a long time).   If we eliminate food plant inspection, will some food producers lower their costs of doing business as a result?  Yep.  Of course, if something goes wrong, people lose their savings, the financial system almost collapses, and a lot of people may get sick and even die.  Limiting risks (the downside) will almost always somehow restrict or limit possible profits (the upside), at least in the short term.

No, we cannot make everything perfectly safe.  Nor should we try. Cost/benefit analyses are one appropriate way to decide what and how something should be regulated.  Is stuff sometimes over regulated?  Sure.  However, what I am hearing and reading now seems to be a general attack on the idea of regulation because it "interferes" with the operations of the market.  But the market is not "sacred"; indeed, if left unchecked, it invites participants to lie cheat and steal (as well as to act honestly) for their own benefit.

Moreover, an unfettered market will have adverse economic consequences besides booms, busts and risks to the general public. Generally, with no restrictions on size or market share, the bigger and more powerful players will get richer and more powerful, leading to concentrations of wealth and/or power that actually decrease competition and stifle the idea of a "fair" or "open" market. 

There are also social policy issues involved.  Child labor laws, minimum wage laws, the ability to collectively bargain - all are designed to keep those less rich and powerful from being oppressed [and I use the word deliberately] by those who are richer and more powerful.  The market does operate, in part, according to a particular "Golden Rule" shared with me by one of my clients- "He who has the Gold, makes the rules".  Again, I am not a Socialist or Communist.  I think a society where one can become obscenely rich and/or powerful is , essentially, a good thing.  I would go further - trying to "force-feed" the economic actions of people in order to accomplish social policy is inherently dangerous; I think parts of the original impetus for the current housing crises were the well meant acts of certain politicians to make home ownership more available to poorer people by "encouraging" banks to make economically dubious loans.  (Of course, once the banks and bankers saw the profits to be made, they resembled a stampede of pigs; I think the bigger problem was a failure of adequate regulation).  Like mighty rivers, earthquakes and hurricanes, the market, at least as the world is now structured, will eventually make anti-market governments pay the price, at the very least in having to pay higher interest rates in order to sell their sovereign bonds. That is not to say we should not sometimes try to politically alter incentives to encourage economic behavior that we believe to be in the greater social good.  Indeed, that is the whole point of most of our tax policy (even the parts that the conservatives really like).  It's just that we should know better than to try to make the river run backwards.

However, we have collectively had the wisdom in the United States, throughout our history, to regulate economic behavior for both economic and social/political reasons.  Although certainly motivated by basic American social and political ideals,  I would argue that these regulations have benefited our wealthy classes, in particular.  Among other things, the "poor" have been and are treated "well" enough (or believe they are) to keep them from an armed insurrection.  (No, I am not kidding here;  Communism became a powerful International movement for a reason).

In short, saying that a program will make things more expensive for business or could "hurt" some market is not a reason to automatically not do it.  To maintain otherwise is to advocate creating a Golden Calf and labelling it "short term market forces".  Enough.

1 comment:

  1. This is fascinating and very well written. You should think about sending it to one of the electronic forums or one of the more traditional news magazines as a commentary.