Thursday, October 22, 2015

Will Bureaucrats Save You From Predatory Capitalists?

You would think that the argument would have been settled. You would think that those who favor free markets would be able to take a deep breath and rejoice in their victory.

You know and I know that China tried history’s most grandiose experiment in communal agriculture. It was called the Great Leap Forward. After the dust settled, something like 35 million people had starved to death. When Deng Xiaoping took over the government and the nation in the late 1970s the first order of business was to privatize agriculture, thus to pave the way for freer and more open markets. The results have been incontestably good: in 1980 the extreme poverty rate in China (that’s living on less than $1.25 a day) was over 80%. By 2011 it was 8%.

Of course, there have been problems. Perfection is not an option for human beings. Chinese economic growth has produced some problems… especially of the environmental sort. It would be nice if the nation could have done all the right things at once. But, markets and human nature do not allow it. They work on trial-and-error. They set priorities. They might choose to place prosperity and a sufficient supply of food ahead of clean air. They believe that they can deal with the pollution later.

It should be obvious, but the markets are not in the business of making you behave virtuously.  At least, not in the short run. They are not in the business of preventing you from making bad decisions. 

Free markets did not invent temptation. One does not quite understand why they are being criticized for not having eliminating it. 

Those who continue to despise markets believe that capitalists are predators, but that government officials are virtuous. In fact, markets have been known to correct themselves. Some human beings recognize the error of their ways and correct them. In the long run, people figure out what is good for them and what is bad for them. Sometimes they purchase and consume what is bad for them because they find the ancillary benefit to be worth the risk. Sometimes they just make bad choices and suffer the consequences. 

It would be nice if we always made good decisions, but then there would be no free will, would there?

Dealing with temptation is basic to human ethical behavior. It has been thus from the time of the book of Genesis. To assume, as the new anti-capitalists do, that government officials are saints is naïve to the point of being dangerous.

Take the case of Michelle Obama’s healthy foods program, whereby the government gives school money to serve lunches that she and a certain number of nutrition experts consider to be healthy. One understands and one must mention that the government guidelines about what is or is not healthy are a work in progress. They are changing all the time. It used to be that cholesterol was bad for you. Down with butter and eggs. Now, it’s carbs that are making you fat. Tomorrow… who knows?

In any event, you also know that when schools started serving lunches filled with fruits and vegetables children did not eat them. The schools were tossing all the healthy food into the garbage and the children went off campus to have pizza and Big Macs.

Another victory for behavioral economics!

Finally, Bozeman High School (in Montana) dropped out of the government program and started offering children lunches that they wanted to eat. The results have been widely reported.

Here is the way the Daily Mail told the story:

The decision by officials at a high school in Montana to give up $117,000 in federal money and drop Michelle Obama's healthy lunch program has proved to be a popular and profitable success.

Business has been booming in Bozeman High School's cafeteria since its board members voted to drop the National School Lunch Program in a bid to keep students from leaving campus to eat.

The lunch program set limits on calories, fat and salt in lunches and mandated that more whole grains, fruits and vegetables should be served in order to curb the onset of childhood obesity.

Many students who weren't fans of the lunch program would leave campus to get fast food at lunch, but they've been returning now that the program is gone, the Bozeman Daily Chronicle reported.

Alison Beckman, the high school's food service manager, said over the summer : 'They're young adults.

'At this age you're not going to tell them what to eat. 

'All the new rules and mandates have done is push students off campus to the fast food restaurants.' 

The only benefit was that the people pushing the healthy lunches that nobody ate could feel virtuous. They could feel that they were better than the free market.

In the meantime, two major economists George Akerlof and Robert Shiller are undeterred. (One notes in passing that Akerlof is married to Fed Chairman Janet Yellen.) They want you to know that capitalists are predators, and that free markets are exploiting your weakness, even making children diabetic and overweight. They are doing this by placing candy bars in places where children are more likely to buy them.

Because, don’t you know, children would never buy candy bars if they were not tempted to buy them at the check-out line.

Anyway, Akerlof and Shiller are acting more like moral philosophers than economists. Astonishingly, they are proposing a foolproof way to solve the human problem of temptation. They argue thusly:

Curiously, while economists understand each and every such instance where people are tempted to buy things that are not good for them, they fail to appreciate that this occurs because of a general principle of economics. They fail to understand that free markets, as bountiful as they may be, will not only provide us with what we want, as long as we can pay for it; they will also tempt us into buying things that are bad for us, whatever the costs.

Lead us not into temptation… deliver us from evil… that is going to be the new mantra for economists who seem to have it in for human nature and Western civilization.

But, they ignore the fact that we do have the right to purchase and consume things that are bad for us. We even have the right to engage in behaviors that are bad for us. We have the right to take risks. If they do not turn out well, we are responsible for our choices.

The authors have a grudge against capitalism. They see capitalists, not as feeding the world but as preying on our weaknesses in order to lead us to make bad choices.  Their New Republic article is absolutist in its scope: “The Free Market Preys on Your Every Weakness.” Think about it, the free market is predatory and does not leave a single one of your weaknesses untouched. As for the benefits that free market economics bring, the authors do pay lip service to it, but their title gives away their bias and their moralism.

They write:

As long as there is a profit to be made, they will also deceive us, manipulate us and prey on our weaknesses, tempting us into purchases that are bad for us. 

It’s not just about Snickers bars and Diet Coke. It’s also about the financial crisis of 2008:

Most notably, we economists should have been a chorus warning of the financial crash of 2008. We should have recognized that people should not be buying overrated mortgage-based securities, nor should banks have been creating the insecure loans that backed them. Instead there were at most a few lone voices of protest. We should have been more skeptical.

One might ask to what extent government mandates contributed to the situation. Didn’t the government force banks to make bad loans to people who would never be able to pay for them in order to achieve a higher good—home ownership for minority groups.

How did that effort to produce human virtue work out?

In any event, the authors see themselves as the white knights that are going to rescue us from free markets:

The public fails to understand that in the economic equilibrium, if there is a profit to be made, someone will take it up, as long as it is legal and as long as there is no public protest against it….

That is, markets are not benign forces working for the greater good but instead are filled with businesses that “phish” by exploiting our weaknesses to get us to buy their products. We are the subjects of those phishes—the “phools”—when we fall for it.

Now that you have learned that you are a phool, that you might be duped into doing something that they and their friends do not believe is good for you, what is the solution?

The economists believe that this condemns markets. They might have said that it does not speak especially well of human nature and that it is the nature of human competition that some people do better than others.

They write:

Second, there are financial booms and busts because stories—what we are saying to ourselves and what we say to each other when we make our decisions—spread like epidemics. Those stories lead people into bad investments, and then, when those investments go sour, there are declines in confidence that threaten the whole financial system. Humpty Dumpty has a great fall and only slowly is pieced back together again.

Fair enough, sometimes crises arise. Sometimes they are managed well. Sometimes not. No one ever said that the markets were a free-for-all, but markets do correct and they do punish those who get caught up in the euphoria.

The economists are horrified that the market allows tobacco and fattening foods to be sold. It recalls the time when the nation was overtaken by hysteria about alcohol... to the point where it passed a constitutional amendment banning it. How did that work out?  One understands that the authors would be against banning alcohol; they would prefer that bars be relabeled coffee shops and that alcohol be hidden behind the counter at grocery stores. 

They authors are down on democracy because it appeals to your worst impulses by making people compete for votes. They neglect to mention, in the article cited, that the principle of the balance of powers between branches of government was designed to mitigate the effects of absolutist government.

Akerlof and Schiller would be happier if behavioral economists and government bureaucrats were put in charge of all aspects of our lives:

Third, regarding health, the market gives us tobacco, which, according to Centers for Disease Control estimates, is responsible for almost 20% of deaths in the United States. The pharmaceuticals industry sells us drugs with unknown long-term effects, which are sometimes severe. And Big Food serves us sugar and fat, so that two-thirds of Americans are overweight, with more than half of them also obese. The list goes on.

Finally, the political system in a democracy is like a market system: there is a competition for votes. But that too has a “phishing equilibrium.” To keep their jobs, politicians have to raise money from “the interests” and use it for TV ads that show what nice folks they really are. 

They continue:

The economic system works as well as it does not just because of individual incentives, but also because a whole raft of individual heroes, social agencies and government regulation puts limits on this downside of markets to phish us for phools. Such policy is a balancing act, to filter out the bad sediment while allowing through the true benefits of free markets.

Pray tell, what makes Akerlof and Shiller believe that government officials and social service providers are paragons of human virtue. Is it because they are not motivated by the profit motive? Surely, they do everything in their power to enhance their own compensation and to keep their jobs. Their unions contribute vast sums to politicians in order to receive the largesse that flows to them from said politicians. And they do everything in their power to gain more power over everything, thus more work for them. Don't we know that bureaucrats, when compared to equivalent workers in the private sector, are largely overpaid.

Keep in mind that when do-gooders go around the world giving out free food, they put local agriculture out of business. Thus, they make the local population permanent wards of their largesse. Let’s hope that they are handing out healthy wholesome food… the kind the American children en masse are refusing to eat. 


Ares Olympus said...

Oh, these debates do get a bit tiring. Which is best a free-market or regulated-market? It must be 100% one or 100% the other, right? Or maybe there's some middle ground?

Okay, in one corner we have Lady Liberty and the old quote goes "My right to swing my fist ends where your nose begins."

And in the other corner we have oppression, with C.S. Lewis calling out do-gooders:
“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

Then we can see Stuart proposes "Good manners" as the glue that holds community together, enforced not by law or regulation but by a traditional shame-honor society, which apparently doesn't work well with multiculturalism where there are no elders respected by all who get to set the standards. So we're left with "free market" manners that leave us all confused and violated by the lowest common denominator, where political correctness tried to raise the bar, only to be shot down as someone else's bad ideas that I resent.

And if we go back to the world of money, we can look at the failed prohibition as an example of "do-gooders" forcing their morality down our throat, while economists solved by that by a hefty tax, so the tax is larger than the costs of production. And we outlaw driving under the influence with high costs to getting caught.

Another ultra-predatory business is "payday loans", where you can pay 400-500% effective annual interest rate, which might be no big deal if its just a one time thing, for people too poor to have a credit card to cover shortfalls, but of course most of the time ends up being rolled over and with new fees added for many months so an original $500 loan might end up costing many thousands of dollars.

So perhaps there is a learning curve and poor people only get tricked once, and after getting exploited once and digging themselves out, they never go back, OR they use more self-discipline, and all is well.

Or even better, perhaps poor people "learn their lesson" and stop paying their promised debt. Oh, wait, that's what political campaigns and failed business leaders do. Poor people are unfortunately too proud to refuse to pay their debts. Or will you go to jail? Probably not, but they'll threaten it.

And that show part of the problem - the bureaucrats might not be there to protect you from the capitalists, but are there to enforce the will of the capitalists.

And that reminds me of a recent speech I read, given by "Progressive" candidate Theodore Roosevelt in 1912. Roosevelt saw the threat of corporations to make law in their image, unless a government by the people was strong enough to resist.
There once was a time in history when the limitation of governmental power meant increasing liberty for the people. In the present day the limitation of governmental power, of governmental action, means the enslavement of the people by the great corporations, who can only be held in check through the extension of governmental power.

And when we recently had billionaire Tom Perkins wishing that elections would be not by "one person, one vote", but "one dollar, one vote".

Will multinational corporations really rule the future? I guess if they do, we'll deserve it for failing to defend our collective sovereignty. After that we can worry more about the do-gooders.

Ignatius Acton Chesterton OCD said...

More denial. The human capacity for evil is legion. It's not limited to a specific sector of our economy. And this just in: government is a competitor for power and resources in our modern society. The collective hand washing that goes on with the demonization of the for-profit sector -- private enterprise -- is nothing short of hilarious, as it is so preposterous. This kind of denial and lunacy are the reason we have hipsters. Hipsters exist because everyone told them they were special. The term "Millenial" makes me nauseous.

Sam L. said...

Well, we know that capitalists will not save us from predatory bureaucrats.