Wednesday, August 31, 2011

the price of proof

It seems, sometimes, that human history has a parallel with English law, which is that any idea that becomes popular is presumed brilliant, and the onus of proving otherwise falls on anyone who disagrees.

A telling example would be Milton Friedman’s insistence that all free markets are not just benign but benevolent:
Government, he believed, cannot exist without compromising the freedom of markets and reducing their benevolence and government must therefore be evil.
Some socialist goody-goodies [e.g. any person more than one micron to the left of Genghis Kahn] only demand government intervention in markets because they want to guarantee equal outcomes, according to Friedman.
That is, not only should every person be ensured a start in every race in life’s Olympics, but they should also be guaranteed an equal-first place prize.
Not only will this not work, said Friedman, it’s counter-productive to try.

His best selling book Free to Choose was a monumental success, in part because it is rare for any book about economics to set out its arguments in such a straightforward and accessible style. The book stresses, more than the clip above does, his assertion that progressives want equal outcomes, not just equal opportunities. Friedman was as careful in his choice of arguments as the best of us. He was also always very adept at deflecting questions by reframing them before he answered.

Although I won’t be around for it, I do anticipate that 100 years from now history students will read of Friedman’s 20th Century influence and power, especially his work for the IMF, and conclude that our generations were gullible and backwards, or that his theories were given a little too much credence to be morally acceptable.

What is less certain, but I think, quite possible, is that time will show the current worldwide popularity of privatisation is another idea best described as “monumentally misguided“.

I believe:
  • The proper purpose of a political /economic system is to provide the best possible result for the greatest number of people.
  • Capitalism and the free market are the most efficient ways available of sharing around scarce resources. 
  • Although capitalism and free markets are efficient, they are far from perfect. [think drug trafficking].
  • Some government interference in the market place is necessary.
  • Some government interference just makes things worse.
  • Sometimes governments should just mind their own bloody business.
This is probably what most people believe. Where we might disagree is in how to achieve our goals, or where to draw a line between government and government-free policies. 
Two of the very important assumptions [amongst many] on which much economic theory rests:
  • Everyone who buys or sells makes rational decisions ; and
  • Everyone who buys or sells has perfect information.
My gut reaction to the first of these is ROFLMAO, but the ‘perfect information’ assumption can provide a clue to when it is appropriate for a government to interfere. 

When Adam Smith first wrote The Wealth of Nations - the bible by which Milton Freidman swore - he was writing at the beginning of the industrial revolution. In the 1770s, even Smith didn’t have perfect information about how the industrial revolution was panning out, but he quite reasonably believed if someone went to the market and bought a cheese which was no good, then it served him right. Let the buyer beware.
But when it comes to a modern car, or computer, or even a house, 250 years after Smith’s era it would be silly to expect everyone to have perfect information. Consumer protection helps to level the playing field a little, bridging the gap between the original theory of free markets, and today's reality.

To be fair to Friedman, he wasn’t totally indifferent to social inequalities; it’s likely he really believed his own theory that the more we leave the market alone, the better off everyone will be.

Traditionally, we place conservatives on the right of the political spectrum. Traditionally, conservatives don’t like to meddle in economics or human affairs, believing that when the time is right change will come and there is no need to force matters. The smaller the government’s power and influence the better.

In some countries more than in others, the right is also synonymous with religious conservatism. If I were to hazard some guesses about why, some of the following ideas might rate a mention:
  • Freedom of religion means governments should not be deciding what is right or wrong, for that is the Lord's job;
  • Fundamentalists resent paying taxes to a government full of godless people;
  • Fundamentalists resent subsidising godless lifestyles [e.g. supporting single mums and therefore encouraging careless promiscuity];
  • Communism means even more government than capitalism does - tsk tsk tsk;
  • The Russian model of Communism, as practised in the 20th Century, was not just godless but brutal - it also left people without basic, day to day goods and services;
  • The good thing about waiting for change rather than wanting to push for it is that there's no need to question anything, or allow shades of grey to complicate matters. Claims like those of the Tea Party leaders, that God himself abhors big government, shift the burden of proof to those with more liberal inclinations;* 
  • Socialism is a Jewish [i.e. Anti-Christian] doctrine **

* to oversimplify: Christians from a range of different 'churches' can agree that God [i.e. Christ] exists and might also agree government should be small. On the other hand, people who tend to the left tend to disagree about everything amongst themselves, e.g. is this problem caused by class exploitation, racism, or sexism? They might agree in general terms on goals but different priorities or isms prevent them from speaking with a united voice against the very values and attitudes they all want to change.

**please don't shoot this messenger!

next time: rednecks


  1. Hi Fruitcake,

    I suspect you have some training in economics or at the least a very healthy interest and some extensive reading. Your position on the Liberal Conservative scale is harder pick but I was amused by this from your "I believe" list

    Although capitalism and free markets are efficient, they are far from perfect. [think drug trafficking].

    The drug trafficking reference is either a moral assurtion that drugs are bad and that the market provision of them is somehow wrong or ironically this is an example of political interferance in a market providing an imperfect market.

    This one too was of interest,
    Some government interference in the market place is necessary.

    Hopefully you mean the market itself needs regulated, for example banning short selling on the sharemarket, rather than specific interfernce such as the Reserve Bank buying and selling currency to influence currency markets.

    The former is ok because it provides a level playing field for all market participants. The second style always seems to have unintended consequences as the market adapts.

    Bridging the gap of perfect knowledge with consumer protection is a fine idea but in practice has proven difficult to succesfully impliment in some instances. House building is a big challenge. What it has succeeded in doing is driving up costs, a potential misallocation of resources.

    And as for the unholy alliance of conservatives and church that is worthy of more column inches as it is an interesting phenomenon.

    Once again a great thought provoking blog.


  2. Hi Big Dog,
    Part 1, yes but I'm a dropout. [It's the mental health thing]. On the other hand, I'd like to think the healthy interest was the motivator all along and that rather than just memorise stuff to get a piece of paper I actually gained something from the bit I did work through. Since then I'm largely self taught [think Hitler]. As a friend used to say "you gotta find history fascinating... it's so stupid!".
    Part 2, in coming posts I hope to work from R to L. Somewhere to the right of middle. Guess I'm either a lateral thinker or all over the shop depending on sub topic, or even your own point of view.
    Part 3, the 'far from perfect' comment [not too clear in my post] is intended to challenge the 'isn't it marvellous, everything about the invisible hand makes life rosy' attitude Smith had. I think he WANTED the system to be inherently moral so that's what he saw. Then Friedman came along and took up the same position, with 'equal outcomes are impossible' as his loophole to excuse NOT working for equal opportunities which are not always impossible.
    Part 3B, if a free market was inherently moral we wouldn't have drug trafficking, arms smuggling, child prostitution etc. If I have to choose between a moral outcome or an accounting profit I'll opt for the moral outcome even if this requires government interference in an otherwise free market.
    Part 4. Yes, the 'perfect information' assumption is part of Smith's model, so if we can move as close to this as possible [e.g. government interference with consumer legislation or stock market controls] and level the playing field then we can get closer to Smith's pie in the sky ideal than would otherwise be the case. [For most people I suspect insurance policies are the epitome of imperfect information in action. After recent natural disasters the market is already responding!] Currency manipulation is a move AWAY from Smith's ideal [but as you point out, ironically it's another example of 'free market' open slather rules providing an outcome that is NOT what Smith believed God had designed into his system.
    Part 5. AHA!, housing and other attempts to close the gap between Smith's model and today's reality! TOO MANY PARAMETERS TO JUGGLE AT ONCE. [More, later, on shortcomings of the legal system].
    Part 6. OMG, religion. What an exciting topic.
    Part 7. After a lifetime of hoping, the drugs are helping and my mind is working. Thank you for your ongoing and [real] exchanges of ideas, always thought provoking themselves and the sort of conversation which is ordinarily hard to find.