I have a different take on this article than most. I'm a proponent of Classical economics, and I reject all modern schools of economics--neoclassical, Austrian, Keynesian, etc.
Classical thinkers like Adam Smith expounded how rational self-interest and competition together lead to economic prosperity. There's a balancing act going on between self-interest and competition--competition is the economic faculty that restrains self-interest.
Only in perfect competition do we get Pareto efficiency--the state in which it is impossible to make any one individual better off without making at least one individual worse off.
Unfortunately, modern schools of economics have diminished the role of competition. Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil. The result has been a state of affairs wherein the vast majority of people are getting worse off.
WRT government intervention in the markets, Adam Smith would not oppose intervention that fosters competition and stifles monopoly. The goal of the 1890 Sherman Anti-Trust Act was to foster competition, not to diminish "economic freedom."
"Economic freedom" is a mostly meaningless buzzword that's thrown around by both libertarians and socialists. Indices of "economic freedom" as compiled by the Heritage Foundation and the Wall Street Journal serve no other purpose than propaganda.
It's impossible to divorce politics from economics in the real world. Adam Smith understood this. The subject used to be called "politico-economics."
Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power. Until people start to wake up and realize all monopoly power is evil and what we need instead is more competition, things will continue to decline.
Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil.
At least in the case of government, you may feel that it is evil, but it is necessary [0]. So the more pragmatic and productive approach would be to think about how this monopoly power could be used to further prosperity and equity of the people.
Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power.
I think both those characterizations are a bit simplistic. Look at the discussion surrounding surveillance, secret courts and the police state, for example.
[0] This is true even within the economy: having a common measure of value is important for doing business, so you need currencies to have large scopes. Whoever ultimately controls a currency necessarily has a lot of monopoly power. So the question is not whether such powers exist, but how they should be structured subject to goals that we need to set for ourselves as a society.
I was speaking specifically of monopoly power, i.e., the power to raise or lower prices in the market. And no, neither government nor private firms should have this power. Monopoly power is an example of market failure. In a competitive market, all participants are price takers, i.e., passive agents incapable of changing the market price. In perfect competition, in every transaction, at least one party is better off, and nobody is worse off. That all changes when somebody gets the power to set prices; then transactions leave some people worse off.
There are kinds of power besides monopoly power, such as coercive power. WRT coercive power, that's best monopolized by a democratic government accountable to its people. And government can and should use it's monopoly on coercive power to promote competitive markets. Instead, its been empowering monopolies.
But people today aren't well informed enough to make demands on government to promote competition or hold politicians accountable. They're given bogus ideologies (neoclassicism, Keynesianism, etc.). And they're given the false choice between Left and Right.
The terms "Left" and "Right" are not merely overly simplistic. They're total falsehoods, fabricated by self-interested parties to delude people into thinking they either need to give government more monopoly power or else give private firms more monopoly power. There is a third choice that's left unmentioned: Government can promote competition.
I appreciate your engagement in this discussion. I think the notion of a competitive market as you define it [0] is inherently flawed. To quote:
> all participants are price takers, i.e., passive agents incapable of changing the market price
That makes no sense. If all participants cannot influence the price, then where does the price come from?
Logically speaking, once you abstract away from all sorts of fluff, everything that happens in a market is ultimately the result of the action of one or more of its participants. That is, if participants were unable to change the market price, then why would the market price ever change? Why would there be a price in the first place? The fact is that participants are necessarily able to change the market price, whether you want that or not. The only question is how this power is distributed and what the consequences are.
Having competitive markets in the sense of low barriers to entry etc. is clearly a good thing. But in the sense you've defined them, they are either useless or self-contradictory.
Interestingly, for every market, somebody has the (or at least some) power to set prices. Despite of what you write, most transactions are mutually beneficial anyway. Why is that?
I believe this is actually because the vast majority of markets aren't efficient in the efficient market hypothesis sense, and transactions aren't happening at the margin. For obvious transaction overhead and opportunity cost reasons, most transactions are only ever realized if they increase the total welfare not just by some epsilon, but by a significant percentage.
The really interesting question is how this large benefit is distributed between the transacting parties, and I would wager that the power to set prices does actually have a big influence there. That is, whoever actually gets to set the sticker price (for example) is bound to capture a larger fraction of the benefits than the other party, even if the transaction is overall still beneficial to both.
For this reason, I think the problem isn't even so much that transactions leave people worse off. That only happens comparatively rarely. The much more significant problem is when unequal power relations are exploited to give somebody a benefit that is deemed to be unjustified. [1]
The prototypical example would be the millionaire in the desert who is near death by thirst. If she signs over her entire wealth in exchange for a bottle of water and a ride out of the desert, then clearly, this is a transaction that is beneficial to both parties. Yet only the most psychopathic internet-libertarians would ever think that such a transaction was okay in any sense. The problem was not a lack of mutual benefit, but an exploitation of unequal power relations.
[0] And I suppose others define it in the same way, perhaps even a large group of economists.
[1] By the way, this is the root of the classical criticism of capitalism: that the surplus value of labor is siphoned off by capitalists, leaving workers with only a small amount. Even though employment contracts are typically mutually beneficial in the narrow, technical sense, there is the fact that the employer often exploits the reality of unequal power relationships.
> That makes no sense. If all participants cannot influence the price, then where does the price come from?
You are assuming that the dynamics of an economic system is nothing but a summation of the individual dynamics. This assumption excludes the possibility of the emergence of complex structures from simple individual behaviors.
I strongly suggest you take a look at the subjects of Complex Systems[1] theory, Nonlinear dynamics[2], Catastrophe theory[3], and Chaos theory[4]---all consistent, mathematically well grounded theories which allow for the emergence[5] of aggregate behavior that cannot be explained simply in terms of individual behaviors. There is also the emerging field of Complex economics[6]. Donald Saari wrote an introductory paper called the Mathematical Complexity of Simple Economics[7].
What you write is not an argument against what I wrote, and you make incorrect assumptions about what I'm assuming.
You yourself talk about the possibility of the emergence of complex structures from simple individual behaviors.
In other words, you acknowledge that it is the individual behaviors that are necessary for the complex structures to exist. There may not be a simple linear relationship between the individual action and the ultimate outcome, but that doesn't change the fact that individual actions have an influence on the market price.
It also doesn't change the fact that without individual actions, a market price would never change (and would never exist in the first place), and that therefore, individuals have some power over the market price.
That does not mean that an individual can just dictate what the price should be without any constraints, but it does mean that your definition of a competitive market is a meaningless phantasy that cannot possibly exist.
The whole field of optimal control theory is about how to control complex structures that emerge from individual controls.
Edit to add: By the way, outside of the theoretical argument, I think it's a good idea to take a brief look at what kind of markets exist empirically. In all markets that actually exist, it is obvious that there are actors who are capable of changing the market price.
This holds for exchanges, where actors change the price by buying or selling. It also holds for more everyday markets where it's typically the seller who puts up a sticker price. For example, the people running a supermarket set the price for the items in the supermarket.
One last thought: My argument is basically that for every market, there is some function f whose outputs are the prices in the market, and that the only inputs of this function is the history of actions of market participants (the shape of the function depends on the structure of the market).
My argument then continues to say that since the market price is a function of only the actions of the market participants, there must be at least one market participant whose actions influence the price, otherwise the price could never change. This is a simple mathematical statement.
Your attempted counter-argument is that the function f could be very complicated, which is completely irrelevant to my argument.
> you acknowledge that it is the individual behaviors that are necessary for the complex structures to exist.
Monopoly pricing and price fixing are not any of the individual behaviors necessary to get a market price, and that's all I was arguing.
In the absence of monopolies and cartels, market prices will emerge from individual behaviors, without any one individual having the power to set the price.
> a competitive market is a meaningless phantasy that cannot possibly exist.
If competitive markets don't exist empirically, that's not a flaw in the theory of Classical economics, it is merely a symptom of corrupt culture and politics. It means we don't really have a free-market system---
What we have today is more akin to Mercantilism. And with income inequality increasing at an accelerating rate, our society will soon devolve back into Feudalism.
> Your attempted counter-argument...
My argument isn't with you. My argument is strictly anti-monopoly and pro-competition.
Although I agree to classical economics as the ideal, I'd argue that there are some moral arguments to limited government ownership and even monopoly in certain areas. That is, to guarantee a certain level of service, to handle natural monopolies, and to ensure that profits from large natural resources are distributed to the people rather than the few who has the capital, the luck and the political influence to acquire the mines/oil fields/etc.
Me->Mukkai S. Krishnamoorthy->Joseph E. Flaherty->David C. Arney->Paul Erdős
For a time, it appeared to be 2, but Paul Erdős and the Erdős-1 mathematician with whom I collaborated ultimately withdrew their paper, because they found their results were similar to a previously published paper.
I've also appeared on a local Philadelphia PA TV show with newscasters who interviewed Kevin Bacon. Not sure if this gives me a finite Bacon Number, since it was TV (not a movie) and it was non-fiction. If so, then I have the finite Erdős–Bacon Number of 6.
If you sent a Wuphf (pronounced "woof") to someone, the message went to the recipients' home phone, cell phone, email, fax, pager, Facebook, twitter, and AIM.
On the one hand, WUPH.com was a satire of Silicon Valley in a comedy sketch on an episode of "The Office" called "The Whistleblower" that aired in May 2010. So HootSuite, IFTTT, &c, &c, are all great examples of life imitating art (anti-mimesis).
On the other hand, the WUPH.com beta site mentioned above actually worked, at least for a while, until NBC shut it down. There are a couple of write-ups about this on Forbes:
Gary Gygax was a Christian. In February 1969, he wrote an article in IFW Monthly explicitly stating he was a Christian and making an argument why Christians shouldn't celebrate Christmas; he justified his argument with Biblical sources. See http://boingboing.net/2012/12/24/gary-gygax-explains-why-chr...
Original D&D included Christian symbolism: Clerics used holy water and a cross. Gygax's 1975's D&D Supplement I: GREYHAWK (page 34) states:
"All Vampires are affected by the cross, despite any former religious background, as it is sovereign against them."
Furthermore, the demons and devils in early D&D were presented as adversaries, not as role models.
I started playing D&D in the early 80s. I went to Catholic grammar school. We were taught by priests and nuns. We played D&D in the schoolyard. Nobody discouraged us from playing.
I was also bullied quite a bit in grammar school and high school, and I think I would have gone nuts if I didn't have D&D as an outlet. D&D also got me interested in reading books and studying probability. D&D helped improve my grades from Cs and Ds to straight As. I eventually got a B.S. in math with a 4.0 GPA.
As a grown up, I played in a group DM'd by a fundamentalist Christian, who didn't see any conflict between his religious beliefs and fantasy role playing games.
Apparently, Harvard's copy of Practicarum quaestionum circa leges regias is actually bound in sheep skin, not human flesh, at least according to this article: "Harvard Law School's 'Human Skin' Book Isn't Really Made of People" published on 03-Apr-2014 at http://gawker.com/harvard-law-schools-human-skin-book-isnt-r...
The article doesn't address the question: Why has the GDP share of the FIRE sector recently grown so much so fast?
If its growth were the result of increasing authentic demand for financial services, or increasing efficiency in the supply of financial services, then that would be OK. However, I see three main bad reasons for the recent explosive growth in the FIRE sector:
1. Their cost of borrowing is artificially low. They don't need depositors anymore. They can borrow limitless funds from the Federal Reserve now at 0.25%. Their real borrowing rate is actually negative if we're honest about inflation, rather than relying on fabricated government numbers that leave out housing, healthcare, food, fuel and education.
2. The Fed is creating artificial demand for financial products. After the 2008-9 crisis, the Fed has created $3T out of thin air and used half of it to buy mortgage backed securities.
3. Over the last 30 years, the federal government has shown its willingness to bailout failed financial institutions that took on too much risk-- We saw it with the S&L crisis of the 1980s and 1990s; we saw it with the 1998 bailout of LTCM; and we saw it again with the $700B TARP in 2008.
If we would simply allow the free market (rather than The Fed and federal government) to determine interest rates, and the demand for securities, and the appropriate level of risk appetite, then we'd see the FIRE sector shrink back to its historically low share of GDP. Page 37 of this paper by Thomas Philippon charts the growth of the US Financial Industry as a share of GDP from 1860 to 2007: http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf
It's debatable how much of this we can honestly attribute to the military--
Leó Szilárd and Enrico Fermi patented the idea of a nuclear reactor in 1933. The military didn't invent it.
Christian Hülsmeyer was a German inventor and entrepreneur. He was the first to use radio waves to detect "the presence of distant metallic objects"; he got a patent for his "Telemobiloscope" in 1904. The military didn't invent it.
The first patent for using a gas turbine to power an aircraft was filed in 1921 by Frenchman Maxime Guillaume. This predates the RAF's patent by 11 years.
Richard Drew invented Scotch tape and masking tape in the 1920s. In 1927, J&J invented cloth tape for medical uses. So far no military involvement. Then in 1943, Vesta Stoudt, an ordnance factory worker, thought to add waterproof plastic to J&J's cloth tape, making the first duct tape, and that's the extent of the military involvement. Duct tape was later improved in 1960 by an HVAC engineer by making it flame resistant. Seems that the military role in developing duct tape was rather minimal, and would have been made eventually by the free market.
There are serious issues trying to pin down who invented the first gunpowder rockets and for what purpose. Seems likely gunpowder was invented by Taoist alchemists seeking an elixir for immortality, and that the very first application of gunpowder rockets was fireworks for entertainment.
Without funding these projects would not have happened, and the inventions would have died. Or at the very least would only have happened much, much slower.
An example of this is that however one designs a working fusion reactior, one thing you can be near sure of : the design is in the US patent database (and publicly accessible). Yes, really. Of course, most of them are not getting built (the US is the only country that's even considering anything but a tokamak approach at all).
Would humanity never ever have invented these technologies without war ? Probably we'd have found them eventually. Would we have them today ? No way in hell.
> Would humanity never ever have invented these technologies without war ?
Not all economic growth is good growth. There's bad growth too. Like anything else, war has costs:
(1) Price tag. For example, "The U.S. wars in Afghanistan and Iraq will cost taxpayers $4 trillion to $6 trillion, taking into account the medical care of wounded veterans and expensive repairs to a force depleted by more than a decade of fighting," quoted from The Washington Post (March 28, 2013): http://www.washingtonpost.com/world/national-security/study-...
(2) Harms/damages. For example, in the Afghan and Iraq wars, we have 6,600 dead Americans. Of the 1.6M veterans of these wars, 670,000 have been awarded disability, and another 100,000 are pending. Source: McClatchy DC (March 14, 2013): http://www.mcclatchydc.com/2013/03/14/185880/millions-went-t...
Harms inflicted on US troops include: amputations, traumatic brain injuries, mental illness, suicide, rape, sexual assault, and sexual harassment.
Harms inflicted on Iraq include: 150,000 to 400,000 dead, 600,000 orphans living in the streets, 1.3 million internally displaced, 1 million displaced to Syria, 100,000 imprisoned and tortured with no due process, 25% without clean water, 30% unemployment, etc., etc.
(3) Opportunity costs: I think President Dwight D. Eisenhower said it best in 1953--
"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone.
"It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.
"The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.
"It is two electric power plants, each serving a town of 60,000 population.
"It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway.
"We pay for a single fighter plane with a half million bushels of wheat.
"We pay for a single destroyer with new homes that could have housed more than 8,000 people.
"This, I repeat, is the best way of life to be found on the road the world has been taking.
"This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron."
Smoke and mirrors aside, the taxpayers have actually taken a huge loss on these bailouts. The official figures say: $608.9B out; $621.4B in. Looks like a $12.5B profit. But looks can be deceiving. First, it neglects the fact that we had to borrow that $608.9B and pay it back with interest. Second, and more importantly, it ignores inflation-- If we computed inflation the way we used to, before Greenspan took the helm of the Fed, we've been running 8-9% inflation per year recently. So the money we taxpayers got paid back isn't worth as much as the money we paid out. This devaluation of currency is especially evident when you consider that Ben Bernake printed up $3T out of thin air, and used half of it to buy up worthless mortgage backed securities.
But there's an even bigger issue at stake: While the US pays a lot of lip service to capitalism, this is not the way capitalism is supposed to work. AIG, Goldman Sachs, Fannie/Freddie,... they should have all been allowed to go out of business in a real capitalist economy. And that $608.9B should have been put to more productive purposes.
"Many people criticized the Fed for its response to the Great Depression. How is the Fed's response to the current crisis different?"
"The key difference between the 1930s and today is how the Fed has reacted to the crisis. In the ‘30s, the Fed more or less let the banking system collapse, allowed the money supply to collapse and allowed the price level to fall."
I'd hardly call the Fed's response to the current crisis a success-- The U6 unemployment rate for the US is currently 12.6%; when we add back housing, healthcare, food, fuel, and education into the inflation statistics, its been running at 8-9%; and the Income Gini coefficient in the US is about 0.477. Meanwhile, the TBTF banks are even bigger, and the Fed's own balance sheet is a disaster waiting to happen.
Yes - you're right, it isn't a pretty picture. That being said, can you imagine the outcome of letting major institutions fail? It is likely things would be much worse. Otherwise healthy institutions may have been brought down in the process.
Letting the banks fail doesn't entail doing nothing and letting people suffer. Hank Paulson's bank bailout proposal got rammed through Congress by the Bush Administration without much consideration of any alternatives. Paulson's plan helped banks and bankers at the expense of everybody else. There were lots of other proposals that got ignored by the press. Here's three different approaches. While I personally favor the third approach, I think its very important to dispel the idea that we didn't have any choice but to bailout the banks, so I want to illustrate a variety of approaches:
(1) Steve Keen suggested a debt Jubilee: "monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public--but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency" quoted from http://www.debtdeflation.com/blogs/2012/07/22/the-crisis-in-...
(2) Mortgage assistance: put a moratorium on foreclosures; freeze rate hikes in adjustable rate mortgages; help homeowners refinance their mortgages; or replace home borrowing with renting.
(3) Ron Paul proposed we abolish the Fed. While the Fed's profits belong to the federal government, the Fed itself is owned by the nationally chartered banks. Therefore, it's power to create money is used to benefit the banks, not the government or "we the people." Take that power away from the banks and put it back in the federal government, where the US Constitution says it belongs. This has many immediate advantages. Here three: (i) The federal government can tear-up the $1.6T of debt on the books of the Fed. (ii) The federal government no longer needs to borrow money. (iii) Eliminate the asset bubbles created by the Fed's artificially low interest rates and quantitative easing. See http://theeconomiccollapseblog.com/archives/14-reasons-why-w...
This recently posted YouTube video by UNSW Professor Norman J. Wildberger discusses the discovery of the quaternions by Hamilton and the subsequent discovery of the octonians. It's 59 minutes, 30 seconds long, and it was published on March 5, 2014:
In the second half of the Keiser Report: New Crypto Phenomenon Ethereum (E569) (published Mar 1, 2014), Max interviews Charles Hoskinson, a cryptographer and one of the people behind Ethereum: http://www.youtube.com/watch?v=hdAnyC45ZbU&t=724 [video]
Classical thinkers like Adam Smith expounded how rational self-interest and competition together lead to economic prosperity. There's a balancing act going on between self-interest and competition--competition is the economic faculty that restrains self-interest.
Only in perfect competition do we get Pareto efficiency--the state in which it is impossible to make any one individual better off without making at least one individual worse off.
Unfortunately, modern schools of economics have diminished the role of competition. Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil. The result has been a state of affairs wherein the vast majority of people are getting worse off.
WRT government intervention in the markets, Adam Smith would not oppose intervention that fosters competition and stifles monopoly. The goal of the 1890 Sherman Anti-Trust Act was to foster competition, not to diminish "economic freedom."
"Economic freedom" is a mostly meaningless buzzword that's thrown around by both libertarians and socialists. Indices of "economic freedom" as compiled by the Heritage Foundation and the Wall Street Journal serve no other purpose than propaganda.
It's impossible to divorce politics from economics in the real world. Adam Smith understood this. The subject used to be called "politico-economics."
Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power. Until people start to wake up and realize all monopoly power is evil and what we need instead is more competition, things will continue to decline.