Feed on

A colleage of mine was flamed by a friend after he criticized the following “news article” for reading more like an editorial. I think the following exchange is illuminating. And you would be correct to assume that I have yet to receive any response whatsoever from Mr. A.

—–Original Message—–

From: Mr. A [mailto:Mr.A@berkshirecompany.com]

Sent: Wednesday, March 05, 2008 10:43 AM

To: Barry James; Jack Sethman; Michael J. Rizzo

Subject: Markets

I am beginning to think that electro-shock may be in order for you. You seem to prefer markets to human beings and businesses to consumers. Markets are artificial economic constructs within an economic system. Blindly defending them as living entities that are completely self regulating and self administering is simply naive. As human constructs, markets and economies are as flawed as humans are. They need to be monitored, regulated and adjusted. What they do naturally is not

automatically right or correct. Do not make these false idols your God!! It is the free market economy that is currently leading us down the road to economic ruin. It’s time to take markets off autopilot and to remember that

markets exist for consumers not to rule them!! Jack, I think we may need to do an intervention with JB. After a little

ecletro-shock at Riggs, he needs to go to Wharton for 6 months to learn proper economic principles and then maybe an intensive program somewhere else on the nature and importance of humanity!

Your friend, Mr. A

My response (edited slightly) follows (credit to Liberty Fund summary of Public Choice for guideline of discussion):

Markets are artificial constructs? Do you know what economists mean when they refer to “a market”? It is simply shorthand for the millions of decentralized (and voluntary) actions of individuals (yes, human beings and consumers). You are burning a seriously large corporatist straw man with your argument.

And before I paste in a reasonable explanation of what a market actually us (I will bet a large amount of money you will not read it), have you ever considered the fact, yes fact, that the monitors, regulators and adjusters you seem to place blind faith in, these people acting in the political marketplace, might have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest, just as much as the vile corporations you seem to despise (don’t individuals run and own those too?). Is there no such thing as government failure? Just because you identify some problem does not mean that the optimal arrangement is for government to step in.

Just one of thousands of examples — Congress has frequently passed laws that are supposed to protect people against environmental pollution. But Robert Crandall has shown that congressional representatives from northern industrial states used the 1977 Clean Air Act amendments to reduce competition by curbing economic growth in the Sunbelt.

Although the regulators you seem to have such high regard for are expected to pursue the “public interest” they are making decisions on how to use other people’s resources, not their own. And these resources must come from taxpayers and those dealing with the regulation whether they like it or not. Couple this with the fact that citizens have poor incentives to monitor the behavior of our political oligarchs as well, and regulators and legislators often act in ways that are extremely costly to the citizenry.

And while a truly just collective decision is an impossibility (it requires unanimity), the conventional wisdom that majority decisions are inherently fair has been shattered time and time again in all sorts of literatures.

How about figuring out ways to expand competition in the areas you are dissatisfied with? Well, that takes effort and it is costly. But it is costless to you to spout out things like “we need to regulate.” Who gives a hoot about the hair stylist who can not find work because she is not licensed?  

And you never care to compare market outcomes with the correct counterfactual. You commit a grave nirvana fallacy my friend. To compare any outcome to some ideal is ridiculous, the proper comparison is to the next best alternative – and as I allude to above, and as the course of human history has shown, voluntary arrangements have promoted the cause of liberty, health, happiness and prosperity far better than any collective or other coercive arrangement.

And I would like for you to substantiate your claim that free markets are leading us to ruin. I’ll wager even more money that you cannot. Would you rather be middle class in 1978 or in 2008? Would you rather be poor today in the US, or rich in the US in 1890? What share of the population earns the minimum wage today? Are cars safer today? Are homes larger today? Is food less expensive today? Do we have more choices today? Do we live longer today? Would you really prefer to have a midwestern manufacturing job instead of some dreaded white collar job today? Would you prefer to grow all your own food? And so on. And your beloved government has not produced one iota of this progress itself.

Sadly, you will just dismiss this as right-wing ideologic ranting, which serves only to demonstrate how much kool-aid you really have consumed.


Your new right wing, corporation loving, consumer screwing lackey, Mike


ON FREE MARKETS (from Murray Rothbard)

Markets are artificial economic constructs within an economic system.

Blindly defending them as living entities that are completely self regulating and self administering is simply naive. As human constructs, markets and economies are as flawed as humans are. They need to be monitored, regulated and adjusted. What they do naturally is not automatically right or correct. Do not make these false idols your God!!

It is the free market economy that is currently leading us down the road to economic ruin. It’s time to take markets off autopilot and to remember that markets exist for consumers not to rule them!!

Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a newsdealer for fifty cents, the newsdealer and I exchange two commodities: I give up fifty cents, and the newsdealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.

This simple reasoning refutes the argument against free trade typical of the “mercantilist” period of sixteenth-to eighteenth-century Europe, and classically expounded by the famed sixteenth-century French essayist Montaigne. The mercantilists argued that in any trade, one party can benefit only at the expense of the other, that in every transaction there is a winner and a loser, an “exploiter” and an “exploited.” We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a “positive-sum” rather than a “zero-sum” or “negative-sum” game.

How can both parties benefit from an exchange? Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the newsdealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant values each good in question, and each participant’s bargaining skills. How many cents will exchange for one newspaper, or how many Mickey Mantle baseball cards will swap for a Babe Ruth, depends on all the participants in the newspaper market or the baseball card market-on how much each one values the cards as compared to the other goods he could buy. These terms of exchange, called “prices” (of newspapers in terms of money, or of Babe Ruth cards in terms of Mickey Mantles), are ultimately determined by how many newspapers, or baseball cards, are available on the market in relation to how favorably buyers evaluate these goods. In shorthand, by the interaction of their supply with the demand for them.

Given the supply of a good, an increase in its value in the minds of the buyers will raise the demand for the good, more money will be bid for it, and its price will rise. The reverse occurs if the value, and therefore the demand, for the good falls. On the other hand, given the buyers’ evaluation, or demand, for a good, if the supply increases, each unit of supply-each baseball card or loaf of bread-will fall in value, and therefore, the price of the good will fall. The reverse occurs if the supply of the good decreases.

The market, then, is not simply an array, but a highly complex, interacting latticework of exchanges. In primitive societies, exchanges are all barter or direct exchange. Two people trade two directly useful goods, such as horses for cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-step process of mutual benefit creates a situation in which one or two broadly useful and valuable commodities are chosen on the market as a medium of indirect exchange. This money-commodity, generally but not always gold or silver, is then demanded not only for its own sake, but even more to facilitate a reexchange for another desired commodity. It is much easier to pay steelworkers not in steel bars, but in money, with which the workers can then buy whatever they desire. They are willing to accept money because they know from experience and insight that everyone else in the society will also accept that money in payment.

The modern, almost infinite latticework of exchanges, the market, is made possible by the use of money. Each person engages in specialization, or a division of labor, producing what he or she is best at. Production begins with natural resources, and then various forms of machines and capital goods, until finally, goods are sold to the consumer. At each stage of production from natural resource to consumer good, money is voluntarily exchanged for capital goods, labor services, and land resources. At each step of the way, terms of exchanges, or prices, are determined by the voluntary interactions of suppliers and demanders. This market is “free” because choices, at each step, are made freely and voluntarily.

The free market and the free price system make goods from around the world available to consumers. The free market also gives the largest possible scope to entrepreneurs, who risk capital to allocate resources so as to satisfy the future desires of the mass of consumers as efficiently as possible. Saving and investment can then develop capital goods and increase the productivity and wages of workers, thereby increasing their standard of living. The free competitive market also rewards and stimulates technological innovation that allows the innovator to get a head start in satisfying consumer wants in new and creative ways.

Not only is investment encouraged, but perhaps more important, the price system, and the profit-and-loss incentives of the market, guide capital investment and production into the proper paths. The intricate latticework can mesh and “clear” all markets so that there are no sudden, unforeseen, and inexplicable shortages and surpluses anywhere in the production system.

But exchanges are not necessarily free. Many are coerced. If a robber threatens you with “Your money or your life,” your payment to him is coerced and not voluntary, and he benefits at your expense. It is robbery, not free markets, that actually follows the mercantilist model: the robber benefits at the expense of the coerced. Exploitation occurs not in the free market, but where the coercer exploits his victim. In the long run, coercion is a negative-sum game that leads to reduced production, saving, and investment, a depleted stock of capital, and reduced productivity and living standards for all, perhaps even for the coercers themselves.

Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and the heavier the burden of taxation on production, the more likely it is that economic growth will falter and decline. Other forms of government coercion (e.g., price controls or restrictions that prevent new competitors from entering a market) hamper and cripple market exchanges, while others (prohibitions on deceptive practices, enforcement of contracts) can facilitate voluntary exchanges.

The ultimate in government coercion is socialism. Under socialist central planning the socialist planning board lacks a price system for land or capital goods. As even socialists like Robert Heilbroner now admit (see Socialism), the socialist planning board therefore has no way to calculate prices or costs or to invest capital so that the latticework of production meshes and clears. The current Soviet experience, where a bumper wheat harvest somehow cannot find its way to retail stores, is an instructive example of the impossibility of operating a complex, modern economy in the absence of a free market. There was neither incentive nor means of calculating prices and costs for hopper cars to get to the wheat, for the flour mills to receive and process it, and so on down through the large number of stages needed to reach the ultimate consumer in Moscow or Sverdlovsk. The investment in wheat is almost totally wasted.

Market socialism is, in fact, a contradiction in terms. The fashionable discussion of market socialism often overlooks one crucial aspect of the market. When two goods are indeed exchanged, what is really exchanged is the property titles in those goods. When I buy a newspaper for fifty cents, the seller and I are exchanging property titles: I yield the ownership of the fifty cents and grant it to the newsdealer, and he yields the ownership of the newspaper to me. The exact same process occurs as in buying a house, except that in the case of the newspaper, matters are much more informal, and we can all avoid the intricate process of deeds, notarized contracts, agents, attorneys, mortgage brokers, and so on. But the economic nature of the two transactions remains the same.

This means that the key to the existence and flourishing of the free market is a society in which the rights and titles of private property are respected, defended, and kept secure. The key to socialism, on the other hand, is government ownership of the means of production, land, and capital goods. Thus, there can be no market in land or capital goods worthy of the name.

Some critics of the free-market argue that property rights are in conflict with “human” rights. But the critics fail to realize that in a free-market system, every person has a property right over his own person and his own labor, and that he can make free contracts for those services. Slavery violates the basic property right of the slave over his own body and person, a right that is the groundwork for any person’s property rights over nonhuman material objects. What’s more, all rights are human rights, whether it is everyone’s right to free speech or one individual’s property rights in his own home.

A common charge against the free-market society is that it institutes “the law of the jungle,” of “dog eat dog,” that it spurns human cooperation for competition, and that it exalts material success as opposed to spiritual values, philosophy, or leisure activities. On the contrary, the jungle is precisely a society of coercion, theft, and parasitism, a society that demolishes lives and living standards. The peaceful market competition of producers and suppliers is a profoundly cooperative process in which everyone benefits, and where everyone’s living standard flourishes (compared to what it would be in an unfree society). And the undoubted material success of free societies provides the general affluence that permits us to enjoy an enormous amount of leisure as compared to other societies, and to pursue matters of the spirit. It is the coercive countries with little or no market activity, notably under communism, where the grind of daily existence not only impoverishes people materially, but deadens their spirit

Michael Rizzo

—–Original Message—–

From: Barry James

Sent: Wednesday, March 05, 2008 12:51 PM

To: Mr. A.’; Jack Sethman

Cc: Michael Rizzo

Subject: RE: Markets

OK I’ll blow my lunch hour…

The main point is that her “article” from a journalistic perspective, was garbage. Most people I know, regardless of politics, realize the Eagle, except for the Saturday coupons, is a worthless rag, but that one was just over the top. Imagine the reaction if someone had written an article on price inflation and pointed out (factually) that the government has been thieving from all of us for decades.

She is undoubtedly a simplistic lefty who insists that most people are too stupid to make rational decisions on their own behalf, and that a ruling elite, who know more than the ignorant downtrodden, must exist to protect them from their own stupidity. Liberalism is a misnomer, it is anything but. Authoritarianism is a more fitting label. It is we who defend human freedom and property rights who are the true, classical liberals.

To assume that government can outlaw fees (or otherwise interfere with free exchange) without negative consequences is just ignorant. Those on the left never consider that individuals in fact respond intelligently in their own interest. People, be they business owners, consumers, taxpayers, etc. will REACT to change. When ATM fees have been banned, banks removed them. Tax income, we don’t work as hard (my wife is not working bec/ it will push us into a higher bracket, maybe even into the AMT). Tax capital, we take fewer chances (less innovation), mandating higher CAFÉ standards makes it cheaper to drive, so we drive more (so no fuel savings–duh!), set a minimum wage, we hire more semi-skilled labor and fewer unskilled workers thus removing the bottom rungs from the ladder, set rent controls = less housing (more homelessness)(and more dilapidated housing), price controls on gasoline = gas lines at the pump (pure genius Jimmy!). Regulate auto insurance rates, insurers leave the market (even the people’s republic of Massachusetts is beginning to realize that one). Ban goods produced by child labor in overseas sweatshops = closed factories = kids turn to prostitution–it happened in India! (if you want to help them purchase MORE goods produced in those factories–competition for their labor gives more alternatives and more power). Government even regulates barbers and hairdressers to protect us from what…bad haircuts? No, it just means fewer hairdressers and higher prices.

I really could go on all day; these prescriptions have never worked because they can’t.

“It is the free market economy that is currently leading us down the road to economic ruin.” So wrong it’s scary! Where have you been? The U.S. has led by example and the world has followed by embracing human freedom to choose, individual property rights, the rule of law with due process for defending those rights, low taxes, privatization, deregulation and free trade. The result is the current boom in global living standards that is unprecedented in the history of mankind. Who cares if the gap between rich and poor is growing (which is not at all clear) — we’re all getting richer — it is not a zero sum game! The only threat to continued prosperity is government, a necessary evil that must be contained.

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