ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Monday, August 14, 2006

A Few Choice Hayekian Posts

Saw several posts over at Cafe Hayek during the weekend regarding economics and free trade that I thought were just excellent. Here are the links and a few excerpts:

Still Alive in the Long Run
Trade’s documented effect on employment is clear: freer trade does not reduce the aggregate level of employment (and nor does it increase it). Skeptics of free(r) trade frequently respond “Sure, in the long-run new jobs will be created. But what about workers who are unemployed now? The long run is no good to them. Even an economist, John Maynard Keynes, recognized that ‘in the long run we’re all dead.’”

This justification for protectionism – that protectionist policies are justified because they diminish pain and anxiety today, while the costs of protectionism emerge only in the less-significant tomorrow – is faulty on a variety of fronts. Perhaps the biggest flaw of this justification is that it’s a lie. No one really believes that short-run consequences should take precedence over long-run consequences.

You see, people who really believe that long-run effects should be ignored or significantly discounted in favor of short-run effects would, in addition to supporting protectionism, support also the following policies:

- eliminating environmental laws (because these impose substantial costs today in return for benefits that arise mostly in the long-run);
- eliminating Social Security (which forces people to forego consumption today in favor of the long-run).

If no sensible person accepts the mantra “in the long run we’re all dead” as an argument against environmental laws and efforts to reduce the budget deficit, why does this mantra have credence in debates over free trade?

And this one, which discusses creative distruction (something that Liberals and Planners just don't get):
As a Rule, Freedom and Free Trade Work

The current hysteria over “outsourcing” – that is, importing services – often features opponents of free trade posing as defenders of workers who’ve lost their jobs even though these workers “played by the rules.” Sen. John Edwards, for example, during his bid for the Democratic presidential nomination, repeatedly spoke of people who “played by the rules” but who nevertheless got pink slips because of trade with foreigners. The assumption is that playing by the rules should be sufficient to protect you from losing your job.

Appealing to rules is powerful. Everyone understands that breaking agreed-upon rules is wrong.

But there is no rule in a free society that says if you play by the rules – if you work hard, get an education, and are a person of integrity – that you’re guaranteed never to lose your job. Put differently, the fact that honest, decent, hard-working people sometimes lose their jobs is not evidence of unfairness, wrong-doing, mischief, or poor policy.

If government ever tried to enforce a rule that guaranteed that no rule-follower would ever lose his or her job, government would have to (try to) freeze in place the current pattern of economic activity. Consumers would be prevented from changing their patterns of spending; new technology would be outlawed; pursuit of greater efficiencies would be prohibited; demographic changes would be fiercely regulated by government. Nothing that threatens to significantly reduce demand for the output of any existing industry would be tolerated – for any such reduction in demand entails a scaling back of production in that industry and, hence, possible job losses in that industry.

and finally, a post about the protectionists claims that the US can't compete with the lower regulatory environments abroad:
Do US Producers Operate at a Disadvantage Relative to Less-Regulated Producers in Poor Countries?
Don Boudreaux

One frequently encountered argument against free trade is that the generally lower regulatory burdens faced by companies in poor countries afford companies in these countries an "unfair" advantage over companies in rich countries (because rich-country governments generally have more stringent regulations on worker safety and emissions of environmental pollutants).

'Tain't nuthin' unfair going on.

First, an economy's ultimate purpose is not to produce for the sake of producing, but to produce for the sake of consuming. The ultimate standard for judging an economy's performance is how well it satisfies consumers' material desires, not how secure and fairly treated it makes producers feel. If producers in another country are better, for whatever reason, than are domestic producers at satisfying consumer desires, no economic or moral imperative is served by government protecting these domestic firms from competition -- for do so, really, is to threaten to inflict violence upon consumers who insist on taking advantage of the good deals offered by the foreign suppliers.

Second, as with the focus on wages, focusing on the government-imposed regulatory burdens gives too narrow a view. Indeed it's true: all other things equal, firms generally prefer to have to comply with fewer than with more regulations (just as, all other things equal, they prefer to pay less taxes and lower wages). But all other things are emphatically not equal. Rich countries are rich principally because they have good institutions -- formal and informal -- that make property rights reasonably secure, contractual commitments reasonably trustworthy, dispute-settlement processes reasonably unbiased, and on and on. Perhaps the greatest challenge to people who care about fostering wide-spread economic progress is to figure out how to create pro-growth institutions. Doing so is monstrously difficult. But it's also terrifically important, for it's the mix of these institutions that matter most for freedom and prosperity.

Suppose you've saved your pennies and have accumulated $10M to invest. You want to produce ball-bearings. Geographically, two places seem an ideal location for your factory: Nebraska and Nigeria. But geography is hardly all that counts. Will you commit your funds to Nigeria immediately upon learning that environmental and work-place regulations in Nigeria are more lax than they are in Nebraska? Hopefully not. (If your instinct is to say "Yes!", e-mail me; I have lots of things in my attic that I know you'll just love to buy.)

Because your property -- both immobile and mobile -- will be much less secure in Nigeria, because in Nigeria you're likely to have to pay bribes again and again and again, because your Nigerian workers will likely be less educated and less skilled, because the road, air, rail, water, and telephone infrastructures there are much poorer than in Nebraska, the fact that the Nigerian government imposes only lax environmental and worker-safety regulations on firms operating there means very little. The more-attractive place to set up shop is Nebraska.

Indeed, Nigerian factory owners might sing a related song: "We in Nigeria are forced to compete against factories in the U.S. and other developed countries that enjoy many more advantages than we enjoy -- a rule of law, secure property rights, very little corruption." Would the Nigerian people be well-served if the Nigerian government heeded this (accurate) claim and, in response, protected Nigerian producers from foreign competitors enjoying the immense advantages that come from being located in the US?

Cafe Hayek is a great blog.... if you've never been there, check it out.

Your Co-Conspirator,
ARC: St Wendeler

Comments (3)
Immoral Majority said...

Free-market capitalism is very efficient at serving the wants of society, but is almost completely ineffective at serving the needs of society. Take the pharmaceutical industry for example. Developing drugs and other medical treatments takes decades, costs hundreds of millions of dollars, and there is little to no guarantee of payoff. Additionally, a drug that cures disease is far less profitable than a drug which only treats the symptoms, and which must be taken for a customer's entire lifetime. Therefore, there is very little incentive to research curing diseases, only research to treat chronic symptoms. This has been demonstrated throughout modern history, with diseases that were only cured or eradicated through state intervention, such as smallpox, polio, malaria, etc.

Additionally, in industries where a necessary commodity has no comparable substitute, it is often more profitable to disrupt supply to drive up prices. California's energy crisis, for example, was caused by Enron deliberately witholding production to drive up prices. For another example, I would suggest watching BP's profits this summer while the Alaskan pipeline is shut down.

Free-market capitalism is about a small minority controlling the production of the majority, and as these two parties have almost universally divergent needs, only the needs of the controlling minority can be met by such a system.

St Wendeler said...

Free-market capitalism is about a small minority controlling the production of the majority, and as these two parties have almost universally divergent needs, only the needs of the controlling minority can be met by such a system.
It's difficult to have a debate with someone who clearly has no clue about how a free market capitalistic system works.

free market capitalism is about satisfying consumer's demands. The "minority" (as you call them) in free market capitalism is not determined by a committee, a government, or any other means, but by the individuals themselves who wish to satisfy that demand.

If there is an industry where a necessary commodity has no comparable substitute

if you view an industry as a monolith, then your statement could be viewed as accurate. However, there are laws & regulations in our free market economy regarding monopolies and collusion. (The rule of law is one of the key competitive advantages for the US, btw.) Thus, within any industry there are competitors, each vying for their share of the consumer's demand. Therefore, unless they are violating the law through collusion, your situation is unlikely.

Immoral Majority said...

Free-market capitalists despise anti-monopoly laws, or any other governmental control over industry. Maybe you believe in these laws, but then you wouldn't be a free-market capitalist, as they believe in letting market forces control everything - hence the term "free-market."

I'm sorry that you find it difficult to debate me. How do you respond to my specific arguments, relating to health care and the electricity market?

Not all markets are competitive, and in fact unregulated capitalism seeks to destroy competition by its very nature. Standard Oil during the late 19th and early 20th centuries is an excellent example of this. For a more modern example, look at Japanese corporations like Sony. In Japan, the antitrust laws are not as strict as in the US, and as a result, US companies are losing a larger and larger market share to the Japanese in industries such as electronics and automobiles.

Industry's goals are not to satisfy consumer's demand, their goal is profit. The extent to which consumer's demand is satisfied by such system is only the extent to which fulfilling that demand remains profitable.