Free Market economics and Madrick's "Seven Bad Ideas"
I recently finished reading Jeff Madrick's Seven Bad Ideas. The book is written by an economist who supports the kinds of policies used during the 1950s and 1960s, and presents data critical of more recent "free market"-oriented policies. Within the context of discussing the merits of 1960s policies versus 2010s policies, there's plenty of information. However, you won't see efforts to look beyond these horizons.
Readers who have limited knowledge of the underpinning of conservative / "free market" economic policies may appreciate the issues being divided into seven "bad ideas." However, there's considerable overlap between a number of them. One says individual selfish business transactions will result in a beneficial global economy. Another says the economy is self-correcting. Another says little government involvement is needed or desirable... The book provides historical examples and shows that much of free market claims are simply dogma.
In the US, free market policies are most commonly identified with the Republican Party, and the GOP does seem to take a more extreme approach to them. However, the book clearly states that the shift from the 1960s policies began under Pres. Carter and has been reflected to one degree or anotehr by following Democrats.
- - - -
Some of my thoughts:
Free market advocates say standards of living have increased. Yes, the growth of technology and knowledge has increased affluence since prehistoric days of stone tools. Progressives point to growing income inequality today. Free marketers say income inequality has always grown. We need to ask what we have to change so the benefits of technology and knowledge are shared more equally, rather than just accepting there's always been inequality.
Under free markets and minimal government, private companies will automate jobs to the extent there will be a substantial number of long-term unemployed people and minimal government support for them. Today, predictions are that this may only be decades away. We need to prepare now.
There's more to running the goods and services in a society than how much is made at what price and such. Today, industrial production, mass-production agriculture, extracting natural resources, etc. can have impacts on the environment, climate, odors and sounds, and other issues. Globalization means transporting goods further distances, causing more impact on the environment and climate. "A good life" isn't just consumer goods, so these factors should be decided by an informed majority.
The book talks about the inflation and unemployment of the 1970s causing a wave of conservatism. It's stated as if average Americans were impacted and pressured the corporations and politicians to carry out more corporate-friendly policies. I'm not so sure. (I'm currently reading Martin Gilens' Affluence and Influence which analyzes the discrepancies between public opinion and government policies - the latter generally tilting toward the most affluent.) Madrick isn't clear about causes of the shift in economists' views. Perhaps, he thinks economists were part of the average Americans impacted by inflation and unemployment, and shifted their economics based on personal life experience. It would be more informative to see which economists shifted first (and what was distinctive about them,) and then what was distinctive of the following waves of shifting economists. But that's not in the book.
I wondered whether other factors may have played a part in economists' views shifting. I wonder how big money interests might have influenced this. Economists employed by corporations might have been selected by beliefs. But did big money investment in university economics departments, scholarship programs, etc. have been involved? I have no data.
- - - - -
Thoughts related to particular chapters:
Chapter / Bad Idea #1: Revival of the "invisible hand" view of free market economics.
The book points out this assumes that consumers are purely rational and have full information for making rational decisions - which isn't true. The author sees this as reasons to modify (not reject) the Invisible Hand. Madrick doesn't note that experimental economics has shown most people do not act purely selfishly in transactions. I accept that hunter-gatherer societies provide benefits for members despite having no formal laws or government. But that's the benefit of not being loners. My general view of the "invisible hand" is: We have a planet-wide civilization, hi-tech science, thousands of years of accumulated knowledge, an ability to include fields such as human behavior and history, etc. And economists tell us we should just watch TV and let the economy do whatever by itself? In our current economic system (which has little efforts for coordination), there's a great deal of complexity to understanding its fluctuations. But there are sciences such as meteorology that deal with highly complex systems. And if we don't begin with the assumption of an economics which minimizes coordination, we don't have to work with the same level of complexity.
Free marketers would probably say citizens benefit from companies providing expert services, but the government can't provide services that benefit citizens. Free marketers will say competition is beneficial, but will oppose having government-run businesses competing with private companies. These kinds of points which seem significant to me are absent in the book.
Chapter / Bad idea #2: the free market is automatically self-correcting.
Perhaps, there's a sort of truth in the concept (taken more in the abstract than the concrete.) There is an internal logic in a capitalist economy. When it begins to go "off course," the logic steers it back toward the preferred path. But what is the logic? As advocates of the invisible hand would say, each person enters a transaction wanting to get personal benefit. In a capitalist society, the wealthy have disproportionate influence and strategic position. (This may be increased by personalities which go into business being more self-interest oriented, while others may have personalities with more empathy and cooperation - and may also have standards of living in which reciprocity is a greater necessity.) Therefore, the wealthy have more control over the course (especially if elected government stays out of labor relations, education assistance, consumer protection, public assistance, minimum wage, etc.) While technological advances may tend to raise living standards (as it did in prehistoric days), income inequality grows - which gives the wealthy even more control. If the purpose of economics is to maintain the status quo with its natural internal logic, free market economics may be the optimum approach. But is that the starting premise government should begin on (should it even be the starting premise of economics)?
An important part of free market view is opposition to government debt. To me, this seems odd since I assume these same economists don't oppose families going into debt to buy homes or send their kids to college. I assume they don't oppose corporate debt as a matter of principle. Free marketers may say that's "microeconomics" not "macroeconomics," but doesn't the invisible hand say that microeconomics creates macroeconomics?
Chapter / bad idea #3: Limited role of government in the economy.
Is consumer spending the best way to guide what is made? Consumer spending only occurs after the planning, production and promotion of goods. Other means might indicate preferences earlier in the process. For instance, what if society decided to stop producing some cheaper versions of products with short lifespans in order to produce longer-lived versions of the products in mass, lowering unit price. Perhaps, poorer consumers would initially have to be subsidized, but the longer lives would mean buying fewer of these items during a person's life, resulting in spending less in the long run. The total amount of man-hours and raw materials to keep the population supplied would decline, allowing resources to be put to other efforts. Society could benefit as a whole. A more limited step which would also extend product lifespans would be to legally forbid "planned obsolescence."
Suppose a relatively small company has an employee who has a breakthrough invention. The company becomes huge, the owners become billionaires, but the inventor *perhaps* becomes a millionaire. We're told this makes sense because the employee needed the company's resources to commercialize the invention. What if the government provided resources for inventors to commercialize inventions. The government would take a cut of the income from the invention, but wouldn't take a business's huge cut for luxurious living for owners. The inventor could get at least as much as he would get today - but the part which didn't go to billionaire lifestyles would be put into supporting more inventors than companies do now.
Suppose the government sees a potential technological advance that could benefit humanity. The government tries to interest private companies in doing R&D on it. Suppose none choose to act as they don't see enough near-term return on investment. It may be beneficial to competition in the market for the government to try to develop the tech.
We're told that one of the exceptions that Milton FrIedman made to his opposition to government involvement in the economy was insuring competition. Yet, he presumably would oppose guaranteeing competition by having government-run industries competeing with private companies. (Having worked for a government-run company competing with private companies - with various disadvantages imposed on the government company - I know one can compete.) I'd also note that even a government which nationalizes most businesses could maintain competition by having several divisions in which different management controls competing public producers.
Chapter / bad idea #4: The importance of keeping the inflation rate low
This shows how contrived the free market view is. It says there's an invisible hand that guides the economy, that the economy is self-correcting, and that government involvement should be minimal. Yet, the government should intervene to correct the inflation rate. Of the two economic rates (inflation and unemployment) which tend to be watched, they only want government action on inflation. This means low loan rates from the Federal Reserve for big business, it means when banks loan money to consumers that inflation doesn't deplete the real value of the money which is re-paid to the bank. It may also mean workers facing low inflation aren't as aggressive in demanding pay raises. Meanwhile, if the government lets unemployment rise, that will tend to keep wages low.
Chapter / bad idea #5: There are no speculative bubbles
The pay and stock opitions of executives is discussed in this section. While reading this, another point crossed my mind: If executives buy or sell stock in the company they manage, how can it not, in effect, be insider trading?
Chapter / Bad idea #6: Globalization support (low tarriffs, subsidize industry, deregulate)
While free market dogmatists would claim the free market helps all, we should think about what we want and whether free market globalization does that. There are clear benefits for relatively affluent countries and established multi-national corporations. Even a country with vast population, land area and resources (such as China) may be able to expand its economy in this situation (but not necessarily by following free market policies.) But can poor / small countries get significant benefits - as distinct from being used by multi-nationals, with perhaps minor improvement for the general population. As a computer programmer, I had co-workers who had been brought over from India. One point which struck me was the fact they had gotten their programmer training at India's public colleges. The people of India paid to train them, but India ended up with fewer skilled professionals than it created, while the US ended up with more skilled professionals than it created. How can a less affluent nation compete under those conditions? A few years ago, I read a NY Times article about US health care companies going to South Africa to recruit nurses - South Africa had lots of nurses who could be paid less. South Africa trained many nurses in an effort to care for its large number of AIDS patients. So, the US got more lower-paid nurses, and South Africa was left with less health care for seriously ill patients. Can this kind of free market really benefit humanity?
The author quotes a free market advocate saying the world should have as much free trade as the 50 states do. Are all 50 states equally affluent? Are most "red states" less affluent because their people are lazy or because their state governments are less free market oriented? This free market advocate says international free trade will force nations that spend too much on social programs to scale those back. The social programs in "red states" are more limited than in "blue states" - does that mean "red states" are more affluent and have stronger economies? In recent decades, companies relocated facilities to some "red states," and those states may now be less poor than they were. At best, one might claim that in 50 - 100 years the goal might be achieved. But the best case scenario is that over long stretches of time the poor areas will become affluent by taking from areas that go from affluent to poor. Then after many decades those areas will reverse again...
The author says free market advocates say that in the last few decades world poverty rates have declined. However, the author notes this is mostly attributable to China and India which have not embraced the free trade policies.
Chapter / Bad idea #7: Economics is a science
It struck me as odd that this book listed this as one of the "bad ideas." Economics may not be able to experimentally test as thoroughly as the physical sciences can. However, if the author argues that economics is not a science, it begs the question whether the author's critique of the free market approach was non-scientific.
Readers who have limited knowledge of the underpinning of conservative / "free market" economic policies may appreciate the issues being divided into seven "bad ideas." However, there's considerable overlap between a number of them. One says individual selfish business transactions will result in a beneficial global economy. Another says the economy is self-correcting. Another says little government involvement is needed or desirable... The book provides historical examples and shows that much of free market claims are simply dogma.
In the US, free market policies are most commonly identified with the Republican Party, and the GOP does seem to take a more extreme approach to them. However, the book clearly states that the shift from the 1960s policies began under Pres. Carter and has been reflected to one degree or anotehr by following Democrats.
- - - -
Some of my thoughts:
Free market advocates say standards of living have increased. Yes, the growth of technology and knowledge has increased affluence since prehistoric days of stone tools. Progressives point to growing income inequality today. Free marketers say income inequality has always grown. We need to ask what we have to change so the benefits of technology and knowledge are shared more equally, rather than just accepting there's always been inequality.
Under free markets and minimal government, private companies will automate jobs to the extent there will be a substantial number of long-term unemployed people and minimal government support for them. Today, predictions are that this may only be decades away. We need to prepare now.
There's more to running the goods and services in a society than how much is made at what price and such. Today, industrial production, mass-production agriculture, extracting natural resources, etc. can have impacts on the environment, climate, odors and sounds, and other issues. Globalization means transporting goods further distances, causing more impact on the environment and climate. "A good life" isn't just consumer goods, so these factors should be decided by an informed majority.
The book talks about the inflation and unemployment of the 1970s causing a wave of conservatism. It's stated as if average Americans were impacted and pressured the corporations and politicians to carry out more corporate-friendly policies. I'm not so sure. (I'm currently reading Martin Gilens' Affluence and Influence which analyzes the discrepancies between public opinion and government policies - the latter generally tilting toward the most affluent.) Madrick isn't clear about causes of the shift in economists' views. Perhaps, he thinks economists were part of the average Americans impacted by inflation and unemployment, and shifted their economics based on personal life experience. It would be more informative to see which economists shifted first (and what was distinctive about them,) and then what was distinctive of the following waves of shifting economists. But that's not in the book.
I wondered whether other factors may have played a part in economists' views shifting. I wonder how big money interests might have influenced this. Economists employed by corporations might have been selected by beliefs. But did big money investment in university economics departments, scholarship programs, etc. have been involved? I have no data.
- - - - -
Thoughts related to particular chapters:
Chapter / Bad Idea #1: Revival of the "invisible hand" view of free market economics.
The book points out this assumes that consumers are purely rational and have full information for making rational decisions - which isn't true. The author sees this as reasons to modify (not reject) the Invisible Hand. Madrick doesn't note that experimental economics has shown most people do not act purely selfishly in transactions. I accept that hunter-gatherer societies provide benefits for members despite having no formal laws or government. But that's the benefit of not being loners. My general view of the "invisible hand" is: We have a planet-wide civilization, hi-tech science, thousands of years of accumulated knowledge, an ability to include fields such as human behavior and history, etc. And economists tell us we should just watch TV and let the economy do whatever by itself? In our current economic system (which has little efforts for coordination), there's a great deal of complexity to understanding its fluctuations. But there are sciences such as meteorology that deal with highly complex systems. And if we don't begin with the assumption of an economics which minimizes coordination, we don't have to work with the same level of complexity.
Free marketers would probably say citizens benefit from companies providing expert services, but the government can't provide services that benefit citizens. Free marketers will say competition is beneficial, but will oppose having government-run businesses competing with private companies. These kinds of points which seem significant to me are absent in the book.
Chapter / Bad idea #2: the free market is automatically self-correcting.
Perhaps, there's a sort of truth in the concept (taken more in the abstract than the concrete.) There is an internal logic in a capitalist economy. When it begins to go "off course," the logic steers it back toward the preferred path. But what is the logic? As advocates of the invisible hand would say, each person enters a transaction wanting to get personal benefit. In a capitalist society, the wealthy have disproportionate influence and strategic position. (This may be increased by personalities which go into business being more self-interest oriented, while others may have personalities with more empathy and cooperation - and may also have standards of living in which reciprocity is a greater necessity.) Therefore, the wealthy have more control over the course (especially if elected government stays out of labor relations, education assistance, consumer protection, public assistance, minimum wage, etc.) While technological advances may tend to raise living standards (as it did in prehistoric days), income inequality grows - which gives the wealthy even more control. If the purpose of economics is to maintain the status quo with its natural internal logic, free market economics may be the optimum approach. But is that the starting premise government should begin on (should it even be the starting premise of economics)?
An important part of free market view is opposition to government debt. To me, this seems odd since I assume these same economists don't oppose families going into debt to buy homes or send their kids to college. I assume they don't oppose corporate debt as a matter of principle. Free marketers may say that's "microeconomics" not "macroeconomics," but doesn't the invisible hand say that microeconomics creates macroeconomics?
Chapter / bad idea #3: Limited role of government in the economy.
Is consumer spending the best way to guide what is made? Consumer spending only occurs after the planning, production and promotion of goods. Other means might indicate preferences earlier in the process. For instance, what if society decided to stop producing some cheaper versions of products with short lifespans in order to produce longer-lived versions of the products in mass, lowering unit price. Perhaps, poorer consumers would initially have to be subsidized, but the longer lives would mean buying fewer of these items during a person's life, resulting in spending less in the long run. The total amount of man-hours and raw materials to keep the population supplied would decline, allowing resources to be put to other efforts. Society could benefit as a whole. A more limited step which would also extend product lifespans would be to legally forbid "planned obsolescence."
Suppose a relatively small company has an employee who has a breakthrough invention. The company becomes huge, the owners become billionaires, but the inventor *perhaps* becomes a millionaire. We're told this makes sense because the employee needed the company's resources to commercialize the invention. What if the government provided resources for inventors to commercialize inventions. The government would take a cut of the income from the invention, but wouldn't take a business's huge cut for luxurious living for owners. The inventor could get at least as much as he would get today - but the part which didn't go to billionaire lifestyles would be put into supporting more inventors than companies do now.
Suppose the government sees a potential technological advance that could benefit humanity. The government tries to interest private companies in doing R&D on it. Suppose none choose to act as they don't see enough near-term return on investment. It may be beneficial to competition in the market for the government to try to develop the tech.
We're told that one of the exceptions that Milton FrIedman made to his opposition to government involvement in the economy was insuring competition. Yet, he presumably would oppose guaranteeing competition by having government-run industries competeing with private companies. (Having worked for a government-run company competing with private companies - with various disadvantages imposed on the government company - I know one can compete.) I'd also note that even a government which nationalizes most businesses could maintain competition by having several divisions in which different management controls competing public producers.
Chapter / bad idea #4: The importance of keeping the inflation rate low
This shows how contrived the free market view is. It says there's an invisible hand that guides the economy, that the economy is self-correcting, and that government involvement should be minimal. Yet, the government should intervene to correct the inflation rate. Of the two economic rates (inflation and unemployment) which tend to be watched, they only want government action on inflation. This means low loan rates from the Federal Reserve for big business, it means when banks loan money to consumers that inflation doesn't deplete the real value of the money which is re-paid to the bank. It may also mean workers facing low inflation aren't as aggressive in demanding pay raises. Meanwhile, if the government lets unemployment rise, that will tend to keep wages low.
Chapter / bad idea #5: There are no speculative bubbles
The pay and stock opitions of executives is discussed in this section. While reading this, another point crossed my mind: If executives buy or sell stock in the company they manage, how can it not, in effect, be insider trading?
Chapter / Bad idea #6: Globalization support (low tarriffs, subsidize industry, deregulate)
While free market dogmatists would claim the free market helps all, we should think about what we want and whether free market globalization does that. There are clear benefits for relatively affluent countries and established multi-national corporations. Even a country with vast population, land area and resources (such as China) may be able to expand its economy in this situation (but not necessarily by following free market policies.) But can poor / small countries get significant benefits - as distinct from being used by multi-nationals, with perhaps minor improvement for the general population. As a computer programmer, I had co-workers who had been brought over from India. One point which struck me was the fact they had gotten their programmer training at India's public colleges. The people of India paid to train them, but India ended up with fewer skilled professionals than it created, while the US ended up with more skilled professionals than it created. How can a less affluent nation compete under those conditions? A few years ago, I read a NY Times article about US health care companies going to South Africa to recruit nurses - South Africa had lots of nurses who could be paid less. South Africa trained many nurses in an effort to care for its large number of AIDS patients. So, the US got more lower-paid nurses, and South Africa was left with less health care for seriously ill patients. Can this kind of free market really benefit humanity?
The author quotes a free market advocate saying the world should have as much free trade as the 50 states do. Are all 50 states equally affluent? Are most "red states" less affluent because their people are lazy or because their state governments are less free market oriented? This free market advocate says international free trade will force nations that spend too much on social programs to scale those back. The social programs in "red states" are more limited than in "blue states" - does that mean "red states" are more affluent and have stronger economies? In recent decades, companies relocated facilities to some "red states," and those states may now be less poor than they were. At best, one might claim that in 50 - 100 years the goal might be achieved. But the best case scenario is that over long stretches of time the poor areas will become affluent by taking from areas that go from affluent to poor. Then after many decades those areas will reverse again...
The author says free market advocates say that in the last few decades world poverty rates have declined. However, the author notes this is mostly attributable to China and India which have not embraced the free trade policies.
Chapter / Bad idea #7: Economics is a science
It struck me as odd that this book listed this as one of the "bad ideas." Economics may not be able to experimentally test as thoroughly as the physical sciences can. However, if the author argues that economics is not a science, it begs the question whether the author's critique of the free market approach was non-scientific.
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