Even here in the U.S. you have money=power problems. Obviously, money talks, and the smaller and less diversified the economy the more that money will talk. While on the national scale Hollywood, trial lawyers, and labor support for the Democrats counterbalance business support for the Republicans, on more local levels things can get seriously out of whack, depending on who’s got the most money where. The result of this can be economies that get to be dominated by a single interest and wind up declining as a result, like Detroit with its car industry or Rochester with Eastman Kodak. In a tiny poor place like Malawi, the problem of a small clique dominating everything can get overwhelming. Power and politics can kill an economy, something that the standard economic theories don’t really address well. Corruption doesn’t destroy an economy unless there’s only one clique with all the power & money, which appears to be the case in Malawi, from the article. That’s the real killer.
Democracy is the political way of managing competition, capitalism the economic way. But first you have to have true competition between different interests in both arenas, and the possibility of forming fluid alliances among these different interests. It appears that Malawi doesn’t have that yet. It’ll be tough to get the place going until it does.
Really? Cite? Please show me some cites human existence was better for the poor workers slaving in factories prior to labor laws than they were out in the fields immediately prior to the industrial revolution (I’m talking about within a century). Their work in the factories was far more dangerous, their environment was far more unhealthy, etc.
The people left the countryside for the factories not because they wanted to but because they were forced off their land in mass numbers immediately prior to and during the beginning of the industrial revolution in Europe. In the US it was mostly immigrants who thought the conditions were going to be a lot better than they actually were.
Most people didn’t see any improvement in their welfare due to capitalism until governments and unions stepped in to get laissez-faire capitalism off their necks with child labor laws, minimum wage laws, work week caps, etc.
Regulated capitalism is a wonderful thing and can work wonders. Austerity measures usually just make things a lot worse for the poor in a country, except in extreme examples of state largess.
And in any case, a large part of the problem is the protected markets of the large consumer countries like the US, Japan and Europe. This inevitably makes life very difficult in third world countries, and the IMF has been pushing to get 1st worlders to drop their protection measures for several years now to help out the global south.
Come on now, that’s not terribly fair. It’s far fairer to say that they’ve only recently tried to actually grapple with problems they’ve long known about but have tried to abstract away from, in good economic tradition, wink wink.
Among their problems, the World Bank and IMF, is they have a sort of Catch 22 position. If they withhold funds etc. due to corruptioni, etc. they’re big meanies, if they try to force change, they’re big meanies.
It’s not clear to me precisely how they can really instill institutional change and the like, whether they have the real tools to do so. Certainly with the Cold War over they’re more free to pursue more clearly economic goals, although e.g. in re Iraq the US has put intense pressure on them to move regardless of their rules.
No. They usually come with terrible inefficencies. Bribery, unstable rules, threat of expropriation or risk thereof. No, it’s not the Western Corps that keep your average dictarship alive, it’s pure domestic rent extraction. Impoverishing for the masses, enriching for those in power.
An efficient system helps create wealth. Not the only aim, but certainly an important one.
Is that the goal?
Rubbish.
The IMF and the World Bank hardly “spread economic disaster” – they, largely the IMF, step into the breach when economic disaster has occured.
You might care to read Easterly’s book. His points rather are off from your apparent line of argument. I frankly find a whiff of sour grapes in it, but it has useful points.
Actually I’d like a cite to that, follow up if I may. I’d note that the facts as cited there prove rather little. the 1960s and 1970s were a period of explosive growth for Africa, relative to the present, but decades which saw the emergence of many of the impoverishing factors that now are present:
(a) Chronic civil conflict.
(b) Bloating vampire states - large bureacracies whose main function is rent extraction
© Import substitution policies
(d) High protective barriers combined with subsidies and overvalued currencies, all producing severe economic distortions largely benefiting the urban elites at the expense of the rural masses (although depends on which ones).
(e) Exploding debt burdens.
In a very real manner, ill-advised pseudo-Keynsian policies (really merely cover for the Vampire State) set up Africa for the collapse of the 1980s and 1990s. A real mess of uncompetitive economies with much wasted capital spent on idiotic projects.
The bolded phrase I think better fits the Bank and Fund critics, in the aggregate, than the two Bretton Wood s institutions themselves.
Certainly blaming them for the ills of the developing world is like blaming a physician whose tools have been inaquate. It might be potentially useful if the criticism is well-founded, but often it’s nothing more than facile scape-goating.
I am something of a fan of moderate Keynesian policies myself, however it is not the case the Keynesianism a la the 1960s-1970s worked “better” than supposed “Freidmanism” of the 1990s. The problems faced are non-trivial and it is not clear to me that any set of policies or tools the two bring to bear are in and of themselves adequate.
[Fixed quote tags. – MEB]
“Qoute”. “Qyoite”. “Quyote”. Jeeez. Collounsbury, my man, if you don’t learn how to spell “quote” I’m gonna start up a bunch of threads on “Al-Quaeda”. And maybe throw in a few references to “Quatar” and “Iraqu” while I’m at it.
Errrrrr…
I’ll think of some excuse in a minute. Ahem. Yes.
George Tenet cleared those spellings for me.
How do you square a “free market” and “protectionism”
In a free market any third world country would be dumping goods in our markets because they can produce agricultural and low tech goods much more cheaply. Why don’t they ? Because we subsidise our farmers and steel industries etc. to the point where we can dump on the third world.
Getting the third world to open their markets to us is gross hipocracy until we get rid of subsidies, of course that would be suicide as it would cost us jobs.
Better that they suffer than us.
I suspect free markets would work very well. Unfortunately, the first thing you do when you get the chance is apply the power you’ve acquired to make the markets somewhat less than free.
That is, at best, a gross oversimplification, and at worst, a baldface lie. Early factory work was neither easy nor pleasant, tis true, but people found jobs (at a time when there were simply too many agriculturalists for the demand for food) and made good wages. They may not have been rich by our standards, but compared to the rural life they’d been accustomed to, many found city work to be heaven. There were schools for at least some children, and I dispute your assertion that it was categorically unhealthier. Fact is, rural water supplies were invariable unpurified, whereas many towns had proper sewage and some water-cleaning systems at the start of the industrial era. As the late-blooming example of Berlin in the 1920’s shows, there were lots of problems in delivering such services as quickly as new neighborhoods were formed, but eventually they did catch up. People moved to the cities in droves because they wanted to.
Why don’t you provide some cites to the contrary, and we’ll talk, since you brought the subject of cites up.
Uh? “what the market will bear” means that you will only receive for your product what the general public is willing to pay for your product. It doesn’t matter whether you are Warren Buffett or Joe Wino; the general public will not pay more for your product simply because you are rich.
Yeah, money is power, but in the opposite way you mean - it’s the general public’s money that wields the power, not the rich individual’s.
Sua
The one overriding principle or rather, characteristic, of a free market is that it is free, i.e. that individuals are free to decide the value of things to them and decide if they want to trade and on what terms. I think freedom is always a good thing. I like freedom. Nobody knows as well as I do what the value of things is for me.
the alternative is to have someone else make that decision for me and I do not like that. I like freedom to decide what I am willing to pay for things and I am willing to give others the freedom to decide on what terms they want to part with their own things.
Keeping it as narrow as possible, your question, like so many free-market advocates, is putting the cart before the horse. The free market does not exist in any meaningful sense; it is a rhetorical construction in the same way that those who wish to proscribe abortion are “pro-life” and those who wish to allow it are “pro-choice”.
In the economic sense, when talking about market efficiency, the word “efficiency” is short-hand for “Pareto efficiency” or “Pareto optimality”. What this means is that there is no way to make one or more persons better off without making at least one other person worse off. Put another way, no well-being is being wasted. This can be illustrated by the example of international trade. When the gov’t. applies a tariff to an imported good, a pair of pants let’s say, it is creating a loss of well-being that is not recaptured by any other economic actor. Supposing I wished to buy that pair of pants for, let’s say, $40. But a tariff is imposed raising the price to, again just picking a number out of the air, $45. Now I don’t want the pants, so I spend my $40 on domestically produced pants instead. You can say that I’m no worse off–instead of $40 worth of pants, I got $40 worth of pants. However, I am worse off because I had a preference for the imported pants over the domestic pants, but was forced to consume the good that was only second best to me.
The situation I described is not Pareto efficient, because removing the tariff will return to me that well-being that was lost. The domestic pants industry suffers because I buy imported pants instead of domestic pants; the foreign pants manufacturer benefits because I can buy her pants; I benefit because I can have the pants I prefered instead of the pants I didn’t. Any int’l. trade text will work through the math; I’m not going to do it here. What is important, is that on net, the imposition of the tariff imposes a loss on society that is not re-captured anywhere else. Removing the tariff will “create” more well-being than it “destroys”, so that those who gain can compensate those who lose, and still have some extra benefit left over to enjoy!
A “free market” is efficient in this sense. When the market outcome obtains, whatever the distribution, we know that well-being is maximally produced. There is no way to increase it (without bringing something external into the system).
Here’s the problem with those who advocate the free market. It is not a free market that is Pareto optimal. It is a competitive market that is Pareto optimal. What’s the difference? I can’t tell you, because nobody can actually tell me what the heck a free market is supposed to be! But I can tell you this, to be efficient, the free market must first be competitive. (Competitive means that there are enough buyers and sellers, it’s easy enough to get information, and it’s easy enough to get in and out of the market that it is the market that sets prices, not any individual buyers and sellers.)
The market isn’t competitive because it is free, to be efficient the market must be competitive.
(Another problem with free marketeers is that they tend to assume that a market solution is sufficient to declare a socially desirable outcome. But there is no reason to assume that this is true. A competitive market solution will be Pareto optimal, but the result could be very, very bad. In that case, the economy would need some interference from the gov’t. to make the result socially desirable. The hard parts are 1) getting those who are hurt from the interference from being so selfish, and 2) interfering with a minimum of distortion.)
Generally speaking, I do get a little worried when I hear people talking about free markets, because what they generally seem to think is that by free market they mean that they can pretty much do what they want in the name of commerce and not have the government interfere. But that is not efficient–rather, that is not guaranteed to be efficient. (It may be by accident.) Keeping markets competitive may take quite a bit of interference, e.g. keeping markets from becoming monopolistic or passing a lemon law to improve information in the used car market. One could spend one’s entire professional career as an economist studying the myriad ways in which the market can fail to be competitive and/or efficient. The difference between me and a libertarian is that a libertarian thinks that the market can solve market failures.
I get the impression that many free marketeers would agree that, “The one overriding principle of a truly free market is that everything – prices, quality, etc. – is ‘whatever the market will bear.’” That is simply not efficient, nor is there any reason to assume that it is socially desirable.
Going off on a tangent, when it comes to groups like the IMF, I don’t think that they are generally speaking about free markets in the swash-buckling, robber-baron sense of the word that is so beloved to the Cult of Ayn Rand. Rather, they seem to advocate things like eliminating crony capitalism and allowing bad businesses to either reform or die, thus putting those resources to better use. A government can only prop up the edifice of crony capitalism for so long before it will collapse. Another thing the IMF might advocate is the removal of trade barriers (don’t confuse free trade with free markets). By doing this, not only will the gov’t. be removing the distortions that blatantly waste well-being, it will also allow for more economic growth. IIRC, Dollar & Kraay, in a paper titled “Growth is Good for the Poor”, did a panel data study of 80 countries over a period of 40 years and found that, as predicted by economic theory, dropping trade barriers helps economic growth and that economic growth helps the poor.
Another thing that the IMF does is to “impose” austerity measures on the borrowing gov’t. It seems more than a little insane to say, “Your country is going belly-up, the economy is collapsing and people are starving–so spend less on social services!” But that is indeed what they do. What they also do, that so many critics seem to ignore, is lend money to offset the drop in gov’t. funded spending. Additionally, the fiscal responsibility inherent in the austerity package prompts inflows of foreign capital investment.
True, the IMF’s success rate isn’t as good as we’d like to see. But then again, just last week I spoke with a fireman who’s CPR failed to save a man’s life. Do we blame the fireman’s motivations or indict his methods? Gov’ts that go to the IMF are collapsing in a major way. It shouldn’t be such a suprise that some, even many, can’t be saved with the resources alloted to the IMF.
The fact is that in a nation that is collapsing from protectionist policies, crony capitalism, and fiscal irresponsibility, tough choices need to be made. When the IMF insists that trade barriers be dropped, that businesses who survive solely on the largesse of gov’t. favor & regulations be made to die, and that unsupportable social spending be curtailed, surely people are going to be hurt. But I am skeptical that they are going to be more satisfied when all foreign investment flees an imploding economy, gov’t. funds dry up completely, and national cohesion devolves into tribal competition for scarce natural resources.
I think you gave an excellent dissertation js. I’d like to amend this part a bit (not that it is wrong). Anytime a purchase is made the purchaser and the seller are better off, otherwise the transaction would not occur and there is a social gain. In fact the buyer has determined that that is the best use of his $40, otherwise he would spend it on the better option (food, shirts. etc.). Now suppose I will pay $40 for pants but nothing more, a foreign competitor can sell me the pants for $40 and we are both better off. A domestic manufacturer can only sell it for $45 and can’t compete so a tarrif is applied to make the imported pants $46. I don’t buy the pants and society is worse off because the most preferred transaction does not take place.
I would also add to a prior discussion that for a free market to survive what is truly needed is clearly defined, tradable and enforceable individual property rights. As long as you have that you can have an Monarchy , a Democracy, Dictatorship…
Because YOU were the one who made the original claim. Please back it up. This is how it works on the boards, you should know that by now.
You made the original claim. When you back up your original claim, I will either concede or bring the cites to back up my counter.
Indeed, the general idea is that once the legal and civil framework is in place, the market will almost take care of itself. Instability and uncertainty, however, is death to market efficiency.
Also, don’t confuse efficiency with equity. Just because some people are miserable doesn’t mean that anything is economically inefficient.
[quoet]Here’s the problem with those who advocate the free market. It is not a free market that is Pareto optimal. It is a competitive market that is Pareto optimal.
[/quote]
A problem? This is one of the basic assumptions of the general model that is stated OVER and OVER again. Also important are perfect information and concepts of private, tradable property. Even Smith spent considerable amounts of time discussing the importance of competition, and the dangers of powerful collusion.
What you are upset about is something VERY different from straight debates about free markets. What you are upset about are growth strategies, for which there is no real, general model.
And here, I agree with you. There are a horde of very self-satisfied people trying to “help” the third-world by textbook solutions that have little bearing on the problems actually faced by people in getting their civil and economic systems running. Most of the problems are pragmatic, not economic.
Are you talking to me? I’m more annoyed than upset, and I wasn’t talking about any growth strategies. There can be no straight debate about the free market because the term “free market” it too poorly defined to be meaningfully debated. Anybody with real debate experience knows that one of the first things you do in a debate check definitions. If your opponent is talking about something different from you, and different from the topic at hand, then you use that against her.
I’ve heard no precise, let alone concensus, definition of “free market”. Moreover, I’ve never heard of competition being a necessary component of a free market from a free marketeer, except once when I put one on the spot to specifically elicit how the two were related. And that was an economist. IIRC, even The Road to Serfdom draws a clear and meaningful distinction between the two concepts and advocates dumping “free market” in favor of “competition”. I doubt that you’ll find many free marketeers who’ll agree, without being told the source of the quote, that monopolists should be “economic whippingboys” so heavily regulated that they would gladly take competition in their market than continue under the government’s thumb.
Since the assumption of perfect competition is so basic in the free market “model” that it is stated “OVER and OVER,” why don’t you offer some cites demonstrating that the average free marketeer is well aware that perfect competition is necessary for Pareto optimality, that she understands that without perfect competition all her claims that the free market benefits society through the actions of self-interested individuals are seriously undermined. Absent the competition, all she has is an irrational obsession with the supremecy of property rights. All her claims that the supremecy of property rights will bring an efficient society are based on the competitive assumption. I am highly skeptical that your average free marketeer is cognizant of this.
More seriously, a competitive market should obtain whenever possible. But it is also true that lassie faire does not imply economic efficiency or an even remotely acceptable outcome. In a world full of informational asymmetries, externalities, and coordination problems, the notion that the economy that operates best is the one that is governed least simply does not hold water.
In the context of the OP, economic efficiency is simply not a by-product of a “free market”. It is fine to say that Adam Smith adovcated lassie faire, but it is also true that he would have approved of the government taking on the role of harbor improvements, and I find it hard to believe that with all the work done in the field of market failures Mr. Smith wouldn’t be compelled to admit that there is extensive role for government involvement in keeping markets competitive. I can’t say I’ve heard many free marketeers advocating such a position.
I suppose that in a way, the invisible hand is like the pen: The full quote reads, “Under the rule of just men, the pen is mightier than the sword.” I’ve never heard the full quote used. What I have heard were admonitions to eschew violence, in situations where it would be clearly justified, on the grounds that words are stronger than bullets. Similarly, the invisible hand only moves the market when the market is competitive. I can’t say that I’ve heard many free marketeers making that condition clear.
js_africanus: great stuff. Feels like what I was feeling my way towards without really being able to pin it down. Any books out there that cover this in a clear way? Does The Road to Serfdom explain it clearly?
Nonsense. It is an extremely well defined idea. You might try the almost universally recognized Welfare Theorems if you are looking for a definition.
In other words, no matter how many field and policy dominating economists and development analysts I point to to show the consensus about basic models, you can invalidate it by simply pointing at some people you get to define as the “real” free marketers? Sorry, But I don’t feel like playing that game.
Ahem: Laissez-faire.
Carry on, it’s a real pleasure to see an engagement like this.
(And come on Apos, ask him to define ‘real free marketeer’ - our Africanus does have several legit points about the wider universe of commentary.)
[Nitpick] Because it’s not. Contestability will do. Monopolists that price discriminate in the first degree will do too. And of course in the presence of uncompensated marginal externalities, perfect competion in other markets can prevent the attainment of Pareto optimal conditions.