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With the failure of Republican economic ideology writ large across the headlines of our newspapers and the stock market, a vacuum of economic policy theory seems to be emerging.  This failed ideology asserted, essentially, that regulations are a barrier to the natural formation of markets, that markets are themselves entirely natural, and as such, markets were the unique solution to the problems of resource and asset valuation, production and distribution.  The Democratic response to this failure has been largely negative, that is, that it has emerged largely as a negation or denial of one or all of these basic propositions.

However, the negation of a theory is not itself a theory.  But while the empirical falsification of the Republican theory does not, by itself, suggest the correct theory, examination of how the theory failed may give us such evidence to enable us to modify or replace the principles of this theory, and determine the general goal governmental economic policy should promote.

The first principle and the third principle rely, in their own ways, on the truth of the second principle, that markets are entirely natural.  If this principle can be undermined, then principled reasons for rejecting the first and third principles can be discovered.  What does it mean for something to be natural?  One sense, we can quickly reject, is that something non-natural is supernatural.  This, I think we can reject as being rather nonsensical.  Any appeal to the supernatural is fundamentally an appeal to an irreducible mystery, the claim that there is something about the supernatural object that will forever elude the understanding.  No one who wants to seriously claim that markets are not natural will be entertained for long if he claims that it is because they are supernatural.  

Another way to claim that markets are not natural is to claim that they are artificial in the original sense, they are artifacts of human effort and contrivance.  Now, you might think that this is quite obvious, and that the task of undermining Republican economic ideology is done.  After all, what are markets, except social settings where human beings can trade their resources and assets with one another?  The entire thing is human effort and contrivance.  But there is a more subtle sense of natural and artificial that may be at play here.  Consider the design of a hammer.  It's shape and size, amount of decoration, presence of a handle, etc, will all depend on the task you need it for, the materials you have on hand with which to make it, its social significance (is it a ritual object?), and so forth.  It's design and form is immensely variable, and yet, the clarity with which we apprehend its purpose, despite such variability in design, shows us that such a design is entirely artificial, i.e., the result of intentional human effort and design.  Now consider the way in which you blink when a mote of dust hits your eye, or how you put one foot in front of the other when you walk.  Do any of us think that these occurrences are the result of intentional human effort and planning, or are they just what naturally occurs?  I would maintain that these things are natural, as strongly as I maintain that the shape of the hammer, even its existence, is an artifact.  It may be that markets are natural in that same way, that the creation of these social settings and the trading with one another are as natural to us as breathing.  And some evidence exists which suggests this to be the case, namely, that some of our primate relatives engage in trading, and have socially acceptable times and places where such trading occurs.

So what is the danger of thinking that market are natural?  One of the greatest dangers is that because markets are natural, they are immune from normative or moral evaluation.  The lion naturally hunts and eats the antelope, and often the antelope endures horrific suffering before dying as a result of this natural situation.  Sometimes, the lion fails, and she and her pride suffer and die as well.  But we decline from offering moral approbation or criticism of this situation precisely because it is natural.  We do not work to educate lions as to the harm they are causing the antelope by such brutal methods of harvesting, nor persuade the antelope into sacrificing their weakest or oldest members to feed the lions.  When a dust mote falls into my eye, I am not made more virtuous by blinking, nor do I deserve any condemnation if I fail to blink.  If markets are likewise natural, then their effects are as the effects of a hurricane or earthquake when they are bad, and as the effects of a rich growing season when they are good.  They cannot be avoided and they cannot be changed or negotiated with.

And there is a further reason for thinking that the belief that markets are natural is disingenuous.  This is because Republican ideology does not promote just any sort of market.  They do not support forced trades where the force is non-natural.  That is, they support free markets.  And this is the third sort of "natural" that we might think applies to markets.  Markets are "natural" when the trading taking placed within them is not coerced by non-natural forces.  However, if this is what Republicans mean when they think that markets are "natural," this is a far cry from thinking that such markets naturally arise.  For one thing, there are quite strict requirements that must be met for an exchange to be considered "free" or not unnaturally coerced.  In the first place, both sides of the exchange must get some benefit from the exchange.  No con-artists allowed, and no trading things that have no value just to be trading.  Second, the amount of information available to both sides of the exchange must be quite significant, amounting to knowing how much would be gained from other potential trades that could be made instead throughout the entire market.  Third, the actors must be rational.  They must use the information in the appropriate ways, and not get run around with psychological fallacies.  They must be able to accurately assess the benefits they will get, and the value of what they are trading.  Indeed, these requirements are so strict, it is difficult to see how they could arise naturally.

If we allow that markets may be called "natural" in this sense, then we are using "natural" as a moral evaluation of markets.  No market can meet these restrictions completely, but they may be evaluated by how greatly and to what extent they do meet them.  More "natural" markets are thought to be better, on this account, than less "natural" markets for two reasons.  On the individual level, freedom from unnatural causes to trade means that no person or social organization is forcing you to make any trades.  You get to make your own choices about what you want and what you're willing to trade for it.  On its own, this is probably the greatest individual good, from the subjective perspective, conceivable.  On the social level, Adam Smith's theories assure us that rational traders in a "natural" market like the one described above will distribute resources in the optimal way, according to whatever metric you wish to use, from ongoing sustainability, to the promotion of future wealth building, to adequate and virtuous distribution of resources.

The problem is that these "natural" markets are not natural at all, they are ideals, and they can only be approximated at best in practice, and only in certain resource distribution domains.  For these free markets to promote the social good in the way it promises, it must be possible to construct the market to more closely approximate the ideal.  But these are not markets free from regulation, rather, they are loaded with it.  They are loaded with regulations that ensure access to information, subsidies and submarkets for education relevant to making choices in that market domain, rules to define and promote competition between and real choices for producers, distributors and consumers, rules about what can be traded and to whom.  Most pernicious, are those con-men and fraudsters, who are always looking for a way to set up shop inside a legitimate market, and begin trading magic beans for the real wealth people have worked and bled to create, but also those cumulative effects, the forces that each of us exert on one another in sometimes very remote and distant ways, forces that must be fought with regulation to keep the trade free.

And in some cases, it must be admitted, that humans are not naturally well suited to the establishment of "natural" markets.  Sometimes, markets fail, even as they attempt to approach Smith's ideal.  The causes of these failures can be discerned as well, and here, the fault lies sometimes with us, and sometimes with what we want to trade.  One way in which we can fail to meet the ideal of rationality is as result of our lifespans.  Our most productive years rarely last more than 40, and it is even rarer to find someone with a coherent project through all that time, to matter how great the benefit.  Those that have, and who have succeeded, are the icons of history, but the projects themselves were public and social, on a par with a governmental project today.  The benefits of such activity as reconstructing our infrastructure lie far in the future, and its benefits are diffuse enough to prevent any individual actor from undertaking this project alone, even if she had the resources at her command to succeed.  Such activity, which is to our rational benefit to pursue, but whose benefits are remote, and whose initial cost is high, will never appear rational to individual traders of such short life spans, but must be imposed upon them by a collective social authority.  

Other failures involve externalities in the trade.  When I purchase gasoline for my car, I do not bear the full brunt of the costs of that choice.  The carbon dioxide and other pollutants that are emitted, while on an individual level are insignificant, combined with the similar effects of others' similar choices, have costs that are quite high to the health and climate conditions of those I will never meet.  But here, a more natural market cries out for creation, one which caps emissions, and where emission permission slips are traded, and where the wealth created from such exchanges and the taxes and fines that enforce the cap can be used to pay back the costs to those whose health and industry has been damaged as a result of them.

Finally, we must be aware that these "natural" free markets are not immune from more fundamental criticism.  The speculative leap that "natural" markets will result in the socially optimal distribution of resources, though not offered without reason, is far from demonstrated.  For one thing, we know from history, and from the inexorable logic of the free market demand for ever increasing productivity, whether from technological innovation, or by cutting wages and increasing hours, that those who earn their consumption money from wages will forever get the short end of the economic stick.  Market innovations, and sometimes technology, can reverse this trend for a time, but absent this providence, wages in an overall free market will decline.  One of the things this requires is that we not regard the labor market as one which can be "naturalizable," that is, approximated to an ideally free market of the sort Smith describes, or, if we do wish to naturalize the labor market, we must provide another source of income for many of the members of our society.

In conclusion: Free markets are good!  Free markets don't happen by magic.  Free markets require regulations to be free.  While free markets are good, they are not enough.  Government infrastructure programs for long term good, being proactive in creating and regulating new markets to internalize externalities and a robust social safety net are required.

Originally posted to Nellebracht on Thu Oct 16, 2008 at 12:06 PM PDT.

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Comment Preferences

  •  Blah (0+ / 0-)

    Too many words.  For an example of what I'm talking about here, we have the CDS market.  As I understand it, these were essentially insurance policies taken out on an underlying mortgage.  But because they were almost entirely unregulated, there were no restrictions on how many times a mortgage can be insured, for how much it can be insured, who can hold either end of the policy, or what the rules for trading and disclosure were for trading either end of the policy.  This led to a situation where almost nobody could know enough to make an accurate evaluation of the instrument they're trading or the instrument they're trading for, or even the alternatives on the market.  This lack of information transparency prevents it from being a market free from coercion.  

    While the voices of dissent are many, reason has but one voice. -lizardbox

    by Nellebracht on Thu Oct 16, 2008 at 12:12:28 PM PDT

  •  we don't exist in a vacuum (0+ / 0-)

    Right now, the world has a great economic model to follow and which is in fact being copied around the planet: Germany. Germany, with the best work force in the world, almost best set of social benefits in the world, low deficits, consistent growth, and which reacted to this crisis in a mature and expeditious manner. What Americans will need to learn in the future is that the world no longer looks to America for anything, America is a dinosaur, a leftover from a previous age like the Soviet Union was in the 1980s, a giant with clay feet that everybody cannot wait for to collapse. When people think of unfettered high growth market capitalism, they don't think US, they think China, and that is where the venture capitalists looking for high but risky yields are going. And when people think of a well developed economy of the future, they think of Germany. The US militarist empire is only a reminder of an ugly war torn past.  

    Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

    by Marcion on Thu Oct 16, 2008 at 12:12:35 PM PDT

    •  Uh, ok (0+ / 0-)

      I don't know where I said we did exist in a vacuum, but ok.  And I'm not interested in our reputation.  I'm interested in how politics and economics should intersect.  What the economic goal of politics should be.  If Germany offers a good model, tell us what that model is, and what beliefs it bases its activities on.

      While the voices of dissent are many, reason has but one voice. -lizardbox

      by Nellebracht on Thu Oct 16, 2008 at 12:16:26 PM PDT

      [ Parent ]

      •  the german model (0+ / 0-)

        Is to discard the concept of a natural free market entirely and to understand that every aspect can and should be molded by rational governmental policy to achieve long term goals. You train a work force to do the jobs you anticipate they will be asked to do tomorrow, at government expense. You support companies that contribute to the economy, and crack down on companies which are not. There's no deference to the freedom of markets at all. The American handwringing on the subject is like something out of the early 20th century, when these battles were already fought and lost. The problem in America is that the left is so ineffectual that the right is able to ignore the developments of the last hundred years and keeps refighting the battles as though there is still some controversy on the subject of laissez faire capitalism, which is a 19th century artifact.

        Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

        by Marcion on Thu Oct 16, 2008 at 12:24:28 PM PDT

        [ Parent ]

        •  That is no model at all (0+ / 0-)

          And it all hinges on what you understand "rational government policy" to be.  In fact, your description is no different from how dictatorial communist countries describe themselves.  Individual freedom is important.  I don't want a government or any other person to tell me what I value and what I must be willing to exchange for it.

          While the voices of dissent are many, reason has but one voice. -lizardbox

          by Nellebracht on Thu Oct 16, 2008 at 12:32:19 PM PDT

          [ Parent ]

          •  well then (0+ / 0-)

            If you don't believe that people in a democratic country are better able to decide on and execute long term economic policy, then enjoy the ride when economic policy is determined by the accidental impact of a myriad grasping capitalists each trying to maximize his short term profits. No long term planning is possible in such a system, and so there can be no real discussion of moving to a sustainable economy or creating a comprehensive social net. Letting a bunch of people thinking about their next buck determine the course of our country for the next hundred years seems like madness to me, but I guess actually centrally planning something through democratic government institutions is communism, so let's just let the market decide.
            The funny thing, the global market has decided that the German model is better, and while the US manufacturing sector is on life support, the German one is flourishing, with companies all over the world competing with each other as to who gets to pay the high German taxes, submit themselves to tight regualation and pay German workers the highest wages in the world. Because their system works, their workers have been trained and retrained in the latest skill sets, and their government won't just run the country off the tracks in the name of freedom.

            Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

            by Marcion on Thu Oct 16, 2008 at 12:39:21 PM PDT

            [ Parent ]

            •  Thank you (0+ / 0-)

              You've confirmed my suspicions.  It is clear to me now that you did not even read what I wrote above, but merely responded based on what you thought you knew about what I was talking about, based on a skimming of the subjects I introduced.

              The whole point of this diary is an inquiry into what the role of government interventions into the market in general ought to be.  The old model, that such regulations and imposed structures were antithetical to the notion and authority of markets as "natural" entities, and can only work to subvert them, has not only been shown to be false empirically, but as trading on an equivocation in the senses of "natural."  That you mistake my position for this one definitively tells me that you did not read it through.  

              In fact, this diary is a sustained argument for greater governmental regulation within markets.  I am strongly hesitant of the notion that the goals government pursues in such regulations should be set by democratic initiative.  For one thing, such initiatives are always promoted by the most vocal minority at the time, and for another thing, unless the People's inclinations are in line with the overall promotion of freedom, the regulations and restrictions within markets they would seek would amount to coercing trades from at least some people.  There are some instances where majority rule should be restricted, and no majority should be able to tell any minority or individual what they value and what they must be willing to exchange for it.  Rather, markets should be regulated to be able to approximate freedom as described in Smith's model, in order to more greatly universalize and maximize freedom on the individual level.  

              And where markets are unable to do this, the government must do it directly, as in the building and maintenance of roads and schools, power distribution infrastructure and information access.

              While the voices of dissent are many, reason has but one voice. -lizardbox

              by Nellebracht on Thu Oct 16, 2008 at 01:00:33 PM PDT

              [ Parent ]

              •  no, i get what you are saying (0+ / 0-)

                I just think your position, which is fairly leftish and pro regulation by American standards, does not go nearly far enough. You are still buying the line that somehow all that needs to be corrected about the free market are its excesses and inherent flaws, such as the tendency to ignore externalities if somebody else can be expected to bear their cost. It's a fairly conventional American view of the market that still accepts it as the greatest good.
                And what I'm arguing for, is a model that treats the market as a blind and potentially very destructive force that needs to be tightly controlled and managed by a government, forcing it to serve the long term goals of the people, as communicated through democratic institutions. The market does not need to be shored up, it needs to be used to provide the greatest output for the economy, while protecting the people and the country from the natual effects of a free market, which are extreme instability and  inequality, as well as a focus on short term maximization of profits thorugh unsustainable means.
                Though your position is considered lefttist in America, you continue to accept the dogma that the market and maximization of consumer choice are the greatest good and somehow equivalent to freedom. Freedom to choose between a variety of goods which are made as cheaply and shoddily as the producer can get away with, at the cost of consumer health and planetary enviornmental degradation, is not freedom, it's consumer slavery.

                Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

                by Marcion on Thu Oct 16, 2008 at 01:16:46 PM PDT

                [ Parent ]

                •  But that's not at all what free markets deliver (0+ / 0-)

                  Free markets which meet Adam Smith's definition of free, where information is abundantly and transparently available, and people are more naturally inclined to act rationally according to Smith's definition, do not produce cheap, shoddy products.  They produce products adequate to their intended purpose as cheaply as they can, but not more cheaply.  In such markets, there's nothing you can "get away with" because that by definition implies coercion and manipulation.  Markets which allow such activity at any level can never be free.  And a variety of choices, for everybody from consumers to producers, is an unqualified good in itself.

                  You insist that the long term goals for which government intervenes in the market, and the goods it sets the market to produce, can be identified through democratic mandate.  I maintain that this is dangerous, as democracy is itself unstable, and the whims of the majority should never overwhelm the right of individual self-determination, as democratic assignment of these goals would do.

                  On the contrary, the one general long term goal that government policy in markets must promote, and which all other more immediate goals must be referred to, is the maximization of individual freedom.  This also requires a recognition that freedom, like wealth, has a marginal rate of return.  When you are already quite free, a small increase in freedom matters less to you than if you were nearly entirely coerced.  But that is a topic of a different day, and which justifies more specific redistribution than the attitudes which I recommend be adopted by government in its dealings with economic institutions.

                  While the voices of dissent are many, reason has but one voice. -lizardbox

                  by Nellebracht on Thu Oct 16, 2008 at 01:35:29 PM PDT

                  [ Parent ]

                  •  such an ideal situation (0+ / 0-)

                    So you posit an ideal market, but admit that democracies are ridden with flaws. No such ideal market place can exist, Smith was as much a utopian thinker as Marx. Capitalism depends on ripping somebody off. If everybody received exactly what their labor or capital entitles them to, the profit margins would tend to zero. The way to maximize profits is to either underpay the workers, or to produce a good that is as low quality as possible to be while still attracting consumers. A fully informed and empowered consumer public plus a fully mobile labor base would make capitalism unprofitable.

                    And as to the long term goals of government, I think governments are unable to maximize freedom, as any government action inherently takes freedom away. The function of the governmet is to protect the economy and the enviorment, as well as the lives of the citizens, while leaving an unregulated sphere of behavior in which its citizens can be free of all dictates, including the dictates of market necesssity.
                    To me a person who does not have to survive by unequally trading their labor for pay that is inherently lower than the value of their labor is much more free than a person that can post whatever they want on the Internet. The slavery to market capitalism is far more onerous than the loss of symoblic freedoms, because it literally robs people of one half of their waking life. And in a truly rational world, we can easily produce enough goods and housing to provide this to every single person free of charge, leaving the choice of whether or not they wish to work up to them. That would be true freedom. Germans have it. We don't.  

                    Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

                    by Marcion on Thu Oct 16, 2008 at 02:00:01 PM PDT

                    [ Parent ]

                    •  Reading comprehension is essential (0+ / 0-)

                      Free markets as they are described by Smith are ideal entities, and are not to be found in the world.  Nor is it possible to construct a completely free market.  But the fact that it is ideal does not mean that it is useless.  Rather, it is a regulative goal which we can more closely reform existing markets to approximate.  

                      And your critique of capitalism, borrowed loosely from Marx, assumes too much.  For one thing, the economy does not tend toward zero-sum.  Rather, technological and market innovations create new value.  And the fact that assets are consumed requires new assets to be continually produced.  Not all profit is stolen surplus value from labor.  And the very activity of capitalism that, in periods of low innovation, puts downward pressure on wages and upward pressure on hours worked, also works as an incentive to that innovation.  Capitalism requires ever increasing productivity in order to remain profitable, as markets approach the ideal.  It does not care if that increase comes from making workers work longer, or giving employees computers to make them work more efficiently.

                      And further, I fully admit in my diary that the labor market is one where capitalism suffers from a market failure.  The only solution to this market failure that I can see is to establish an income stream for those who currently rely on wages that is not derived from wages or labor.  

                      As for government not being able to promote freedom, this is very antithetical to my conception of the role of governments.  We establish governments, in the first place, and at the local level, to protect our freedoms from other individuals or groups who might take them from us.  Whether these be property freedoms or any other sort, the most primitive function for government in a domestic sense is to police its people.  This does not take their freedom, rather, it promotes it, gives it security, and establishes standards and expectations we can rely on in setting up our personal and cooperative enterprises.  Freedom is not some negative thing, as to be free from interference or free from manipulation, though this is part of it, but is also a real positive function, the real existing ability to pursue one's goals through available means that can be relied upon, established by rights to those goods that make such freedom possible.

                      While the voices of dissent are many, reason has but one voice. -lizardbox

                      by Nellebracht on Thu Oct 16, 2008 at 02:28:51 PM PDT

                      [ Parent ]

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