Saturday, October 24, 2015

I'm an Unrepentant, Wild Eyed Free Marketeer

In spite of the fact meteorologists have access to plenty of data and no shortage of hi-tech tools.
they are regularly wrong. Everyone knows why, variables. If a butterfly flaps its wings in..., well, you know the rest. We're pretty good at predicting the weather one to three days out, but beyond that, the farther out you go the more butterflies you have to keep an eye on. If one of Mothra's smaller relatives flies through even a short term forecast, you're screwed

Economists have the same problem to deal with, variables. They build computer models designed to predict where the economy is headed. Or, they try and predict what might happen if this or that policy is implemented. Now, like it or not, you're part of an ever expanding, ever interconnecting global economy. There are roughly 7.1 billion souls on this planet trying to get the most bang for their Bucks, Euros, Rubles and the like -- 24/7/365. That's an awful lot of folks and potential spending decisions to account for. The Federal Reserve System of the United States of America, where they pull the levers and adjust the dials, never issued a bulletin prior to the Great Recession warning that the economy was about to crash. Turns out that selling houses to millions of people that can't afford them can get ugly, and fast.

Who Knew?

It gets worse. The study of economics is the study of macroeconomics and microeconomics; the big picture as opposed to the local, independently owned, car repair facility that recently ripped me off...

Well duh! exclaims a gentlereader, everyone knows that!

Settle down, I'm working here! No, everyone doesn't know that, their busy leading busy/crazy/hectic lives and hoping that whose ever job it is to figure out the best way to keep the economy on track has a clue, but that's not my point. What I was going to say was that since these divisions are two sides of the same coin, this introduces another layer of complexity. Also, if you happened to stumble into the bar where your local economists like to hang out after work, the arguments most likely to lead to a brawl are about macroeconomic issues. The study of microeconomics has generated a good deal of consensus. Macroeconomics, on the other hand, has not -- and never will.

There are two reasons for this: Economists with radically different ways of viewing how the world works, proposing theories from radically different starting points, that's the first one. The other is that a theoretically objective, unbiased professional can't set up an experimental economy in a laboratory and start experimenting to see what happens. Like meteorologists, they must rely on computer modeling and, well...please refer to paragraph two.

So...

Though major paradigm shifts in hard science can turn a given field of study on its head, these are, to put it mildly, few and far between. A chemistry major may show up for class on some random day and be startled to find that her favorite (married) professor has turned his back on academia and accepted a lucrative job offer from DuPont because his grad student girlfriend is pregnant and now there are doctors and lawyers to be paid. However, she's highly unlikely to discover that the professors replacement wants her to forget about all this atoms and molecules drivel and instead begin studying the basic principles of magic and alchemy.

On the other hand...

The next time she shows up for what's turned out to be her least favorite elective, macroeconomics, which was being taught by the newly impregnated undergrad who's on leave due to medical and legal problems -- it wouldn't be particularly shocking if the new professor announced that although she will gracefully continue to teach university approved mainstream Macroeconomics 101, she's a communist and frankly thinks it's a bunch of bonkercockie. But you can trust her professionalism and objectivity.

Meanwhile, off campus...

The market -- free, sorta free, heavily regulated, and/or all of the above -- continues to (seemingly) perform miracles on a daily basis This is true in spite of the obvious fact it's not perfect, it will never lead to utopia -- and no one's actually in charge.

How? 7.1 billion souls doing what needs to be done to survive, and when possible, with a little style.

Adam Smith explained the who/what/when/where/why (coincidentally) the same year America was born, but all he did (besides inventing modern economics) was formally codify what had been going on since Og (master spear maker, lousy hunter) made a deal with Ug (master hunter, lousy spear maker).

Og and Ug accidentally invented free trade. By specializing in what they were good at instead of trying to do everything themselves, both improved their lives exponentially. The market they created was self-regulating -- as long as they both kept it honest. If Og's Spears and Stuff dealt in sharp, durable spears and Ug's Meats and Things fulfilled their pledge to trade in only fresh, healthy meat it was a win-win. Og was an idealistic socialist and thought Ug was a mean spirited, selfish libertarian. Ug was a rugged individualist who thought Og was hopelessly nieve dork. So what?

It gets better.

Both Og and Ug started trading with other specialists and free trade went viral. Since many people were good at the same things, businesses had to find a way to lure customers into their cave, instead of the other guys. Competition was born and it also went viral. Only the specialists that provided the best service or products survived, the rest were driven out of business and had to find another specialty. The customer wins and the failed specialists drive innovation by specializing in something else, occasionally something that nobody else had thought of. The innovators occasionally made a cave full of money, occasionally changed the world. A few of the winners retired, moved to a larger cave with a great view and doted on their grandkids. The rest prepared to fight off the inevitable competition.

Wait a sec', Self-regulating?

Yup. Think about it. Two grocery stores at opposite ends of a small town are locked in competition. Both seek to offer consumers the ideal mix of price and service, the customers will unsentimentally decide on the winner, the loser will go out of business. Or, the loser (necessity is a mother) will come up with a new angle and like the fake wrestler in a fake wrestling match, who clearly should be dead, will rise from the canvas and secure victory. Or maybe just become a laundromat with a bar where you can get loaded and meet chicks/dudes.

Ah ha! But then the survivor will have stumbled into a monopoly and that's why we need the gubmint or even The Gubmint to step in, The Gubmint has tons of economists (paragraph two again) on the payroll, The Gubmint...

...Needs to manage the safety net, make sure no one's getting cheated, enforce contracts and property rights, and lock up or kill the bad guys.

Have an OK day.                                                                                      

©Mark Mehlmauer 2015


If you wish to like, react, leave a comment or share -- please scroll down. 

Mobile gentlereaders, if I've pleased you, there's additional content to be found via laptop and desktop.