Increased Calls for Government Intervention into Private Markets

Is the idea that more government intervention is needed to regulate markets and redistribute income gaining wider acceptance?

The Free Market: A False Idol After All?, by Peter S. Goodman, NY Times:  For more than a quarter-century, the dominant idea guiding economic policy ... has been that the market is unfailingly wise. So wise that the proper role for government is to steer clear and not mess with the gusher of wealth that will flow, trickling down to the every level of society, if only the market is left to do its magic.

That notion has carried the day as industries have been unshackled from regulation, and as taxes have been rolled back, along with the oversight powers of government. Faith in markets has held sway as insurance companies have fended off calls for more government-financed health care, and as banks have engineered webs of finance that have turned houses from mere abodes into assets traded like dot-com stocks.

But lately, a striking unease with market forces has entered the conversation. ... Regulation — nasty talk in some quarters, synonymous with pointy-headed bureaucrats choking the market — is suddenly being demanded from unexpected places.

The Bush administration and the Federal Reserve have in recent weeks put aside laissez-faire rhetoric to wade into real estate, wielding new rules and deals they say are necessary to protect Americans from predatory bankers... Were the market left to its own devices, millions could lose their homes, the administration now says.

Central banks on both sides of the Atlantic are coordinating campaigns to flush cash through the global economy, lest frightened lenders hoard capital and suffocate growth. In Bali this month, world leaders gathered in the name of striking agreement to slow climate change. ...

Throughout history, regulation has tended to gain favor on the heels of free enterprise run amok. The monopolistic excesses of the Robber Barons led to antitrust laws. Not by accident did strict new accounting rules follow the unmasking of fraud at Enron and WorldCom. Now, the subprime fiasco and a still unfolding wave of home foreclosures are prompting many to call for new rules. ...

[I]n Washington, and under the roofs of many homes now worth less than a year ago, there appears to be a shift in the nation’s often-ambivalent attitude about regulation. ...

Liberal critics have long asserted that dogmatic devotion to market forces has skewed American society toward those of greatest means. More wealth is being concentrated in fewer hands, with rich people capturing the best housing, private education and health care services...

That critique informs proposals from Democrats vying for the presidency, as they debate how best to expand access to health care and ways to shift the tax burden to the rich. They are in essence calling for market intervention to redress imbalances. With the gap between the richest and poorest now greater than it has been since the 1920s, these pitches have emerged as central components of their campaigns

More notable, though, is how fervent proponents of unfettered market forces have lately come to embrace regulation.

The Bush administration, in seeking to freeze mortgage rates for some homeowners... Treasury Secretary Henry Paulson Jr. ... is demanding that banks accept smaller payments than promised, while describing the market as a fallible thing in need of supervision. “The government acted to prevent a market failure and to try to avoid unnecessary harm,” he said...

[W]hen things go wrong, demands grow for the government to step in and make them right. “Untethered market forces lead to bad things,” said [Jared] Bernstein of the Economic Policy Institute. “You simply can’t run an economy as complicated as ours on ideology alone.”

The statement "Democrats vying for the presidency ... debate how best to expand access to health care and ways to shift the tax burden to the rich." contains different types of intervention, one that addresses a market failure and another that redistributes the outcome of the market process.

Some types of government intervention - weights and measures, disclosure requirements, truth in advertising, safety requirements, etc., are intended to make markets work more efficiently by creating conditions that better approximate competitive ideals. The debate over health care can be cast in this light, i.e. as a debate about how best to solve a market failure that prevents broader coverage at lower prices.

As second type of intervention redistributes income ex-post, i.e. after the market process has occurred, often through taxation and spending programs. In an economy with significant market failures that cause an inequitable distribution of income and wealth, ex-post redistribution may be justified to redress the imbalances caused by the market failures (and to create equal opportunity).

Thus, the first two types of intervention occur due to market failures, in the first case the intervention is to correct the failures and improve market efficiency, and in the second case the intervention redistributes income ex-post to make-up for inequities caused by existing market failures.

There is also a third possibility, intervening when markets are working reasonably well. Here, the assumption is that even well-functioning markets can produce inequitable outcomes and hence ex-post redistribution is required. Unlike the first type of intervention which corrects market failures, this type of intervention often leaves markets functioning less efficiently. Much of the objection to government intervention is made on this basis.

Here is what I am trying to argue. One type of intervention attempts to correct market failures so that they function more efficiently. The recent calls for financial market regulation, for example, largely fall under this umbrella. Another type of intervention attempts to redress inequities brought about by markets that are not functioning properly, e.g. not rewarding capital and labor in the correct proportions. Calls for redistribution can arise from this type of reasoning.

The last type of intervention redistributes income even though there are no market failures. Here, even when the economic system functions perfectly, i.e. according to competitive ideals, the outcome is still deemed inequitable and hence redistribution is needed. Some of this is out there, i.e. this type of intervention has its advocates, but of the three types of intervention I think this is the least important factor. I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided. It's when the game is unfair that there are objections and calls for intervention to correct the inequitable outcome, and to fix the game so the problems don't happen again in the future.

Comments

[barry payne - economist]

Some major factors which have changed and sometimes prevented altogether intervention in markets include:

The emergence of winner-take-all network markets. Networks used to appear in the form of traditionally regulated utility networks, railroads and highways, but have become increasing deregulated there and in other versions, such as the impenetrable WalMart supply chain network.

The emergence of privatized substitutes for government functions and services presented as "efficiency" measures when many are designed instead to extract heavy subsidies from that government part of the operation to which they are joined at the hip.

For example, consider private contractors in in military and intelligence-spy community, much of the latter employed specifically to get around laws and regulation designed to protect civil liberties.

The health care industry does the same, for example, when using Medicare Part D to fund substantial profits for Big Pharma, Big Insurance and Pharmacy Benefit Managers.

Some regulatory economists used to say, when regulating something, regulate the hell out it and when not, deregulate it completely, but never, ever intermingle the two because each will inevitably exploit the other.

The emergence of conflicting measures of "efficiency", such as those used by Big Tele and Big Cable, the two landline monopolies that control 95% of access to internet broadband in most places. The result is U.S. broadband that cost twice the price and offers half the bandwidth and penetration as in a place like South Korea.

Consider the rapidly rising cost in some industries like health care, contrasted alongside rapidly declining costs in others, such as computer hardware and software, in an ironic context of claims such as computerized medical records are extremely expensive.

The irreversible nature of huge specialized sunk costs which have little or no alternative use, such as in the highway system or eletric generation industry that hampers flexibility and change by modern alternatives such as high speed rail, walkways and bikeways, and distributed generation.

Management by crisis versus long term management, for example, the recent jump to build nuclear power plants to stave off climate change where increasing uncertainty clearly justifies building in much more flexibile alternatives with far less start-up and shut-down costs. Markets would never do this, thus the nuclear subsidies.

Also consider a similar effect in the medical industry at the individual level, treating emergencies at extreme cost which could have been avoided for pennies on the dollar with a few sane longer run measures.

The emergence of a lobbying institution and public relations industry that governs market intervention policy from the inside out, from the top down to result in the effects listed above.

[Bruce Webb]

It is a continual source not perhaps of amusement but of bemusement how often 'market failure' operationally equates to 'rich people losing money'.

The current 'crisis' was triggered when investors woke up and realized that higher returns equated to more risk, that mortgages priced at 10% were more likely to fail than ones priced at 6.5%. Why this came as a surprise is not quite clear to me, apparently some people slept in on the first day of Econ 101, but it happens all the time, we saw it in the S&L bailout. When someone is promising double digit returns when the overall economy is growing at single digit rate then the borrower has to be exploiting some narrow corner of the economy before enough money flows in to bid down the return. When everybody is promising double digit returns you know something is wrong.

If you extrapolate current health care spending you find it will capture huge percentages of GDP in the future. Which means it will not happen. Either we will find efficiencies or encounter rationing. The same was clearly true with housing. You can find niche markets where prices can fundamentally depart from equivalent rent, indeed the place I grew up in (Marin County, immediately north of San Francisco across the Golden Gate Bridge) did so. We bought a house in about 1967 for $28,000, sold it in 1971 for $33,000, it would probably go for $700,000 today. But Marin has unique advantages not shared with Riverside, Ca. at the end of the day the typical postal worker and cashier clerk just aren't getting paid enough differential to support a 10x cost of housing.

Risk/reward. Supply/demand. The housing collapse wasn't a result of market failure, the housing bubble was. Buyers and lenders simply lost sight of the basics of economics, if it is too good to be true it probably isn't true, if its a can't lose investment you are likely to lose your shirt. Because in any market transaction there is somebody on the other end of the deal who is not out to simply give you free money. It bothers me some when unsophisticated people get caught up in the trap. On the other hand financial professionals can go to the wall. Rich people losing money is only a tragedy in Greenspan's mind, but it seems to be the only thing that calls for market intervention among the free market folk.

We will have to come up with a new catch-phrase. Perhaps "Too Rich to Fail"

[zinc]

"Not by accident did strict new accounting rules follow the unmasking of fraud at Enron and WorldCom."

Bad accounting practice has been the greatest failing of the financial markets. Off balance sheet accounting vehicles have no place, zero. Phony accrual accounting gimmicks in revenue and liability recognition, under-reporting of executive compensation, and income tax loop holes have led to a lack of transparency. Let's tell Joe Lieberman and his lobbiest buddies to stay out of the accounting business.

Tax laws favoring capital, corporate, and un-earned income over labor and the flattening of the personal income tax has skewed income distribution to obscene levels.

The medical business is a monopoly and monopolies always require regulation.

IMO, we are talking more about a "reinstatement and enforcement" of regulation.

[bakho]

Good post. I like the way you break down regulation into categories. The starting point of "if only the market is left to do its magic" is an ideological position that no one believes. Markets cannot exist without some underlying rules. Unfortunately, good regulation can work so well that people forget why the rules exist (the libertarian fallacy).

[ken melvin]

Why should a people, a government, grant control to markets? Markets are but another tool to be used.

[Nicolas]

Mark Thoma, it's not the first time you bring this argument:

"I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided. It's when the game is unfair that there are objections and calls for intervention to correct the inequitable outcome, and to fix the game so the problems don't happen again in the future."

I would really like you to be more precise on your argument. What is a "fair game"? People with better education obviously have a starting advantage over the others. Do you advocate uniform public schools? People with rich parents overwhelmingly end up rich as well. Do you think every child should be brought up in common without parental influence? Tall people tend to end up in more important jobs with and higher wages. Should we also make sure that the gene pool is the same for everyone? And I didn't talk about which sex or skin color you may want to start with if you want to be rich someday. And in the end, luck is also an important part of one's economic destiny.

So I'm asking, what you think of Rawls' 'veil of ignorance'? In a nutshell, say one could chose which kind of redistributive rules to apply to a society before he knows where he will be born. Assuming he is risk averse, wouldn't he like to have some kind of insurance in case he ends up in the worst situation?

[hari]

It's a misnomer to consider that markets are "free" to value and redistribute, if they so wish. Markets are, in principal, a function of the economic space in which individuals make choices - the result is therefore not only inequitable but also a poor proof of public taste.

In EU, sectors such a health care, education and child welfare are NOT subject to market mechanism. They're fundamentally state responsibility for which the taxpayer is politically willing to pay.

[Frank Levy]

Mark - A good post up to your last point.

You say, "I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided." But an individual's perception of a game's fairness can depend on the outcome they receive.

For example, most economists see free trade is a fair game that benefits the U.S. But today, when most incomes are flat, the September NBC/WSJ poll reported that 59% of Republicans (sic) thought free trade was hurting the U.S. more than helping it.

[bob mcmanus]

Nicolas did not really beat me in mentioning Rawls, I just quit the first time an hour ago. Neo-liberal economics equals economic efficiency as "justice as fairness"?

I think I am stuck on Mark's first kind of inequitable distribution, the one that would be a "market failure" in a "fair game."

This clause:"In an economy with significant market failures that cause an inequitable distribution of income and wealth..."...MT

What, are assymetrical information/institutional imbalances/inadequate countervailing powers "market failures" or political injustices? I think Rawls has helped economists turn morality & politics into a kind of technology and calculus with, of course, economists enjoying the OP & VoI.

[bob mcmanus]

Well, Anne posts block quotes as arguments, altho this isn't an argument, but simply a little research

"The interpretation given above [ed imperfect competition, externalities, commons] is the mainstream view of what market failures mean and of their importance in the economy. This analysis follows the lead of the neoclassical school, and relies on the notion of Pareto efficiency[6] – and specifically considers market failures absent considerations of the "public interest", or equity, citing definitional concerns[5]. This form of analysis has also been adopted by the Keynesian or new Keynesian schools in modern macroeconomics, applying it to Walrasian models of general equilibrium in order to deal with failures to attain full employment, or the non-adjustment of prices and wages.

Many social democrats and "New Deal liberals", have adopted this analysis for public policy, so they view market failures as a very common problem of any unregulated market system and therefore argue for extensive state intervention in the economy in order to ensure both efficiency and social justice (usually interpreted in terms of limiting avoidable inequalities in wealth and income). Both the democratic accountability of these regulations and the technocratic expertise of the economists play an important role here in shaping the kind and degree of intervention. Neoliberals follow a similar line, often focusing on "market-oriented solutions" to market failure: for example, they propose going beyond the common idea of having the government charge a fee for the right to pollute (internalizing the external cost, creating a disincentive to pollute) to allow polluters to sell the pollution permits." ...Wikipedia, "Market Failure"

[Bob]

Why would anybody listen to the fools that peddled this "pure market" crappola.

It's pretty obvious that these people were either extremely stupid or devious.

Yet you turn on Fox Spews or read or watch most of the financial "experts" (i.e. jerks in suits) and you see them still pushing that snake oil.

Most of the repub candidates are doing it too.

[Bruce Wilder]

Rawls and his "veil of ignorance" are an unrealistic abstraction, which, nevertheless, point to the suspicion with which we treat principles adopted with an awareness of self-interest.

Right-wing ideology in economics is built out of three components. The first is the notion that there can be a functioning market with no government intervention: the perfectly functioning market yielding perfect outcomes.

As bakho wrote, markets cannot exist without underlying rules. So, it has been since the first medieval bishop stuck his crosier in the cathedral square and declared a market day, when the knights were not allowed to steal from the peasants and merchants.

Markets arise, when all the other possibilities for human avarice and ambition are put off-limits.

As an economy becomes ever more complex and sophisticated, the rules multiply, because rules are organization -- the more organized we are, the more rules there are. There's no space, where it is possible to actually have a choice of fewer rules or more rules -- that's not a tradeoff, which exists, except along the continuum of more organization or less organization. And, less organization, less government is less developed, poorer.

The only choices we really have regard the quality of the rules, the quality of rule management and the distribution of power, wealth and income.

There's no "natural" distribution of income from markets, efficient or otherwise. Because the rules are not "natural" -- they are always an artifact, a human construction. The rules reflect and determine the distribution of power.

In economics, there are, tellingly, two critical topics for the distribution of income, which tend to be neglected by right-wing economists, when it suits their ideology.

The first, and most commonly recognized, is the topic of externalities. Externalize costs and get rich. It is a common formula in business. And, it depends on having power, unopposable power.

The second, and less commonly recognized, is that the distribution of income follows the distribution of risk. The distribution of income and the distribution of risk are intimately related; in financial incentive terms, risk and reward. Yet, everywhere there are economists, who will talk abstractly about income distribution and income transfers, without ever mentioning the key word, insurance.

This is where we ought to come back to Rawls, because the key to decision-making behind the "veil of ignorance", as Rawls lays it out, appears to be how much of a taste for risk do we take with us beyond the veil of ignorance, how much insurance does justice require?

Economics actually has an answer: perfect incentives require perfect insurance, so that the mathematically-expected outcome can be treated by the decision-maker as if it were equivalent to a certain outcome. Perfect insurance accomplishes this by making the the mathematically-expected outcome the actual outcome.

So, economics has an answer for the design of the rules behind a veil of ignorance: not knowing your own, personal situation, but, somehow, still having preferences (nevermind that there can be no personal preferences without personal history, situation and circumstances), it is not a question of how much of a chance you want to take on your own destiny, or arriving at a max-min trading off the misery of paupers against the long-shot joy of being a prince. The better question, as economics would instruct, is to ask, how do you want to structure the power and incentives of other people? Not yourself, but your companions. How desperate, or ruthless, do you want other people to be? Other people, who will populate your lifeboat earth, . . . or prison earth, if you are of darker mien.

[Bruce Wilder]

Government intervention into private markets.

"private"???

As opposed to public markets?

What assumption lies behind this odd language?

[kthomas]

I have to admit, it's very funny watching Republicans seek the middle-ground on economic issues. Like worms coming out of the earth after a heavy rain. "Save us, save us"....Phooey. Squash them, I say!!! Bird food, the entire lot of 'em.

I think I'll go with Prof. Thoma's third possibility. It is the most prodent path to take, but would obviously meet the most resistance to the monied classes.

I've said it before....Marx is laughing at all of us from the grave. Milt Friedman is obviously turning in his.

[GeorgeNYC]

Markets are not "efficient" they "efficiently achieve equilibrium" That is an extremely important distinction. There are many equilibrium states. "Free" markets are a misnomer because what people mean is "open" which may require government intervention to create the necessary "openness."

[Denis Drew]

The most important type of intervention is setting the market up with adequate checks and balances -- so nobody is in a position to take advantage on the basis of raw bargaining power (blackmail?) -- in the first place. Once that is accomplished we can be pretty count on "fair" outcomes (meaning minimally the poor don't keep getting poorer kind of thing).

Given the overwhelming need for checks and balances in all human interaction, I question the use of the term "failure" when discussing the mechanism of markets. An unconscious mechanism should not be expected to bring about "fairness" -- that's our conscious responsibility -- it is only supposed to "clear": meaning all resources are used up and used up efficiently. Describing market "failure" implicitly accepts Republican/Chicago Boys ideology in a way because it agrees with their ideological expectations of a blind mechanical entity.

People in this country have to get the idea in their heads that unfettered market ideology is just as unrealistic as socialist ideology for the same reason: the exact same lack of understanding of the overwhelming need to keep people (management, union, whoever) from setting out consciously to eat other people's lunch (always with full conscience excusing rationalizing of course). You cannot try to solve any problem in this country without first getting past the threshold of this mindless ideology.

I wish Adam Smith had come along 50 years later; he would have left us a splendid description of the race to the bottom that came with one side getting the upper hand in the labor market with industrialization.

Reunionizing American (our giant current need) will automatically set in motion progressive policies on all other fronts, foreign and domestic -- only way people can get their power back.

[ScentOfViolets]

I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided. It's when the game is unfair that there are objections and calls for intervention to correct the inequitable outcome, and to fix the game so the problems don't happen again in the future.

Bingo. This to me is the centrist position; calling for readjustment afterwards to make the outcomes more equal is what strikes me as what should most reliably called liberal or even leftist. And yet, it seems what I would call the centrist position is all too often tagged with the sobriquet 'liberal' as if the term were an epithet.

I would also hazard that to the extent there is a breakdown in morals, in social cohesiveness, it is precisely because the game seems rigged. Most people I come into contact with seem to feel that hard work is not rewarded to the extent it is claimed to be, that certain people fail most magnificently and yet somehow fail to reap their just rewards, etc. There are a few, a very vocal few equipped with supercharged megaphones who are trying to argue otherwise, but it seems that a lot of people these days aren't buying it.

So what is the state of Galbraith's countervailing powers paradigm these days? Is it getting respectable again amongst mainstream economists?

[Bruce Wilder]

mt: "The last type of intervention redistributes income even though there are no market failures. Here, even when the economic system functions perfectly, i.e. according to competitive ideals, the outcome is still deemed inequitable and hence redistribution is needed."

I have been thinking about how to comment succinctly on this, and have come to understand that I do not understand.

I see the words on my screen, but the meaning remains impenetrable.

The best I can come up with is an analogy: a fair game of chance, like an honest game of dice or a fairly weighted roulette wheel (with or without slots for the house? I couldn't decide).

Is that what we are to imagine the working of the economy is? A fair game of chance?.

I find that I object to the abstraction. At least, I think I object to the abstraction. That is, I object to the description of a class (or two classes, labeled good and bad) of government interventions as ex-post redistribution. I object to "ex-post" "tax and transfer redistribution" as a representative abstraction, in creating this typology of government interventions.

First, what is the justification for "ex-post"? If the game continues, there can be no ex-post -- the intervention, whatever its supposed timing, becomes a consideration in continuing gameplay, no? There's never a final, final outcome, just precedent and expectation founded on it.

Second, is the attempt, here, to bait the trolls? Is the abstraction chosen, precisely, to frame the "ex-post redistribution" of the outcome of a fair game -- a perfectly functioning ideal market -- to pre-emptively legitimize the critique: "Some of this is out there, i.e. this type of intervention has its advocates . . ." sounds like George W. Bush framing one of his infamous "Some people oppose Mom and Apple Pie, but I . . . " Of course, unlike what George says, what Mark Thoma writes in this case is strictly and literally true, but the rhetoric is so smooth that one would scarcely guess that the vast majority of referent advocates of this kind of re-rigging of a fair game into an unfair game are, in fact, libertarian Republicans, who think the winners, the corporations, and the already rich are not rich enough, that the outcome of a fair process must be tilted against the already poor and dispossessed.

I have come to well and truly hate the way economists abstract government "redistribution" and "transfer payments". Could a rhetorical frame be chosen that would be more de-natured, more prejudicial than this particular abstraction?

My own view, which I will assert is canonical, orthodox economics, is that income distribution and its incentive properties cannot be usefully abstracted from risk and insurance.

There's never an "ex-post" -- whatever the government does becomes part of the game, and so that particular keyhole should never be used to faciliate redistribution by tax and transfer, abstracted from incentive/insurance effects.

The general problem -- the general "market failure" -- is a failure of insurance markets. Relative to an imagined ideal of incentive efficiency, insurance tends to be underprovided, because of well-known, inherent failures in insurance markets. Moreover, the private provision of insurance tends to be biased toward an inefficient dynamic re-distribution of wealth and income toward the already rich, a dynamic pattern of re-distribution that has no projected static end-point, let alone abstract merit.

Some of the adverse selection/moral hazard failures in insurance markets are readily remedied by government, simply by employing the government's capacity to compel everyone to pay for insurance. Hence, a general, market-failure argument for government intervention in insurance markets, and scrutiny by government, as referee, of all provision of insurance.

The provision of insurance in the employment relationship, for example, is an inextricable part of the incentive structure of an employment relationship, and, more broadly, of an enterprise's supervisory hierarchy (aka bureaucracy). Just as Frank H. Knight would have it. But, given the inherent and unavoidable potential for abuse, whenever private wealth is used to provide insurance and exercise authority, the government, as referee and agent of the collective interest, should scrutinize and police these "market" relationships. As Denis Drew wrote above, "Given the overwhelming need for checks and balances in all human interaction . . ."

It seems to me that libertarian ideology rests on minimizing externalities and disappearing insurance, as justifications for pervasive government intervention in the economy. I see no reason to aid them in disappearing insurance by talking abstractly about "tax and transfer" as a redistribution, without reference to the insurance and incentive effects.

If there are schemes for government intervention and redistribution, which have perverse incentive effects, by all means let's have that discussion and improve public policy. But, let's have that discussion within a framework of objective economic analysis that acknowledges the need for insurance against risk to achieve fair and efficient outcomes.

[gordon]

There is a fourth type of intervention; when Govts. take over a sector of the economy and operate it themselves. Postal services, police, some education, criminal/civil courts, water supply(?), National defense (until recently, anyhow), public libraries, ports(?), National parks, maybe others in the US. In Europe, railways, water supply (but not everywhere), National power grids, hospitals, ports(?) schools/universities and other things. The phrase "natural monopoly" is often used to justify this.

I wonder how Prof. Thoma sees industrial policy (eg. as discussed by Dani Rodrik) fitting into his scheme?

[gordon]

Sorry, I should have included a link to this post on Dani Rodrik's blog.

[realpc]

"I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided. It's when the game is unfair that there are objections and calls for intervention to correct the inequitable outcome, and to fix the game so the problems don't happen again in the future."

Yes, absolutely. Almost everyone agrees the game should be as fair as possible and that we need a government to make and enforce the rules. And almost everyone wants equality of opportunity but almost no one expects equality of outcome.

And this is why arguing about ideologies is pointless. Almost all of us are basically in agreement, except for fringe ideological fundamentalists.

[Bruce Wilder]

realpc: "Almost everyone agrees the game should be as fair as possible and that we need a government to make and enforce the rules. And almost everyone wants equality of opportunity . . ."

I don't see the evidence in our politics for this thesis. Plenty of people are not the least bit interested in equality of opportunity, and plenty of people do not want the game to be fair.

The people, who hold those kinds of preferences, may be shy about espousing them plainly, but that's a tactical choice. Strategically, they simply want government policy to favor the peculiar and particular interests of themselves, their friends and their families, and, maybe, some general class of folks in some ways "like" themselves.

[realpc]

"Right-wing ideology in economics is built out of three components. The first is the notion that there can be a functioning market with no government intervention"

That is not at all true. No one except maybe some irrational extremists would ever say a market can function with "no government intervention." That is a ludicrous idea. Why have a government if it never intervenes? Everyone agrees that we need laws, and no one thinks the economy should be outside the law.

Do you know of any right-wingers who are anarchists? Of course not.

[ScentOfViolets]

I don't see the evidence in our politics for this thesis. Plenty of people are not the least bit interested in equality of opportunity, and plenty of people do not want the game to be fair.

Ah, you mean the movement conservatives, the right-wingers, the various self-branded flavors of libertarianism and such, I take it. The ones insist the game is fair by definition, so long as the government does not 'intrude'.

[Michael Cain]

And almost everyone wants equality of opportunity but almost no one expects equality of outcome.

No, but in the rich economies of the world today, there seems to be an expectation of bounds on the equality of outcome. Or at least an expectation of a floor on outcomes. Heck, Hayek wrote that in a country as rich as the US of the 1920s everyone should be assured of adequate food, shelter, clothing and medical care to provide good health, and that the state had a role in providing such assurances.

[barry payne - economist]

Bruce Wilder

Interesting, primarily post of 3:07, but needs some clarity. "Ex post" as used by mt seemed to imply no more than say, taxing different amounts of income after it's earned (absent market failure).

Going forward, the same tax structure applies ex ante, perhaps in the sense implied, that the game never stops, including a potential change in the tax structure itself. Neither you nor mt seem to imply retroactive taxation, the most extreme version of ex post.

Conservatives routinely complain that ex ante changes in law and regulation are ex post when they affect irreversible sunk costs going forward.

And they usually get reimbursed for the same, such as the buyout of tobacco farmers after the new regulations or the bailout of the airlines after 9-11 (the latter on much more shaky ex post grounds).

But in reverse, conservatives are not consistent with true ex ante taxes. While liberals might argue that a sharply progessive tax at high income is designed to redistribute the income of anyone lucky enough to land in such a position, conservatives would quickly correct the proposition to "not luck, but individual initiative which taxes penalize".

As I've said before, that could have been anyone besides Bill Gates in that garage, and given the nature of network monopolies and efficiency, their founders, once breaking past the critical mass point of further growth, will reap heavy gains at the expense of many losers despite most tax rates.

The difference in arguments implies the difference in incentives and insurance implied in your comment.

Conservatives will argue that the focus on Bill Gates as a matter of insurance is incorrect, that it should be instead on the stock price which elicits incentives to invest and provides reward on the concurrent risk.

Therefore taxing gains on such efforts from an "insurance-luck" perspective deters investment below "optimal levels in a fair game", turning it into an "unfair game".

But as you say, the game is already unfair by definition, " ... given the inherent and unavoidable potential for abuse, whenever private wealth is used to provide insurance and exercise authority ... ".

So back to mt's point of "even when the economic system functions perfectly", that seems to require by definition a particular adjustment of certain insurance risks a priori, by government intervention, as one more necessary rule before the market can work its magic through the residual of incentives after the insurance effects are removed.

Also as an aside, the next to last paragraph doesn't make sense ... "libertarians justify pervasive intervention via removal of externalities and insurance" ... isn't it the reverse? ... justify no intervention on those grounds?

[2slugbaits]

"...but of the three types of intervention I think this is the least important factor."

This is especially true if you're only wearing your economist hat. The other two conditions all refer to some kind of market inefficiency, which are problems that economists can address on the blackboard. When it comes to the third problem, where there are no market failures, then economists have no more claim to expertise than the next guy. It comes down to competing notions of fairness and equity.

I would say that there is a fourth kind of intervention: when a competitive market solution is possible but due to rent seeking behavior politicians and economic elites intervene to make sure competitive markets are killed in the womb. The sports business is chock full of examples of this kind of behavior.

[Gegner]

Oddly, and for reasons I fail to comprehend, the solution to the dilemma set before us is quite simple and involves none of the troublesome 'alternatives' set forth here.

Tax & redistribute? To what end? If you give a man a fish and make him wait until you return with another, what have you accomplished? Give the man a fishing pole and tell him where the fish are!

The true solution lies within the answer to the question regarding 'what is the 'purpose' of commerce?'

Does commerce exist to enrich those who own it or does it exist to ease the overall burden upon mankind?

If you answer riches for the owners then you cede the need for increased regulation, if only to provide the 'illusion' of equity.

If you answer to secure the common good, then you have ceded the need to create a system that allows all of its members the RIGHT to participate, not just the 'opportunity'.

Without equality there can be no justice, without justice there can be no peace...and without peace there can be no prosperity.

It's a fairly simple formula but when it goes unheeded, society is doomed.

[Bruce Wilder]

realpc: "Do you know of any right-wingers who are anarchists?"

I have met more than a few, on-line, who are, practically, anarchists.

But, point taken. I was not intending to charge political right-wingers with being anarchists, although I can see that my statement was ambiguous. And, of course, as such a criticism, it is ridiculous, as you say. I'll try to do better, in the future. Back to the ol' drawing board, as they say.

My intention was to criticize the practice of taking the abstract, economic concept of a perfectly competitive market, and using it as a benchmark model for evaluating real markets, and the need for government interventions. And, to link that practice to the economic ideology of extreme conservatives, particularly but not exclusively libertarian conservatives.

I regard the theory of market price in perfect competition as indispensable for developing a number of critically economic concepts relating to efficiency. There are no institutions, no government in that theory in its simplest form -- just producers and consumers inexplicably barred from acting strategically. With no institutions and no strategic behavior to cloud the picture, other critical concepts can be developed and laid out. In the classroom, that's a good thing at a certain point.

But, it is not a model for the how the world works. It is not a model for how actual markets come into being and function. It is just a tool for training the mind to recognize and manipulate certain concepts. Such training is a useful -- indeed, essential -- but, by itself, wholly insufficient foundation for modeling and appreciating the functioning of actual markets, which are always very much institutionalized.

My perception is that many conservatives of a libertarian bent mistakenly take the optimal price arrived at in perfect competition as a model and an imprimatur for capitalism, unfettered by government interventions. I fault an institution-less micro-economics of theoretical purity and empirical emptiness, for encouraging people to leap from elementary theory to unrealistic ideal.

It is a complicated notion for a blog comment, but I'll work at it. One's favorite soapboxes can always use a nail and a can of spray paint.

[wogie]

Looks like I'm lagging Slugs here when he says "...where there are no market failures, then economists have no more claim to expertise than the next guy. It comes down to competing notions of fairness and equity."

That is about what I was taught (longer ago than I like to contemplate). In assessing the desirability of various policies, at least two things might be considered (1) the impacts of various policies on allocative efficiency or social welfare, and (2) the distributional impacts of each policy.

However, there is no clear way to assess the overall impact of various distributional impacts of policy on society. Comparing policies based on distributional impacts requires value judgements that are made on grounds that are not "scientific". Because it is not clear what the desirable distributional impacts of any policy would be, economic analyses of policy generally focus on social welfare maximization or allocative efficiency.

So,we are afield from economics when we judge the distributional impacts, and economists have no special expertise to bring to the table -- just opinions on fairness, etc., as Slugs says

[Bruce Wilder]

Me: "Plenty of people are not the least bit interested in equality of opportunity, and plenty of people do not want the game to be fair. "

ScentofViolets: "Ah, you mean the movement conservatives . . . "

Not exclusively. I am enough of a partisan to keep silent about the faults of my (most of my) fellow travellers, but not so partisan as to be insensible to reality. Not everyone is as invariably high-minded as my own lovely self, even among Democrats.

It is a natural narcissism to imagine that any argument, which appeals to one's self would appeal to others, and that we all share modes of thought. The fundamental fact of nature is variation, not standardization or uniformity.

[ken melvin]

Thanks! They did buy out the tobacco farmers and are talking of the need for buying out the health insurance companies, but saw no need for buying out the union worker who lost their job. Strange.

[gordon]

2slugbaits, I've already nailed the fourth kind of intervention; yours is the fifth (though Prof. Thoma might say that it is really a particular case of the first). We've got to keep the running count straight or we might get confused!

[Bruce Wilder]

bp-e: "next to last paragraph doesn't make sense"

In this sentence: It seems to me that libertarian ideology rests on minimizing externalities and disappearing insurance, as justifications for pervasive government intervention in the economy.

ideology rests on minimizing and disappearing; externalities and insurance are the referenced justifications, which are being minimized and disappeared, respectively.

It is an appalling sentence.

bp-e:"Bill Gates in that garage"

It was Hewlett and Packard, or Jobs and Wozniak, in the garage. Gates has no garage in his legend.

What is with you and the archetypal example? First, you confuse Ford Pinto with the Chevy Corvair, now this! What next? ;-)

[Bruce Wilder]

ken melvin: "saw no need for buying out the union worker . . ."

And, it was the slave owner, for whom compensation was proposed, not the slave from whom labor, life and dignity had been stolen, for years and generation upon generation.

[Betsy L. Angert]

Dear Mark . . .

I love the Peter S. Goodman essay. More than two years ago I recall many corporate executives called for a Universal Health Care System, a Single Payer, Not for Profit plan. As powerful as these tycoons are, nothing changed. People are reluctant to embrace what is unfamiliar.

Often I believe we humans view the world as black or white; at times, we offer a shade of gray, as you seem to do in the mention of the three economic theories. Americans know the marketplace and value it, even if it does not function effectively.

With all the talk of Health Care reform, Clinton and Edwards offer near identical programs. Neither will truly benefit the people. Private Insurers will retain their profits. I offer what I belief an excellent evaluation.
What do Mitt Romney, Arnold Schwarzenegger and Hillary Clinton all have in common? They all support the government forcing the middle class to buy a private health insurance policy -- but none want to limit how much insurers can charge or spend.

And that's the problem. Mandatory private health insurance proposals are all stick and no carrot.

The average health insurance premium for a family of four is just over 12 grand per year. What middle-class family making, say, 60,000 bucks per year can afford that bill?

What we need is the carrot of affordable health care. That means government standardizing charges by insurers, doctors, hospitals, and drug companies. No more $6 Tylenol in the hospital.

The reason health insurance is so unaffordable today is that no one is watching the costs. With standardization, insurance would be cheaper and people would want to buy it -- not have to because the government is threatening them with a tax penalty.

Oh wait, I can hear the plaintive cry of the free market. You can't tell a doctor, insurer, hospital, or drug company what's reasonable to charge. That's socialism. Well, how reasonable then is it to tell every American you have to buy a product whose cost is obscene if you want to be a U.S. citizen? Isn't that corporate socialism?

Mandatory health insurance is a government bailout of a free market that's failed its customers. Fewer people and employers are buying private health insurance because it costs so much more and delivers so little.

So rather than let customers demand a new and better product, politicians are forcing us to buy it. Whatever happened to creative destruction?

There's a business plan of course. Mitt, Arnold and Hillary each received six or seven-figure campaign contributions from the insurance industry. The plan is insurers send the bill and we have to pay it.
Jamie Court is president of the Foundation for Taxpayer and Consumer Rights.
Most understand that profits do not trickle down. Even President Reagan's own Director of the Office of Management and Budget, David Stockton, acknowledged this. I believe that as long as we continue to think of the government as something separate from the people we hurt ourselves. Thomas Paine spoke of how we must work together as a society.
Society is produced by our wants and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.
As long as the rich retain power and wealth and the bureaucrats forget to represent the common folk, our options will seem less than attractive. It need not be this way. Imagine if in America, we were united.

Betsy L. Angert
BeThink.org

[barry payne - economist]

It's true that economists have no particular expertise in the area of distribution other than to quantify it once determined. Who should get it for what reason is fair game for anyone, but many economists do jump in on that part as well.

But that's not the usual problem. Because economists do concern themselves with the size of the economic pie, any distribution from it, as opposed to that produced by it, is always looked at closely for interference of the latter by the former.

That's why things like taxes are a big deal to most economists - not who gets them but who pays them and how that affects total output.

Some economists supposedly advise policy makers on the status of the pie so they can cut it up and deliver its parts to their political constituents, including how to use markets and government to produce it.

That's the clean version. The realistic version is sharp division among economists on what effects the size of the pie in the first place, including how to count, measure and determine its components. (It's true - digging holes and filling them up again increases the size of the pie when money is exchanged for the effort.)

In turn, this results in equally divisive views on how distribution differences affect the pie. So many comments may seem like they're about the distribution itself when they're about the effect on total output instead.

To wit, see the debate on tax cuts and tax revenue generation via the Laffer Curve, which has unfortunately slipped to the sophmoric level of a similar debate on evolution and creationism in some circles.

Better yet, look how the economists are moving to their respective corners for the great health care debate.

This also explains why use of "perfect competition" is a common, necessary assumption used to isolate particular subjects for clarity of presentation. Even though the baseline doesn't represent market reality, the assumed variation from it is reasonable for some analysis like market intervention for purposes of redistribution.

But if you read this blog long enough, you'll see even this approach ripped to shreds on occasion by some quite capable critics.

And as gordon points out, the baseline concept can be flipped to its opposite - "perfect government" for lack of a better term, meaning efficient provision not capable by the market necessary to maximize total output. (Even here, some conservatives would dismiss the symmetry altogether, acknowledging only "minimally necessary government" and all above that as "government failure" to shift the emphasis away from "market failure".)

[wjd123]

Here is what I am trying to argue. One type of intervention attempts to correct market failures so that they function more efficiently. The recent calls for financial market regulation, for example, largely fall under this umbrella. Another type of intervention attempts to redress inequities brought about by markets that are not functioning properly, e.g. not rewarding capital and labor in the correct proportions. Calls for redistribution can arise from this type of reasoning.

The last type of intervention redistributes income even though there are no market failures. Here, even when the economic system functions perfectly, i.e. according to competitive ideals, the outcome is still deemed inequitable and hence redistribution is needed. Some of this is out there, i.e. this type of intervention has its advocates, but of the three types of intervention I think this is the least important factor. I don't think people have much problem accepting economic outcomes if they think the game was fair, even if the outcome is lopsided. It's when the game is unfair that there are objections and calls for intervention to correct the inequitable outcome, and to fix the game so the problems don't happen again in the future.--Mark Thoma

Why does Mark give short shrift to those who would intervene in the economic sphere for reasons that aren't economic? I think he is mistaken in doing so.

Economist that see economic criteria as the most important for intervening into the economic sphere would probably ask questions such as these: Why get into intervention on social, ethical, or moral grounds when the most likely outcome would be to decrease economic efficiency and therefore decreased economic gains? Isn't that just what the bickering over different criteria for intervention is sure to do, gum up the wheels of efficiency? Won't the decrease in wealth brought about by inefficiency inhibit the tide that all our boats depend on to be lifted? Shouldn't questions of right action for economic intervention best be kept within the economic field where the experts preside rather than depending on non-economic criterion, especially after economist are working so hard to produce a rough economic justice? After all, aren't most values economically based?

Doesn't all this make intervention that is economically based the most important type of intervention?

Hardly, not in a pluralistic society where every institution from the family, to the professions, to the church, to the government generates its own morality and where every institutional obligations can be overridden for a higher obligation. Why does the economic field get to believe that intervention into the economic sphere for economic reasons are more important than intervention for social reasons, or ethical reasons, or moral reasons.

Economic criteria for intervention may be more important for economist but considering our pluralistic society it smacks of economic conceit.

Placing economic intervention over other criteria for intervention can produce unintended consequences. Suppose economic intervention were to achieve maximum efficiency and everyone getting their rightful piece of the economic pie. Even then someone has to pay for the infrastructure necessary to produce equal opportunity that would lead to just desserts. Wouldn't elevating economic reasons for intervention to the top of the interventionist pecking order favor a flat tax over a progressive one? Wouldn't economist have to look beyond economic reasons to vote for a progressive tax? How would they determine after achieving a rough economic justice that people who have more should pay more unless they had some ethical criterion higher than a rough economic one that everyone should get their justice economic desserts?

So why this economic conceit when it comes to a pecking order? After all science is descriptive. It's not normative and it never will be. You can't go from what is to what ought to be without getting into the realm of values. And I would think that economist would want to understand how intervention into the economic sphere will effect other socially held values. Unfortunately for scientists this is an exercise for someone with the soul of an artist not a scientist.

Scientist have a tendency to fall into a naturalistic fallacy that they can equate some word like efficient with the good thus guiding them to right action. Once they have figured out how to produce the efficient they have produced the good. No matter how much those who practice economics believe that their data is a naturalistic way of determining what passes for right actions, they are kidding themselves if they believe they can equate right action with efficiency.

I think that scientist are suckers for this naturalistic fallacy because their realm is the realm of the rational and they would like to believe that the facts can decide for us. No they can't, we have to decide for ourselves about what ought to be. This entails making a value judgment about what we consider the good and not renaming it the efficient.

Saying that intervention into the economic sphere for economic reasons is more important than intervention into the economic sphere for social reasons seems to me short sighted. An attempt at exclusivity in a pluralist society where morality, ethics, and values are generated from many different sources. I have not objections to fixing the economic game through intervention, but I do object to putting economic reasons for doing so at the top of a hierarchical order.

[ken melvin]

Fantastic comments!

[Lafayette]

Article: The Bush administration and the Federal Reserve have in recent weeks put aside laissez-faire rhetoric to wade into real estate, wielding new rules and deals they say are necessary to protect Americans from predatory bankers

The Republicans re-opened the barn doors ... from whence the stink

HR 3915 (Mortgage Reform and Anti-Predatory Lending Act of 2007), already reported in this blog, passed by the House in October/November was a bipartisan effort to right a wrong created by the Bush administration when state laws in the matter of predatory marketing were preempted by previous congressional legislation.

Of course, it closes the barn doors after the Republicans had re-opened them -- another bit of political ineptitude for which they have become a hallmark.

However, it is questionable that Congressional action is necessary (and if so, how much?) to right the wrong done. After all, the national Treasury is not there to bail out the ineptness of the finance industry.

People should go to jail perhaps for fraud and the proposal to lock variable rate mortgages at the "teaser i-rates" that were contracted could go a long way to alleviating the pain of many.

But, it would be a gross error to bail out the industry, once again, as was done during the S&L scandal over a decade ago.

The Bill cited above goes a long way to outlawing the worst practices of predatory pricing. How do I know that? It has already provoked a wailing alarm from the "BigMortgage" industry. Which means it probably is right on the mark.

(The Bill goes a long way, though not all the way to meet prevalent concerns regarding borrower protection. Some of those concerns are noted in this letter to the House committee in question,
here.)

America has been whacked by a number of unfortunate incidents, originating in the dot.com boom & bust and continuing with numerous job dislocations as well as the sub-prime mess. But, a jump to the conclusion that the market is "warped" or "ineffective" is precarious.

For each of these above incidents, I contend, we ourselves can be found at fault. Consumers who are seduced far too easily by a speculative frenzy and a hubris that set in long ago by which America could sustain forever unskilled jobs.

The markets have simply behaved in the way that we permit them to behave. If a congressional law preempted state laws against predatory pricing and we are paying the price of that stupidity, how is it that market is to blame?

[barry payne - economist]

wjd123 at 6:57, perhaps we agree; for example, most do not challenge the predictions that rising health care costs cannot be sustained, i.e. that some sort of major intervention is necessary;

however, when economists of all stripes also start to make other predictions and recommendations on the same issue about how to get those costs down - along with anyone else - it also affects who gets what medical care by definition, sometimes with large losers like insurance companies and broad based winners like the uninsured, depending on the recommended intervention;

jeff hoffman just posted a good description on the related malpractice thread of what doctors go through when making transplant decisions, affecting who lives or dies, as in "should an older patient in a partial vegetative state be awarded the liver over a younger one when there's only one liver", etc.;

that's a medical decision, in this case of a strong moral nature, made by doctors, not economists, who instead tend to study the more general question, for example, of how organ donation policies affect the supply availablity of organs to recipients in general;

bruce wilder at 8:22, I was trying to expand for understanding on what I view as three (in total) important insights you made in describing problems applicable to medical care; (1) the vanishing independence of physicians; (2) the need for an institutional administrative function to fill the void in (1), and; (3) the head-on attack on private insurance as fundamentally flawed;

as to the source errors of the exploding Pinto gas tanks and Bill Gates in a garage, I don't see how that affects the points made in context of the metaphor applied, but I'll be more careful;

[paine]

nice volley guys

[paine]

"There's no "natural" distribution of income from markets, efficient or otherwise. Because the rules are not "natural" -- they are always an artifact, a human construction."

yes but are these social conventions ways rules
traditions laws
acccidental
or in some important sense like
its morphology to a natural language
necessary and therefore law abiding
to a law higher then "the law "

example not on point
selling cocaine is unlawful
but obeys
a higher tendency
to outlawfully
and gainfully supply
a persistent dependency

---------

"The rules reflect and determine the distribution of power"

this can be bent either towards marx or towards js mill
pretty broad bruce

if the rules at the volitional level
can be followed or broken
but in themselves
are socially necessary
to sustain a specific social formation....

i guess i need to double underline
that change of the rules that modifies
and expedites an on going internal process
and that change that amounts
to a braking of the rules
and destroys the system itself
to either open the way
for society to pull
off
a pheonix act
or
merely a jubilee

or better yet a metamorphic "miracle"

[paine]

"there can be a functioning market with no government intervention: the perfectly functioning market yielding perfect outcomes."

i suggest the iron law the LF's hope to make us all obey is this

spontaneous mareket outcomes
are always better in the long run left alone to work themselves out
the state can only make long run matters worse

regardless of intentions
i should not try to perform heart surgery

imagine a world where heart surgeons
able to do any better then me
"can't ...can't ...can't exist"

[paine]

"Externalize costs and get rich. It is a common formula in business. And, it depends on having power, unopposable power"

i like that as metaphor
but i'd stress the internal externality
of an exploited set of productive "employees"
there are no private markets properly speaking
and third parties
have their public rights too
with all that entrains in Pigou-stan

but there are private firms and
their third parties are more often then not
some other exploiters second parties

[Lafayette]

wjd: Why does the economic field get to believe that intervention into the economic sphere for economic reasons are more important than intervention for social reasons, or ethical reasons, or moral reasons.

Well said. Bravo.

If we make ALL economic decisions based upon efficiency, and efficiency alone, and do not bother about either social utility or morality, then we should strive to maximize one sole factor -- GNP.

However we do it is irrelevant as long as we achieve maximization of GNP. The fair distribution of GNP be damned. And, the quality of life in general along with it.

[Lafayette]

wjd: Why does the economic field get to believe that intervention into the economic sphere for economic reasons are more important than intervention for social reasons, or ethical reasons, or moral reasons.

Well said. Bravo.

If we make ALL economic decisions based upon efficiency, and efficiency alone, and do not bother about either social utility or morality, then we should strive to maximize one sole factor -- GNP.

However we do it is irrelevant as long as we achieve maximization of GNP. The fair distribution of GNP be damned. And, the quality of life in general along with it.

[Bruce Wilder]

paine: "i suggest the iron law the LF's hope to make us all obey is this

"spontaneous mareket outcomes
are always better in the long run left alone to work themselves out
the state can only make long run matters worse"

And, I say, not true. Markets are emergent institutions, and "left alone" they just go right on emerging, sooner or later right into a disaster zone. Keeping a market anywhere near a stable and optimal equilibrium requires careful management of institutional entropy.

Take our current banking crisis as an example. Sure, banks and bankers may be disciplined by the disaster, I guess, but using costly disasters for market discipline requires costly disasters at regular intervals. Costly disasters or government regulation? Ya takes your choice.

[Bruce Wilder]

paine: ""The rules reflect and determine the distribution of power"

"this can be bent either towards marx or towards js mill
pretty broad bruce"

He, who has the gold, makes the rules; and he, who makes the rules, soon has the gold.

Goofy, but memorable, and broad.

The idea that a "perfectly functioning market" has a determinate outcome in terms of income distribution rests delicately on the concept of the production function.

I have called the production function the theorem of the two lies: it is not about production and it is not a function.

Production functions are the theoretical mechanism that makes the distribution of income in a competitive market, "technologically" determined. And, it is a lie.

The production function says that output is a function of inputs. A few seconds of thought will lead you to realize that output is not a mathematical function of inputs. To make the production function a function, one has to jerry-rig an assumption that output is at a maximum. Maximum output is a function of inputs.

But, the production function only seems to be about production. Really what it is saying is that, at a maximum, the income earned from output is equal to the incomes distributed to inputs used. It is a statement about the distribution of income. And, it seems to state that the distribution of income from output to input is fixed, at least when output is maximized by competition or whatever, by "technical" considerations.

If we entertain a production process, which is managed, where output is not, ever, a meaningful "maximum", then the distribution of income is not a fixed and predictable outcome of a perfectly competitive market.

The distribution of income is not an outcome of competitive market processes. Even in theory.

Income distribution becomes a function of the production process manager's need to manage, to motivate behavior, not to draw in an allocatively efficient mix of inputs, but to reward and punish behavior in order to manage production process error, and to direct residual income to particular factors.

That's a lot of good, sound economics for a blog comment, but we need that, sometimes.

[Bruce Wilder]

"And, it seems to state that the distribution of income from output to input is fixed, at least when output is maximized by competition or whatever, by "technical" considerations."

Bad sentence.

When output is maximized, technology, as embedded in the production function, determines income distribution to factors. An allocatively efficient distribution means that inputs are drawn until the price of the input equals its marginal productivity in contributing to maximum output.

Not much of an improvement. I give up.

[Lafayette]

BW: When output is maximized, technology, as embedded in the production function, determines income distribution to factors.

Not as much as labor does, particularly in industrial sectors where it is the major input fact. And, that is the cast in most of industry and commerce.

Let's not over-estimate technology's pertinence to income distribution (which is far more affected by distribution of profits) - just because dot.com heroes made the front pages of BusinessWeek.

Most pertinence in income distribution goes to the return on factor costs, notably labor, and the taxation of compensation in its other forms, notably stock dividends or the resale of stock options.

Technology has far more relevance in productivity and therefore in the aggregate amount of profits. If it makes workers more efficient, it does not return to them the lions share of the return on that efficiency.

Besides, taxation of "unearned income" (namely interest, dividends and capital gains from stocks) does more for Income Inequality (if that is what we are talking about in terms of income distribution) than any other factor. So, we cannot escape the fact that it is necessary to redress Income Inequality.

[wjd123]

barry payne,

I do think we have to put limits on health care. We can't give everyone everything they want. I probably wouldn't allow an expensive operation to keep someone alive for another month. We have to ration health care where it will do the most good.

On the other hand faced with the choice between two people direly in need of a liver transplant, one and unreformed alcoholic that can pay for everything, and the other a reformed alcoholic that can't, costs would have less of an influence on my choice.

Happy New Year

[wjd123]

barry payne,

I do think we have to put limits on health care. We can't give everyone everything they want. I probably wouldn't allow an expensive operation to keep someone alive for another month. We have to ration health care where it will do the most good.

On the other hand faced with the choice between two people direly in need of a liver transplant, one and unreformed alcoholic that can pay for everything, and the other a reformed alcoholic that can't, costs would have less of an influence on my choice.

Happy New Year

[ken melvin]

wjd, today, if you are terminally ill with colon cancer, you can buy a Genentech product that will extend your life for 6 months for $150-200K.

[Real Person from the Real World]

Here it goes, liver transplant scenario to show that we must ration all medical care to those who deserve it. Those with the bucks can fly anywhere in the world to get any legal or illegal medical care they want. Those left to the mercy of others better be sure they have lead a sinless life, if they happen to need extraordinary care. Likewise those who are less sinners, and just unlike, well.... who cares....

[mannfm11]

I tend to agree with those that say this is a bailout of the rich, not the poor homeowners who should have never been able to buy in the first place. This is about Citicorp. When Shumer starts crying, you can bet he cries loudly for Citi and JPM. He couldn't care less about the poor guy in Georgia. This is clearly a Minsky moment though and a Glass-Steagal moment as well. The idea that the Enron scandal was aided and abetted by these NY banks who themselves are engaged in the same financial shell game really takes the cake. This isn't news. It is kind of like Dillenger helping Bonnie and Clyde rob a bank and then robbing another bank after B&C are dead. The problem here is that they took portfolio theory and its risk theory and taken out the idea of risk along with the risk premium. Thus, we have watched a group of people bankrupt the United States, shun regulation, but look for the everloving bailout having passed the risk onto the taxpayer.

[Lafayette]

mann: This is about Citicorp. When Shumer starts crying, you can bet he cries loudly for Citi and JPM. He couldn't care less about the poor guy in Georgia.

Let's put the blame where it goes, rather than helter-skelter.

It is not Shumer's job to worry about the little guy in Georgia. Unless, the little guy is a CitiGroup stock owner -- then Shumer should be concerned that the company stock appreciates and/or dividends paid. Charles Prince has already paid the price of inept sub-prime management at CitiGroup by falling on his sword. (Before the BoD took his head.)

Bernanke should be the person worried about the little guy in Georgia. Better yet, the Georgia state prosecutor should be the person looking into the predatory tactics employed to "hook the sucker" by state credit institutions. These loans were misleading -- did they contravene the Truth in Lending Act (TILA)? We're they outright fraud?

The solution (for the Little Guy) has been suggested. To wit, a law is passed (or if state regulatory bodies issue a regulation) stating that all ARM credit-financing made at "teaser rates" is fixed at those rates long-term and any further increase in the rates is forfeited. (For those occupying their houses, not for speculators "flipping a condo".)

The Finance System, whose profit greed permitted this mess, will take a major hit on the bottom line (they will have a HUGE amount of non-profit generating credits on the books). THAT will be a salutary lesson to our beloved financial Masters of the Universe.

But, don't expect THIS administration to take a whack at BigFinance for as long as Paulson is Secretary of the Treasury. The poor guy will be hounded out of the industry that gave birth to him (and his riches). Pappy Bush wont let that happen.

We have an SEC to look after the stock market. It is a toothless tiger insufficiently independent of Wall Street manipulation. The Fed should have been supervising lending practices of nationwide credit institutions -- but they misplaced their choppers decades ago.

The Federal government is grossly handicapped in the supervision of a crucial sector of the economy -- Finance. That lack of adequate supervision is best corrected by Congress. Don't expect the Republicans to do it, either in the White House or Congress. That leaves who ... ?

[Lafayette]

From "ConsumerAffairs.com", here's an opinion of the Paulson Plan from the consumer's POV.

The article has both good and bad comments regarding the present mess. Does this mean it is "balanced"? Your's to decide ...

[Real Person from the Real World]

I read somewhere, sorry I did not think at the time to get a citation, that Citibank and other companies are offering foreign investors investment products paying very high interest rates, like 9%. I guess that is to make up for the mortgage risks...? Still, the emphasis is FOREIGN.... How come the foreingers get the best stuff, when these are US companies? The global elites have alleigance only to MONEY, and business caters to MONEY. Someone needs to balance things out for the rest of us.... the only entitity with the power and obligation is GOV'T.