"The Invisible Hand Is Shaking"

I recently talked about relative prices as signaling mechanisms in the economy, and how distortions in these signals relate to Fed policy (see False Signals). Part of the discussion noted that "Market failure can also cause distorted prices, but ... this is outside the Fed's purview, so ... that's for another discussion." Conveniently, Robert Frank takes up this issue:

The Invisible Hand Is Shaking, by Robert Frank, Economic Scene, NY Times: Adam Smith's modern disciples are far more enthusiastic about his celebrated invisible-hand idea than he ever was. ...

If you believe, with Smith’s modern disciples, that unfettered pursuit of self-interest always promotes society’s interests, you probably view all taxes as a regrettable evil — necessary to pay for roads and national security, but also an unwelcome drag on economic efficiency. The problem, according to this view, is that taxes distort the price signals through which the invisible hand guides resources to their best destinations.

Smith’s more nuanced position supports a different view of taxes. When market prices convey accurate signals of cost and value, the invisible hand promotes the common good. But prices often diverge from cost and value and, in those cases, taxes can actually help steer resources toward more highly valued uses. ...

The production and consumption of many ... goods ... generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. ...[M]arket forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high ...[, a] classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.

Doing so would not only raise revenue to pay for public services; it would also make the allocation of society’s resources more efficient...

Efficiency is important because any policy that enlarges the economic pie necessarily lets everyone have a bigger slice than before. Economists opposed suspending the gas tax because doing so would make the economic pie smaller.

Of course, when millions of voters feel the pinch of rapidly rising prices, politicians find it hard to stand idly by. But as the late economist Abba Lerner once remarked, the main problem confronting the poor is that they have too little money. The best solution is not to reduce the prices they pay, but rather to bolster their incomes — for example, by selectively reducing the payroll tax for low-income workers or increasing the Earned Income Tax Credit. Suspending the gas tax would encourage rich and poor alike to do more ... driving. It would also promote sales of fuel-intensive vehicles. Because the gas tax reduces waste, it actually makes more resources available to help low-income families.

Gasoline is one of a host of goods whose production or consumption generates costs that fall on outsiders. ... That the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses.

Because such taxes make the economy more efficient, it makes no sense to object that they impose hardships on low-income families. Again, an efficient policy is one that maximizes the size of the economic pie. And with a bigger pie, it’s always possible for everyone to get a bigger slice.

With regard to the size of the pie and who gets what, this is not the only basis for arguing for income redistribution, but I think you can base redistributive policy on a market failure argument, i.e. that distribution mechanisms have failed to reward factors of production according to their contributions to the production process. Some have received too much and others too little, and more could be done to counteract this so that we have a better chance to realize the possibility of everyone getting "a bigger slice."

Comments

[Pollution]

Increasing the price of gasoline does not increase GDP, it decreases pollution. A good goal, but it does not increase the quantity of consumer products available to be redistributed. The total quantity of consumer products extant may actually fall, since increased transportation costs may reduce trade.

Clean air is a definite benefit, but it is not something that can be redistributed.

[brian]

But clean air is a good too. It may not be a tangible good that you can pick up, but it's still a good.

But you're right that it cannot be redistributed, but the fact that it is a public good means that it is provided at the same rate to everyone. Equality in its distribution is inherent in its very nature, so there would be no rationale to redistribute it anyway.

[lark]

I've noticed that economists often cite how their view is in line with Adam Smith, as a way of supporting that view.

I'm not saying Adam Smith is bad, but he died in 1790.

Is there any other scientific field that uses as an authority a member of the field that has been dead for over two centuries? How odd it would be if a physicist used the views of Newton to assert the scientific value of a new idea in physics.

I respect the contributions of economics, this is not meant as disrespect. But why does Adam Smith still hold such currency?

[Bruce Wilder]

Robert Frank Efficiency is important because any policy that enlarges the economic pie necessarily lets everyone have a bigger slice than before. . . .

. . . an efficient policy is one that maximizes the size of the economic pie. And with a bigger pie, it’s always possible for everyone to get a bigger slice.

I wonder if he realizes that the second statement is true, but the first, however hopeful, is false.

Robert Frank:Consider the market for potatoes: in it, production and consumption are determined by millions of separate cost-benefit calculations. Profit-seeking sellers are willing to offer an additional pound of potatoes for sale whenever the benefit of doing so — as measured by what buyers are willing to pay — is enough to cover the cost of production.

The market reaches equilibrium when the cost of producing the last pound is exactly equal to its value. If the costs incurred directly by sellers are the only relevant costs of expanding potato production, and if the benefits to potato buyers are the only relevant benefits, the invisible hand gets things just right.

The Economic Naturalist should get out more, because this description, especially if it is meant to encompass the retail pricing of potatoes in supermarkets, is just nonsense. See this NY Times article, for the case of potatoes. In the supermarket, the price of potatoes is an administered price, just like the price of tomato soup or toothpaste or frozen lima beans or shampoo. If it matters, it is not an accurate description of the interaction between potato farmers and markets; agricultural markets typically involve the farmer making an highly uncertain choice about how much to produce, many months in advance of any actual market exchange, and this circumstance drives many peculiarities in farm product markets and behavior.

Robert Frank: The market reaches equilibrium when the cost of producing the last pound is exactly equal to its value. . . . market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer.

This is a classic description of an abstract, theoretical model, masquerading as a description of the real world. It is not just ignorance, it is deception.

Maybe this is the right model to use, to make the point about externalities. Certainly, I would agree that it is a good model to use to learn to think about externalities. So, I understand that I am making what some people might consider too fine a point. Too many op-ed and Econ 101 arguments turn on treating a theoretical, conceptual, analytical, a priori model as if it is a description of how the economy commonly operates; it becomes a bad habit, that carries over to too many other arenas, where it matters more, that this inaccurate description of actual markets leads thinking far astray.

If one wanted to carry around a theoretical, default model for consumer product markets, monopolistic competition with increasing returns makes a lot more sense than perfect competition with constant returns. That's a tougher row to hoe, because it implies that markets often don't have an actual market price equilibrium. But, hey, maybe you've noticed posted prices and advertising. The existence of advertising implies a world where products are not being sold for marginal (direct unit) cost.

I am not completely unsympathetic with the need to compress thoughts in something the length of an op-ed piece. (I'm writing a blog comment.) When people think about gas prices and gas taxes, I guess we have to start somewhere in turning back the libertarian delusion. But, the libertarian delusion was never about denying the existence of externalities; the libertarian delusion is about denying importance of externalities and the capacity of government to deal with them with sufficient effectiveness and efficiency. But, more importantly, the liberatarian delusion has been about denying the existence of the larger system, and the need to carefully manage the larger system. The colossal system to deliver gasoline; the colossal system to deliver roads and automobiles and places to drive to, and places to park.

The excise tax on gasoline was never about externalities; it was about financing roads -- the tax on gas is a use fee, imposed at the margin, for the use of roads. It is a toll, collected in an adminstratively, highly efficient way. And, Frank misses that.

And, in missing that the gas tax is a toll in a complex system, he misses that there's a system, in which cars, and roads and suburbs are all embedded. A huge system, in which most of the costs were sunk cost investments to minimize the marginal costs of operating within the frame of the system. The System bakes the friggin' pie, and the change in the cost of gasoline is causing the System to burn the pie. And, Frank doesn't have a clue as to what this all means.

[Bruce Wilder]

Robert Frank: market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer

To belabor my point further, if this were ever actually true of an actual, consumer market, the seller would not want to sell an addition unit at the prevailing price. Real life is that retailers spend actual cash dollars trying to get people to buy more, more, more at the prevailing price, or even a lower price. McDonald's will lower the price of hamburgers on Wednesdays, and actually advertise the fact, to draw people to come in and buy more hamburgers at the lower price!

If it pays to promote the product in advertising, the product is not priced at marginal cost. You can twist your brain into a pretzel, trying to rationalize, but making that your hobby won't make you any smarter about economics.

[gordon]

Frank: "Because such taxes make the economy more efficient, it makes no sense to object that they impose hardships on low-income families. Again, an efficient policy is one that maximizes the size of the economic pie. And with a bigger pie, it’s always possible for everyone to get a bigger slice".

Always possible, but not inevitable and in fact rather rare. Consumers of petroleum fuels would be doing the sensible thing if they demanded the slice before the tax was imposed. That means better public transport, some way of getting the shopping home which doesn't require driving, some secure and carbon-efficient way of getting the kids to school, to sports, to their friends' houses etc., and the invention of a non-driving vacation.

Petroleum taxes are regressive. If economists' proposals for mitigating global warming are going to shift the costs overwhelmingly on those least able to pay, those people would be justified in abusing economists and calling for rationing and price controls instead.

[bigTom]

A lot of policy could be implemented via tax and distribute, i.e. all or a substantial fraction of the tax revenue is returned to either all the people, or perhaps more selectively towards lower income people. The real issue, is that the internal US political dynamic seems to be severely toxic to such proposals. Most European countries have been able to raise very substantial oil product taxes, whereas in the US the conventional political wisdom, is that such proposals are political suicide. It looks like the arguments in favor of any such proposals are too intellectual, and therefore elitist to pass muster.

In the case of gasoline, besides pollution, there are some pretty convincing arguments to be made concerning, trade deficits, national security, and national economic preparedness for peak oil, which in my book, are much more serious than the pollution issue. Yet it is the rare American politician who would any of touch this with a ten foot pole.

[OhNoNotAgain]

"Increasing the price of gasoline does not increase GDP, it decreases pollution."

If alternative forms of energy and transportation are then invested in due to the high price of oil, then GDP could increase due to the fact that such investments are normally front-loaded, such as a purchase of a more fuel-efficient car, scooter, bike, solar water heater, etc. that would not necessarily have been purchased otherwise. But, GDP is such a bad measure of our economic well-being, that I don't really care one way or the other which direction it goes in as long as the standard of living of most Americans is decent.

[JeffF]

"The excise tax on gasoline was never about externalities; it was about financing roads -- the tax on gas is a use fee, imposed at the margin, for the use of roads. It is a toll, collected in an adminstratively, highly efficient way. And, Frank misses that."

Road spending paid for without taxes connected to road use is an externality of driving. The gas tax already is partially mitigating one externality (gas taxes mostly pay highways, but don't pay much toward local roads).

[James Killus]

The agency problem always gives the result that those who decide nominal prices will set them to give the those agents (i.e. themselves) the greater share of return for goods and services, and not necessarily those others who contribute to production.

If there were an efficient market for upper level managerial services, there might be some downward pressure on labor costs at higher wage scales, but it's pretty obvious that the real competition is in obtaining the overpaid jobs, not in doing them effectively. I admit that there is, to a lesser degree, some competition in staying out of jail, or at least avoiding shareholder suits, but the general solution to this seems to be to get laws changed, rather than to adjust other behavior.

I'd prefer that some of the people tying their brains into pretzels would try to come up with better solutions to the agency problem, rather than slicker methods of rationalizing the results.

[Lafayette]

Article: But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

Bollocks. Pollution costs, unfortunately, are the figment of some economists' imaginations. Like the methane cows give off into the atmosphere, it is not priced in the milk they produce.

If taxes are uniform, they increase the cost of an article, but they do not distort pricing unless they are singularly above the general level of taxation -- as is the case, btw, for petroleum products.

In fact, the price of petroleum products is so great that it does result in "consumption trade-offs", meaning less real disposable income for other goods/services. This induces consumers to by fewer discretionary goods/services and to concentrate on basic necessities.

However, a generalized sales or value-added-tax does not provoke "consumption trade-offs", it simply diminishes real disposable income available for consumption. Applying the VAT at the pump would immediately liberate purchasing-power – but would reduce tax revenues, which would have to be compensated for in another manner. (See below)

Again, a general sales tax increases overall price levels, whilst lowering consumer purchasing-power, does not result in consumer trade-off "distortions".

Article: The best solution is not to reduce the prices they pay, but rather to bolster their incomes — for example, by selectively reducing the payroll tax for low-income workers or increasing the Earned Income Tax Credit.

True enough, but unworkable. Who is a "poor", who isn't? How do you apply the tax? This suggestion is ripe for finagling, its mechanism is so complex.

A better method, imo, is to trash the current taxation method, meaning both payroll and income taxation -- by substituting both with a combined value-added-tax and selective income tax. A national value-added-tax (slightly larger than most state taxes on all goods/services) would be applied to all consumption, including gasoline. The income tax could start a much higher level, say at or just above the average national wage and become confiscatory at all earnings above X-megabucks per year at 97%.

This would relieve the poorest elements of our society from any income tax or payroll tax whatsoever, but they would indeed pay the value added tax. The value-added-tax would then be shared with the states. Shifting the burden of income tax from the very poor to the very rich could result, if done artfully, in a zero-loss in terms of total taxation revenues.

The additional benefit is that, with no payroll tax to reduce income, the working poor are immediately better off. So is the middle-class and the rich would not even feel the effect on their aggregate income.

Rich or poor, we must all face the obligation of supporting financially the administration of government, whether local, state or national. The poor should not be totally absolved from this duty.

Why? Because it is not only a civic duty, but obviating the poor from All Taxation simply induces them to live within that context and provides no inducement for them to take the escalator up to higher levels of remuneration. At these higher levels, despite the fact that income tax kicks in, they would still be better off – which is what they want to be.

[Bruce Wilder]

Jeff: "gas taxes mostly pay highways, but don't pay much toward local roads"

I suppose that would depend somewhat on which State you are living in.

Jeff: "Road spending paid for without taxes connected to road use is an externality of driving."

In general, the economics of transportation and land use would suggest that the optimal method of road and highway finance would mix property taxes and gas taxes (or similar use taxes), with new construction mostly paid for by bonds secured with property taxes and maintenance paid for out of gas taxes.

If it were up to me, gas taxes and registration fees would be used to pay for no-fault group auto liability insurance, as well.

YMMV

My larger point, really, was that the System (of autos, oil, highways, cities & suburbs) is the result of deliberate planning and careful management by actual humans, and not the spontaneous, invisible and "naturally" ideal work of "market forces" masquerading as Olympian Gods (the Olympian Gods of the Ancient Greeks were concepts made into divine causal agents, so there are remarkable parallels with the religion of economics).

The System doesn't work well at $4/gal and will work very poorly at $8/gal. That isn't just a matter of the price hurting the poor more, or something distributional concern. The System, as I wrote, bakes the pie, whose size so concerns Prof. Frank. For more than 50 years, American life has been structured around a System, where you drove to a better job, to a better house in a better neighborhood with better schools, to big box stores to get better prices, and so on. That's the concrete reality of distributed decision-making. And, there are prices for gas, within sight, where the System that frames all of those choices, simply doesn't work.

We need to be thinking about a new System, and should not be relying on some Titans, called "market forces", doing it for us. That doesn't reflect, on my part, any doubt about the importance of a realistic price for gasoline, or consumer behavior guided by such a price. But, it does reflect a healthy respect for the limits of allocational efficiency as the locus of economic organization.

[Lafayette]

Pick your paradigm

What is missing in the discussion of pricing is that of its counterpart, consumption. Regardless of general pricing levels, what matters to each and every one of us is our purchasing-power. Consumer prices are only one part of the equation. The other part of the equation is general level of compensation, meaning consequently net disposable income and the manner in which we spend it.

If there is no net balance between the two, net disposable income and consumption behaviour, then either of two consequences result.

The first consequence is that which is presently happening in many countries of Europe. Net incomes have stagnated and prices have increased. The balance is lost and disequilibrium occurs. (So much so that re-ascendant inflation is the lead article in the Economist this week, here.) When net disposable income does not go as far as it once did, then consumers retrench by favoring non-discretionary (upon necessities) over discretionary spending. In this paradigm, they sense a loss of “well-being”.

Discretionary spending, meaning expenditure left to personal choice or whimsy, is a good measure of well-being. We buy what pleases us, rather than purchase what is absolutely necessary. This liberty of expenditure is indicative of a higher standard of living -- that which we may call the Prosperity Paradigm. (As averse to the Poverty Paradigm.)

The second consequence occurs when economic circumstances permit incomes to expand apace whilst overall price levels remain stable. Or, at least, less than the expansion of disposable income. This nirvana-like economic state provokes inflation-free expansion of consumption. Basic necessities are easily affordable and the remaining disposable income is spent in a discretionary fashion, typically with wild abandon, if not saved. Which is typical of the Prosperity Paradigm.

The economic circumstances that permit this second instance are found presently in China (and America historically, until lately). People are coming from a have-not economic condition and aspire to a have-something condition. Their disposable income permits them to spend, and spending promotes a higher standard of living. For as long as inflation remains in check.

Such have-not countries have been pursuing consumption at the basic necessities level and frenetic economic expansion now allows them to earn and spend more freely on discretionary consumption. They are just beginning to have remaining, from disposable income, discretionary income – which they seem to want to spend in the stock market, though others are spending lavishly on their personal comfort or even travel. This pattern of consumption is nascent, however. It is nonetheless likely to expand.

In developed countries, such as the EU or the USA, a prosperous country has a set of economic circumstances considerably different. Society in general enjoys a comfortable standard of living. Productivity enhancements as well as the willingness to select work over leisure (that is, income over expenditure) allows consumers to balance discretionary and non-discretionary consumption. Price levels remain acceptable, and economic expansion is reasonable if not frenetic. This historical paradigm has, however, changed recently.

If the Far East has depicted the former economic circumstance described above, then the EU and US describe the latter. The present conditions, however, could not be more opposite. And, therefore, so are the remedies for when economic paradigms change. The Poverty Paradigm is much more prevalent than the Prosperity Paradigm in China. The reverse is true in the more developed countries such as the EU and US.

However, in both instances, paradigm change has occurred—if differently between the EU/US and the Far East. The former has shown a change from Prosperity to Poverty Paradigms, whilst the latter demonstrates the opposite trend.

But that is a debate for another day.

[Lafayette]

The Privilege of Plutocrats

JK: The agency problem always gives the result that those who decide nominal prices will set them to give the those agents (i.e. themselves) the greater share of return for goods and services, and not necessarily those others who contribute to production.

Well put.

There are two ways that what you propose can happen. Either Fiscal or Legislative.

Fiscally, we can tax the piss out of the rich - by raising marginal rates to (at the very least) where they were before the Trickle Down Magician axed them.

There is a legislative way, though a bit more complicated. Presently, there is no legislation in the US (that I know of) that levels the playing field between Management and Staff (meaning essentially non-management). The cherry-pickers of low-hanging fruit are uniquely the former.

Apparently, we have liberty of expression, but liberty as regards profits is the Privilege of Plutocrats. These latter consist of a very, very small percentage of the population -- much to the regret and unfairness to the larger part of the American population. They obtain, however, a percentage of the Income Pie that is grossly larger than their comparative number. (Why? is what one should ask. Because it has always been that way is the tritely nonsensical answer in response.)

Net profit in terms of their volume of a company is decided by who? Management can cosmetically alter the numbers any way it wants:
* By loading the company with debt,
* By allowing itself stock-options that are effective instantly,
* By giving themselves personal loans (also regarded as debt),
* By off-shoring ownership and paying "the owners" exclusive dividends,
* Any number of legal financial finagles,
* Etc., etc., etc.

It's only motivation for reporting them as large as possible is that their stock-options are measured in terms of market value.

A legislative framework for determining net profit distribution can be decided. It could look like this:
* A legal definition of what is allowable management discretion in the accounting mechanism that determines Net Profit,
* A minimum percentage of Net Profit set aside for distribution to non-Management personnel,
* A maximum percentage of Net Profit distributable to management,
* A capping of termination settlements of Top Management (golden parachutes and the like) and the necessity to link them rationally to past performance and not just tenure,
* ... and a few others I've overlooked.

There is no logical or believable reason to reserve net profit sharing to Management alone. None, nada, nichts, rien, niente. (If you have one -- besides the lame "because they earned it" -- let's see it here.)

At the very least, it can be made law that all workers in a company become owners (by means of allocation of at least one share of stock). Since all staff becomes owners, they have a right to minimal Board representation and therefore overview of all financial and accounting operations of the company.

Until the above happens, corporate America will be able to influence considerably the running of the nation by corrupting Congress and presidential elections.

[paine]

pigou is not enough
this abc is way too first level

to not swallow its own second best tail
by partial patching
that covertly seeks rent in the name of pareto...

with complex cross elastic interactions abound
that require
non linear incentives and disincentives
to steer free choice towards higher social welfare ...

sorry folks we're far from eden

even
with a total
pigouvian tax and subsidy mediation
the laws of equity would crash into the laws of optimation

[paine]

"we can tax the piss out of the rich"

bravo laff track bravo
a touch of vulgarity now and again
brightens your prose

[pgl]

Bruce Wilder knocks down the last paragraph of Frank's oped so I don't have to. Some folks are way too dismissive of the distribution of income argument. But let me give Greg Mankiw and his Pigou Club a little credit - Greg notes that the more we raise in gasoline taxes, the less we have to raise in the form of some other tax. Liberals like me would use this to offset sales and employment taxes, which heavily impact the working poor who would pay more in gasoline taxes. Alas, Greg is more interested in reducing the tax burden on capital income.

[paine]

bruce w
social engineer extra ordinaire

gets to gas taxes in a flash

they are indeed a very handsome proxy for lots of car op
bull shit

but we have the tech for road use chrages
time and strip rated

since we're playing big brother
lets go for it ...!!!

[paine]

pgl

u liberal ??

god bless u

and btw
i think we all agree
after a couse in intermediate micro

ramsey rulers
are the cleverist rulers

but they need a fair amount
of careful calculation
using a very interlaced model
and fed
a mountain's worth
of carefully plucked data

call it a naturaloid
liberating tax policy

the height of policy artifice
"meets and beats " the market
thru its shrewd reading of the back story

[paine]

"Increasing the price of gasoline does not increase GDP"

no ...
but it potentially increases
social welfare
with no needed net increase in hu-work

gdp is not the gauge here
its total welfare
one ought not
confuse some margin measured
value of product output
with
comparative levels of welfare

after all i suspect
despite the matrics
of our profit centered corporate hegemons
the rest of us
produce products to produce welfare

[paine]

"why does Adam Smith still hold such currency"

totem pole worship

[jamzo]

relatively inexpensive gasoline has been an important part of the US economy

it fueled many apsects of our economic growth

the massive automobile industry

the national highway network

the population spread from cities to suburbs and exurbs

travel to resorts, etc

the recent price spikes signal the end of an era

[jamzo]

by the way

if "gas taxes" were paying for roads, etc, why does every state in the US have severe road infrastrucuture problems

the "failing bridges" phenomenon has been widely reported

seems the tax funds to pay for these bridges were absent

[ken melvin]

Great discussion, most heretical; all good things come from heretics, so Smith. The analogy w/ religion 'tis an apt one, including the bolstering by more mythologizing and layering ad infinitum.

[bakho]

Markets are created by collective actions. That includes individuals acting as individuals, corporations and other organizations acting for the collective benefit of their members and governments which supposedly represent the collective interests of all individuals. So called "market failure" means that the collective actions are failing to produce the optimal result. Market failure is in other words, government failure if one defines government as representing the collective best interests of all the individuals. We currently have "market failure" in the energy sector because we do not have a government that is acting in the collective best interests of all individuals. We have had a government that has been advancing special corporate and special individual interests above the collective interests.

Government can act in a variety of ways including the use of taxes. Taxes are only one tool. There is nothing that makes taxes more special than other tools such as energy efficiency regulations? Micromanagement and command-control of markets by government may stifle innovation. However, the government can also stimulate innovation in a variety of ways that do not involve tax credits or taxation. For example, the internet started as a government sponsored research program. The rules for the internet were structured by government. The initiation of the internet and internet economy would not have occurred, or would have occurred much later in a less robust form if left to the deprivations of short term corporate interests.

The wealthy elites have tried to redefine the role of government in markets in order to limit the responsibility of the wealthy to the greater community. This is to protect their special interest over the collective interests. We should not accept the limitations they try to impose on government acting in the collective interests of all individuals.

[Lafayette]

Definitional failure

bahko: Market failure is in other words, government failure if one defines government as representing the collective best interests of all the individuals.

I suspect, what we have here cited, is definitional failure.

The "government", this amorphous mass, is indeed elected by citizens. But, to posit that it represents our "best interests" is, I think, a great exaggeration of fact.

Most of the Senate, for example, is composed of millionaires. Do they represent your interests , or theirs? And this is not a rhetorical question.

A representative comes to Congress with a background, which is forged by the community in which s/he has lived. Would a millionaire live within a community where their neighbor an coming over unannounced to borrow flour was poor or middle-classed?

Ask any Senator what is the cost of cross-town DC bus ticket ... and watch the glaze come over their face.

No, sorry, they haven't my interests utmost in mind. Of that I am sure.

[ken melvin]

Right on about the neighborhood. DiFi and Boxer voted for farm subsidies that cost many times what it would take to feed and house our homeless. Seems the 'farmers' live in Pacific Heights; the homeless, of course, don't.

[cm]

Lafayette: "the willingness to select work over leisure"

At least in most of the professional sector (and quite likely in all sectors of business), the only tradeoff I can currently see is the "willingness" to accept penalties and career risk by going home on time or even going part time (where the latter is even an option).

Most people work, or are at lest physically present at the workplace, to the max (where I define the max as something which is long term sustainable, and which is somewhere in the 40 hours per week ballpark). I have yet to see anybody who has done more than that in full-intensity work (not just sitting on their butt and shooting emails or passing content-free remarks in meetings) on a sustained basis (beyond age let's say 30 and for more than 1-2 decades), without adverse physical/mental health effects.

When you can introduce labor legislation that enables "choosing leisure" without penalty, e.g. by enabling part time work without penalty in career and healthcare insurance (admittedly difficult), and legislating a 30-35 hour baseline work week with premium-paid overtime provisions, then we will see how much "willingness" people have to work more. At least for a while, until the new workarounds for squeezing more labor out of people have been figured out.

In a previous job of mine, HQ had a 35-hour work week, and management aggressively solicited the professional staff to convert to 40-hour contracts. Some of those who converted and who I talked to did this from a position where they had previously been pressured into unpaid overtime (overtime was paid but overtime hours were restricted to 20, and later less, per month), along the lines of, I cannot give you more overtime, but do you want to let the project fail or the deadline get blown. There wasn't a lot of employee-side willingness involved.

says...

Lafayette, that was my point entirely.
A corrupt government is the shortest path to market failure. Typical market failures arise by special interests forming cartels, monopsonies, monopolies or information disparities or by special interests externalizing costs to the general public.

Markets operate under rules that are enforced by??? Ultimately, it is the government (the collective will of the people) that enforces contracts, property rights and all the other components of "successful" markets. When government becomes another representative of the special interests instead of the for the collective benefit of the people, then the market is no longer operating under "rules for success" but corrupt rules or "market failure".
Government is more than the current sitting senators, congressmen and elected executives. Government also has more permanent employees that run the agencies, run the courts, etc.

The US government has historically enabled successful markets by a system of checks and balances that guides the process so that the interests of all citizens are considered. In certain periods, such as the current one, the system of checks and balances becomes corrupted and fails. This current breakdown in the system leads to corrupt government and thus to market failure. The failure of the Soviet system was largely due to lack of appropriate checks and balances and means of providing a corrective to ideologically driven policy. Our current situation is economy policy being driven by ideology absent significant checks and balances for the past seven years.

In the current energy problem, it is clear that the vast majority of Americans would benefit from large increases in fleet fuel efficiency. The question should be how to get there and who pays. Instead, any movement to greater fleet fuel efficiency is being held hostage by BigOil and other special interests. Thus we have market failure.

[Fearless Manatee Hunter]

"The Invisible Hand Is Shaking"

Is this the same invisible hand that HRC claims is groping her.....?

Nawwww.......

[Lafayette]

cm: the only tradeoff I can currently see is the "willingness" to accept penalties and career risk by going home on time or even going part time (where the latter is even an option).

Perhaps that is from an American perspective, where the annual work rate is around 1670 hours. Germany and France work 7.5% and 13.7% less respectively (OECD data). I was making an allusion to this "willingness" to trade-off income for expenditure (on leisure).

Americans are workaholics, which is well known. They work hard and play hard. And, in general end up with more heart attacks.

Ya pays fo what ya gets.

[Lafayette]

bahko: Lafayette, that was my point entirely.

Yes, I know. I was just making the same point in another way. Don't take it personally.

In certain periods, such as the current one, the system of checks and balances becomes corrupted and fails. This current breakdown in the system leads to corrupt government and thus to market failure.

Well, checks and balances in the American government is intended to avoid concentration of power, not necessarily avoid corruption. (Though one might well wonder what the hell Starr was up to in his crazed prosecution of Billy-boy.)

Whether an Attorney General goes after a company for illicit market practices depends upon the PotUS. This administration has been far too lenient with corporations, who got away with bloody murder. The subprime mess was just the most egregious example.

But this is the IMPORTANT POINT: Who elected this government, meaning Congress and PotUS? We did. So why blame the government for our ills? We got the government we voted for.

If we were too stupid to see what sort of idiot presidency lead-head would preside, then we deserve COMPLETELY the consequences. Who else?

What I am getting at is this: The Dumbing Down of America is more serious than anyone is giving proper consideration to, and when a problem pops-up its ugly head, then off we go "blaming the gummint".

Too little, too late. What is needed is a bit of introspection. Like: "We have met the enemy and he his us". (Pogo by Walt Kelly)

[cm]

Lafayette: In Germany, demands on degreed professionals are similar to the US. In France and Italy apparently similarly, based on what I've been hearing from people. And the picture when you're "out" appears to be even bleaker than in the US tech centers, which makes for great "compliance". (Where we come back to the "invisible hand".)

Even in (German) union-contract industries there is the concept of "out of tariff" contracts -- get paid above the tariff, but no paid overtime and/or baseline work week exceeding the tariff (35 hours or whatever applies). There are mostly 3 factors -- (1) capped social insurance premiums make above-cap incremental pay (and incremental time) look good, (2) headcount "management" (firing protections and thus hiring restraint), (3) limited supply of competent while still young professionals -- milk them while they're young, when squeezing that time out of your 40+, 50+ people, they will keel over, be sick every so often, or have their performance level drop off, so overall it won't work. The 10-hour work day limit is widely flouted.

There is a spectrum in the US too -- there are many (?) places where a 9-5 is possible, but often it is more a "getting away with it" thing.

[Real Person from the Real World]

More entrepreneurs from the 3rd world where people are commodities are coming to the US to start businesses. They come to the US, and expect most Americans to work at commodity wage rates in competition to their anchor business back on the home turf, and if they are patient, they sometime find someone to sucker into it, or at wages close enough. People talk about UNIONs, but unions require commitment, something most Americans no longer have the stomach for. Too many things to compete with the time and commitment needed. Too many people just don't have the time or inclination.

[cm]

Real Person: This has little to do with "3rd world" businesspeople, your situation notwithstanding. Most major corporations, who are the drivers behind what we are seeing, are controlled by "old (white) boys networks".

Are you suggesting "American" businessmen of formerly European lineage are the paragons of virtue, honor, and straight-dealing, and all the sleaze, double talk, and advantage-taking has been imported by foreigners from the 3rd world?