Class Warfare Blog

February 23, 2017

Why Do Conservatives Want to “Let the Markets Rule?”

It is axiomatic that conservatives want there to be as little government regulation of economic markets as possible, because they claim that “the Invisible Hand of the Marketplace (Adam Smith)” guarantees the best possible outcome and the more we interfere with that, the poorer the outcome will be.

Conservatives say this as if it were a fundamental truth of economics.

Recently a prominent economist died (Kenneth Arrow) and his work is often held up as part of said proof of the infallibility of markets. As the obituary writer put it “Professor Arrow proved that their system of equations mathematically cohere: prices exist that bring all markets into simultaneous equilibrium (whereby every item produced at the equilibrium price would be voluntarily purchased). And market competition puts society’s resources to good use: Competitive markets are efficient, in the language of economists.” (Amen!)

But to prove that particular economic theorem a certain number of “assumptions” had to be made. Here are some of those:
•  all markets are perfectly competitive (all buyers and sellers have perfect information, no buyer or seller is big enough to influence prices)
•  markets in different locations are different/separate markets (so the market for milk in California doesn’t affect the market for milk in Illinois)
•  all markets contain “forward markets” as futures markets in which you can contract to buy anything, for example pork bellies (to make bacon, we hope), for any future year … forever
•  plus, of course, everyone has perfect foreknowledge of those futures markets, too.

This work is considered foundational in economics, earning the authors Nobel Prizes, etc.

Now, what that work actually proves is exactly the opposite of what is claimed. The work shows that markets are perfect and benefit society only with those pre-conditions. Of course, no such markets exist or can exist with those elements in play. What they proved was that the conditions for the trust people place in markets to “do the right thing” are only available in Never-Never Land.

Think about it. If one had perfect information of the future of the prices of pork bellies or any other commodity, why would trades be made? Currently, futures buyers buy future goods because of price uncertainty. The thinking is “I am going to buy now when the price is reasonable because I think the price is going to go up.” You certainly wouldn’t “buy now” if you knew the price was going to go down. And why would a seller sell to you at the current low price if he knew he could get a higher price by just waiting?

All of these assumptions are bogus. You cannot say that the local market for celery in California is unconnected with the local market for celery in Illinois when virtually all of the celery in the U.S. is grown in California. Similarly (and if you hadn’t been around for the past 50 years or so) we couldn’t get tomatoes or fresh fruit in the winter months (or lettuce, etc.) and we made do with substitutes (cabbage for lettuce, etc.) until the fresh, local harvest came in. Now, all winter long we get produce from Mexico, Peru, Southeast Asia, etc. We can have tomatoes and lettuce all winter long. Many of these markets are global making them most definitely not local.

And, then we have advertising to make sure that seller and buyer do not have the same information. (If you think advertisers are trying to share information, wake up!) And so, in no market is there “perfect information” for both buyer and seller.

So, getting back to the original question: why do conservatives want to “let the markets rule?” They actually do not want this. What they want is minimal or, better, no regulation of what they are allowed to do to make money. The “free markets” economics is just a smokescreen for “Do not tell me what I can do!” Further proof of this is the fact that these same people are trying to get advantages for their business written into law: tax breaks, labor favors (labor unions are disadvantaged in “right to work” states), and if they can pull it off: monopolies. Of course, these people say “competition is good,” but basically they want none of it.

If you want a case history of this in action, look at the U.S. automobile industry over the last 50 years or so (post WW2). At the beginning of that period the U.S. car market was dominated by Detroit Iron, mostly in the form of huge, heavy vehicles that got very poor gas mileage (even into the single digits of mpg). Foreign imports began to trickle in in the form of small, gas thrifty cars like the Volkswagen of Germany and Japanese imports (Honda, Subaru, Suzuki, etc.). The major U.S. manufacturers looked down their noses at these vehicles: they were small, had little power, and even less chrome details. But then there were the gas crises of the early 1970’s. All of a sudden, having a gas thrifty car was quite desirable. Sales of “imports” skyrocketed and American manufacturers started bringing out “economy models” to compete. But if “competition was good” Detroit was having none of it. It sought and got protection from the federal government which limited the numbers of cars that could be imported. Japan, previously content to be sending smaller, cheaper cars to the U.S. saw an opportunity. If it could import only so many cars, those cars should provide more profit than the small economy models, so they started importing higher end vehicles (still not luxury models, like the Lexus, but higher end vehicles). These vehicles were much better made that U.S. vehicles and offered much better gas mileage, too, so people snapped them up in droves. Having their numbers restricted also drove up prices because there were only so many around. (This resulted in the cars available being snapped up close to ports of entry, so people in Middle America didn’t notice this at first, but the coasts were bristling with imports.

So, the reaction of Detroit? Going back to Congress and asking for more protection.

At the same time, automotive safety standards were being introduced at the federal level. I remember watching the hearings regarding having a “5 mph bumper.” Detroit’s “Big Three” auto makers said such a requirement (that a car would survive a 5 mph collision with little or no damage—5 mph is a brisk walking speed) would bankrupt them. All of these manufacturers supported this claim. Then a witness, a “shade tree mechanic,” testified that he had a 5 mph bumper, all tested, and available for license that he had made that cost just about the same as what Detroit was paying for bumpers then. These whinging, uncooperative titans of industry certainly lost credibility in front of Congress, which hurt their efforts to get protection from their competition.

So, these claims of markets and competition are “good” are just smokescreens for what they really want: a guaranteed path to make as much money as they wanted to with no interference, certainly not regulations on fuel economy or safety. They preferred to compete on the basis of which cars had the most shiny bits, so as to impress your neighbors when the car sat in the driveway.

Granted, there are some conservatives who probably believe the economic BS (they aren’t a particularly bright group) but that doesn’t make their beliefs true. The real problem is the public has been brought to a similar belief because of the repetition of the false claims over and over and over. I used to carry a spray can of bullshit repellent for just such utterances, maybe I should produce those for sale. The market should be strong.

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5 Comments »

  1. Yes the notion that there is an “invisible hand” out there and that human greed never affects conditions that impact markets is totally absurd. By the time markets do “correct themselves’ some individuals make out like bandits while millions of others get screwed

    Comment by lbwoodgate — February 23, 2017 @ 11:37 am | Reply

    • All an application of the Golden Rule (Them with the gold make the rules.).

      On Thu, Feb 23, 2017 at 11:37 AM, Class Warfare Blog wrote:

      >

      Comment by Steve Ruis — February 23, 2017 @ 11:42 am | Reply

    • Indeed. How do they explain the 19th century? The 18th century? Oh, wait- every century where the only thing the invisible hand guaranteed was exploitation.

      Comment by The Pink Agendist, née Mr. Merveilleux — February 23, 2017 @ 5:50 pm | Reply

  2. There’s also the problem of less-than-perfect market information.

    Comment by john zande — February 23, 2017 @ 3:07 pm | Reply

  3. In answer to the title: So they can rule the markets.

    Comment by shelldigger — February 23, 2017 @ 5:55 pm | Reply


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