Market Economy, Command Economy and Market Failures

Posted by PITHOCRATES - April 30th, 2012

Economics 101

Money replaced the Barter System making it Easier to Trade Freely and Voluntarily

We did our first economic exchanges in a market economy.  Agricultural advances gave us our first food surpluses.  These food surpluses gave people free time.  To do other things besides growing food.  Like developing an alphabet and writing.  Mathematics.  A code of laws.  And we made material goods.  Like pottery.  Farming tools.  Processing olive oil for lamps.  People who were good at making one thing made a lot of that one thing and traded with other people.  Who were good at making one thing themselves.  These people met.  And traded.  Freely and voluntarily.

Free trade.  A key element of the market economy.  Where people freely met and traded the things they made.  With other people who are freely trading the things they made.  Free trade came before money.  We bartered our first trades.  Trading goods for goods.  We then created money to make our trades easier.  Reducing the search time to find people to trade with.

Money is something that can store value.  Which allowed people to trade their goods for money.  Then they took that money and traded it with someone else.  To get something they wanted.  Money allowed people to spend less time finding people to trade with.  Because you didn’t have to find that one person that had what you wanted AND was willing to trade it for what you made.  Money allowed us to advance beyond the barter system.  Which proved more and more inefficient as we produced more and more goods.

Because of Market Failures the Government taxes to Provide Public Goods and Eliminate the Free-Rider Problem

As we produced more and more goods our standard of living rose.  We had more things in our lives that made that life easier.  More comfortable.  And more enjoyable.  Civilizations with a bustling market economy were great places to live.  Because there were a lot of nice things to make life better.  Which other people saw.  From beyond the civilization.  And they wanted what they saw.  And they took it.  By force.  Raiding parties would enter a developed civilization and rape, murder and plunder.  So to enjoy the amenities of an advanced civilization required the ability to protect your civilization.  Which led to one of the first market failures.  The failure of the market to provide city defenses through the free and voluntary trading of people engaged in economic activity.

We call it a market failure because building city defenses and creating an army are things the market economy can’t provide.  One person can’t make a fort or an army.  And trade it with someone else.  It’s too big.  It takes a lot of people and a lot of effort to make these things.  But it doesn’t take everyone.  If everyone else is contributing one person could skip contributing.  That person would still be able to enjoy the benefits of that fort and army.  Living in safety.  And enjoy living in safety for free.  Something we call the free-rider problem.  The fort and army are examples of public goods.  Things the free market can’t provide.  Or that the free market fails to provide.  Not that the market is broken or operating poorly.  It’s because people rarely act freely and voluntarily to benefit other people.  Because any time and money spent doing this is time and money taken away from their own families.  Which would bring hardship to them.  So the government provides these things that are necessary AND cause personal hardship to individuals to provide.  The government forces everyone to contribute.  Which minimizes the hardship each individual must bear.

Some in power like to take this further.  And call things that people can provide for themselves that benefit only themselves public goods, too.  Such as health care.  Higher education.  Housing.  Food.  Everything the people can buy for themselves by working to earn the money to buy these things.  And when they do they alone enjoy the benefits of these goods.  These goods they incurred hardships to obtain.  By working to earn a paycheck.  Or sacrificing other things to have these things instead.  It’s their call.  Their choice.  A choice they enter freely and voluntarily.  Therefore these things are not public goods.  But that doesn’t stop some people from acting like they are public goods.  Usually to help them win an election to office.  Or to overthrow the government.

A Command Economy reduced Economic Activity and Introduced a Police State

Civilizations with a bustling market economy were great places to live.  If you had talent and ability.  If you did then you could work hard and trade your talent and ability for a paycheck.  That you could use to trade for other things in that bustling economy.  Those with great talent and ability would be able to trade these for great paychecks.  Those with less talent and ability would be able to trade these for lesser paychecks.  Which, of course, caused income inequality.  Which is a handy thing to exploit if you want to seize power.  So you can enjoy the best things the civilization has to offer.  When your talent and ability only can trade for one of those lesser paychecks.

History is full of people trying to seize power.  So this is nothing new.  What was new was the way these people seized power.  By using the teachings of Karl Marx and Friedrich Engels.  As they wrote in the Communist Manifesto.  Who attacked market economies.  And capitalism.  Saying that the new middle class, the bourgeois, maximized profits by exploiting the working class.  The proletariat.  Which they said was unfair.  And that the only way to make things fair was to destroy the very concept of private property.  Because only the bourgeois accumulated private property.  The proletariat had none.  And only got poorer and poorer while the bourgeois got richer and richer.  Under their system, then, nothing belonged to the person.  Everything belonged to the state.  If you created something with your talent and ability it belonged to the state.  And then the state determined how to distribute the fruit of your labors.  Basically according to the rule ‘from those according to ability to those according to need’.  Those with the greatest need got the most stuff.  And those with the most ability worked the hardest.  Well, you can just guess how that worked out.  Everyone tried to show as little ability as possible and the greatest need as possible.

Because people weren’t the masters of their talent and ability anymore they couldn’t trade freely and voluntarily.  Which meant there was no longer a market economy.  Instead there was a command economy.  Where the government made all the decisions.  What to make.  How to use resources.  Where people lived.  Where they worked.  And what prices they paid for the things in the state-run stores.  Which had shelves full of things no one wanted to buy.  And empty shelves where the staples went (soap, toilet paper, etc.).  Because the government decided what to bring to the state-run stores.  And in what quantity.  Not people trading freely and voluntarily.  Which reduced economic activity.  Reduced living standards.  And introduced a police state.  Because anyone who had a chance to escape to a market economy did.  Which is why the East Germans built a wall in Berlin.  To keep their people from escaping their command economy.  And going to the market economy across the street.

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Public Sector Pay and Benefits are Bankrupting France and New Jersey

Posted by PITHOCRATES - October 22nd, 2010

Soon, in France, You’ll be Able to Retire Before You Start Working – If the Protestors Get Their Way

Je suis français.  I am French.  And being French, it is my birthright to get lots of free stuff.  Or so says Gilly, a cemetery union representative in Marseille.  The following quotes come from AP’s French strike to save ‘birthright’ of privileges posted 10/20/2010 on Google News.

For Gilly and many other Frenchmen and women, social benefits such as long vacations, state-subsidized health care and early retirement are more than just luxuries: They’re seen as a birthright — an essential part of the identity of today’s France.

I remember reading about the French Paradox.  While Americans were suffering epidemics of heart disease, the French were living to ripe old ages.  Free from heart disease.  The paradox?  The French diet.  Heavy creams.  Cheese.  Wine.  Sure, the Americans eat a lot of crap.  But how can the French have such a high cholesterol diet and not suffer heart disease like the Americans?  Perhaps this can explain it:

“We want to stop working at 60 because it’s something our parents, our grandparents and even our great-grandparents fought for,” says Gilly, 50, a union representative at Saint-Pierre Cemetery, the largest in this bustling Mediterranean port city.

Retire at 60?  Work for half of your life (or less) and enjoy a generous retirement.  No wonder they’re living so long.  No stress.  Cradle to grave welfare.  An early retirement.  Gosh, that sounds good.  Almost too good to be true.  Once upon a time, in feudal France, you worked from childhood until you died.  Things have definitely got better.  Just how long has it been this good?  According to Gilly, it goes back generations.  All the way to his great-grandparents.  But has it?

It was in 1982, under Socialist President Francois Mitterrand, that the minimum age to stop working was lowered from 65 to 60. The measure, emblematic of the 14-year Mitterrand presidency, was adopted by a special ordinance that bypassed parliament.

And now the government wants to raise the retirement age to 62.  You can understand Gilly’s consternation.  If you do the math, the average lifespan per generation must be somewhere around 10 years.  So one can understand how the 50 year old Gilly is anxious to retire at age 60 instead of at age 62.  Because people in his family rarely live beyond 10 years of age.  Unless Gilly is exaggerating for effect.  Or lying.  Because the French were retiring at age 65 until Mitterrand changed that in 1982.

Tax the Rich, Middle Class and Anyone Else Who Isn’t in the Public Sector

This is all well and good as long as someone else is paying the bill.  And this is something that the people in the social democracies don’t understand.  There is a limit to the treasury’s generosity.  For the public treasury to pay these very generous benefits, there has to be money in the treasury.  And states fill their treasury, basically, in one of three ways: taxing, borrowing and printing money. 

If they tax too much, people will have less disposable income.  They will buy less.  Private business will see a loss in sales revenue.  At the same time, they will have to pay more in taxes.  They may lay off employees to adjust to the reduced demand and higher tax burden.  The economy will slow into a recession. 

If they borrow too much money, interest rates will rise.  This will increase the interest people pay on their credit cards.  They will buy less.  Private businesses will see a loss in sales revenue while their costs go up (because of the higher interest rates).  They may lay off employees to adjust to the reduced demand and higher costs.  The economy will slow into a recession.

If they print too much money, they may ignite inflation.  Inflation raises prices.  People buy less because of high prices.  Private businesses will see their costs go up with these higher prices.  They may lay off employees to adjust to the reduced demand and higher costs.  The economy will slow into a recession.

To summarize, excessive government spending leads to recession.  Which results in fewer jobs in the private sector.  This is a big problem for those public sector jobs.  Because it’s the taxes from those private sector jobs that pay for those public sector jobs.  In other words, the more the public sector demands, the more they kill the private sector, the golden goose providing that rich public sector pay and those glorious public sector benefits.

The Sans-Culottes are Very Much Avec-Culottes These Days – But They Still Revolt

I’m sure the French understand this.  I mean, how bad is it really getting over there?  Well, see Clashes, protests in French tensions over pensions by AP’s Angela Charlton on www. apnews.myway.com.  She begins with:

PARIS (AP) – Protesters blockaded Marseille’s airport, Lady Gaga canceled concerts in Paris and rioting youths attacked police in Lyon on Thursday ahead of a tense Senate vote on raising the retirement age.

A quarter of the nation’s gas stations were out of fuel despite President Nicolas Sarkozy’s orders to force open depots barricaded by striking workers.

Gasoline shortages and violence on the margins of student protests have heightened the standoff between the government and labor unions who see retirement at 60 as a hard-earned right.

New violence broke out in Lyon, as police chased rampaging youths who overturned a car and hurled bottles. Riot officers tried to subdue the violence with tear gas. A gendarme helicopter circled overhead.

Wow.  If it wasn’t for the Lady Gaga and the airport and the gas stations and the police helicopter, you’d think the sans-culottes were making another revolution.  It brings to mind the classic lyrics of Adam and the Ants’ classic Ant Rap (my sister was a BIG fan):

Liberté, égalité, au jourd’hui c’est tres tres tres

Voici l’opportunite nous incroyables!

But this ain’t the 18th century.  And famine isn’t a way of life for the masses.  No.  In fact, life is pretty darn good.  No 18th century peasant lived as grand.  In fact, the life they’re protesting about today was closer to the French nobility than it was to the Third Estate in 1789.  These aren’t food riots.  This generation just doesn’t want to work another 2 years before retirement. 

It would appear that these protestors don’t understand the intricacies of a market economy.  Perhaps they have lived too long in a quasi-socialist state.  Been brainwashed by their unions.  Or maybe they just don’t care.  As long as they get their benefits now they don’t care how they impoverish future generations.  It’s a pity.  How a minority of the French people can destroy a great nation. 

Good Work if You Can Get it – and You Can Get it if You Belong to a Public Sector Union

One wonders how people can resort to violence.  Of course, when you consider how much better the public sector lives than the private sector, you wonder how this hasn’t exploded earlier.  Let’s go across the pond.  To New Jersey.  But first, if you work in the private sector, pause for a moment and think about your pay and benefits.  How hard you work and how little time you get off.  Feel overworked and underpaid?  If you worked a 60-hour week or two, you probably do.  Now, think about the last time some public sector union went on strike.  When they asked you to feel their pain.  To support their cause.  Okay, now read this excerpt from a My FOX New York article by Luke Funk (see Audit: NJ Turnpike Wasted Millions On Perks on www.myfoxny.com):

MYFOXNY.COM – Auditors say the New Jersey Turnpike Authority wasted $43 million on unneeded perks and bonuses.  In one case, an employee with a base salary of $73,469 earned $321,985 when all payouts and bonuses were included.

How does that make you feel?  Think about this the next time you get change from the person sitting in a New Jersey toll booth.  Think about your skill level and your pay.  Then think about the toll booth occupant’s skill level and pay.  Now switch places and imagine someone wanting to cut your pay and benefits.  I mean, if someone was trying to cut your pay by, say, $300,000 because the state is on the brink of bankruptcy, what would you do?  Start looking in the want ads for another unskilled job that pays 3-5 times of a skilled job in the private sector?  Or are you going to do what the French are doing?

Is it any wonder Europe is burning?  First Greece.  Now France.  You get pay and benefits like this and you live like royalty.  And one thing about royalty.  They don’t abdicate without a fight.

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