banking, capitalism, centralization, decentralization, decentralized governance, efficiency, entrepreneurs, free markets, laissez-faire, legal system, markets, productivity, property rights, regulation, small government, socialism, transportation
This is some of my thinking on economics. I don’t claim to be right or wrong; rather, this is merely how I perceive things on economic matters at the current time and I hope to refine my views over time.
(1) The debate on whether capitalism or socialism is more desirable is a nonsensical one, because “socialism” is an imagined state where humans get along perfectly and cooperate at all times, and is thus, not achievable.
(2) The very terms “capitalism” and “socialism” disguise the underlying economic realities being proposed by those who throw the two terms around.
(3) “Laissez-faire”, like socialism, is not realistically achievable. Moreover, the term is somewhat non-cognizant because it requires one to make distinctions between “public actors” and “private actors” when both can artificially distort the markets and create undesirable results.
(4) The “free market” is likewise not an achievable goal, but rather, should be thought of as an unknown reality. There is a supply and demand for any good or service, but given the real constraints of the world, markets are never truly “free”. For instance, state boundaries might prevent me from shipping my goods to another party in another state, without being at a competitive disadvantage. Likewise, an even better example is in transportation; the market might have truly desired a road through Path A rather than Path B, but legalities might have deterred that result. Indeed, private property rights themselves are state-protected and represent an “intervention” in the economy. Hence, the markets always have restrictions that might hinder them from achieving an optimal result.
(5) So if markets always have restrictions, but there is an unknown reality that quietly pulls at the market (representing what would happen in a hypothetical “free market”), then the best we can do as humans is to try to ‘discover’ the free market result and create structures that allow us to come as close to obtaining these results as possible.
(6) The policies needed to achieve these free market results, however, would be different across circumstances. To come close to a “free market result” in building a transportation system has many more hurdles than creating one in manufacturing widgets. However, this does not mean that we should ignore the benefits of building systems that best meet the needs of the “market spirits.”
(7) While I’ve suggested that “laissez-faire” is unachievable, policies that generally go along with laissez-faire ideology work more often than not. The biggest failures of laissez-faire policies tends to be when its adherents mis-identify a certain action as being ‘interventionist’, when in reality, it might simply be countering another ‘interventionist’ system that was created. An example is banking deregulation in the late ’90s. The idea is that deregulation was “laissez-faire” an eliminated constraints in the system. However, the advocates of deregulation failed to note that the FDIC’s insurance of deposits was a state intervention that made “deregulation” disastrous. This is not a criticism of the FDIC; rather, the FDIC was actually a reaction to how the actions of banks could create market interventions with devastating consequences.
(8) In regards to the above, I haven’t actually come up with a great way to regulate a banking system without creating problems. I think all systems will have their flaws. In general, I think our system works fairly well compared to others, but that we created moral hazard by subsidizing home loans, not requiring banks to hold adequate reserves, and ignoring market forces when pricing FDIC insurance fees. Large banks that can devastate an entire economy if they fail, should pay disproportionately high FDIC fees based on the risks they impose to the system.
(9) Economics needs an equivalent of Occam’s Razor. It’s generally best to have simple structures. However, it’s not always possible (as with banking and transportation).
(10) As I’ve suggested, promoting “capitalism” or “laissez-faire” seems somewhat non-cognitive to me. People who argue in favor of these things often have good underlying reasons for doing so, but just as often fall back on these labels that are often meaningless or even antagonistic to some people. What is generally true (and more understandable to the layperson) is that interventionist actions by large governments often fail, because top-down decisionmaking often ignores the realities on the ground level. In other words, the people closest to a situation on the ground-level understand it best. Decentralized economic structures are more efficient precisely because of this dynamic. Which is why “small government” generally works best and why lower taxes generally increase wealth (as small entrepreneurs operating on the ground level are more productive than top-down bureaucrats who have less incentive to truly understand the economic realities.) Keep in mind that high taxes represent a decision to allocate more economic production to the public sector, which is generally less efficient.
al gore, alternative energy, bretton woods, carbon emissions, classical liberalism, climate change, entrepreneurialism, fusion, global, gordon brown, government, individualism, innovation, instituate for new economic thinking, mass transit, nuclear power, private sector, public policy
I was reading an article in the New Yorker today about the recent conference organized by George Soros at Bretton Woods, NH. It was the second annual event for the Institute of New Economic Thinking (INET) and as the name implies, the conference was meant to help foster new ideas on how to deal with major economic and financial issues facing the world.
One issue that came to the forefront was climate change. Former UK Prime Minster Gordon Brown argued at the conference that the issue of climate change ”cannot be addressed on an individual basis and can only be resolved by global coordination.” Brown’s thinking on the subject is hardly “new” or “innovative.” Rather, it’s a recycling of the conventional wisdom.
Right now, there are basically two predominant schools of thought:
(1) Climate change has major scientific evidence backing it and it’s vital for governments across the world to take aggressive actions to address the issue,
(2) The evidence for climate change is inconclusive and it would be economically disastrous to use government action to solve a problem that may not exist.
In my view, position #1 is more defensible, but I’m increasingly convinced that it’s also a very wrong position. There is overwhelming scientific evidence that climate change is occurring and being, at the very least, exacerbated (if not wholly caused) by human activities, particularly energy uses that emit carbon into the atmosphere.
I agree that climate change is a very real phenomenon and action is needed to solve it. Where I’m largely in disagreement is the ‘coordinated global action by governments’ part. Brown takes it a step further and says that the problem can not be solved by individuals.
The Flaws with “Coordinated Global Action”
There are several flaws with Brown’s argument. For one — it’s not actually practical. The idea that we could ever get dozens of governments (at least the major ones) to agree on a realistic plan of action that would reduce carbon emissions is nothing more than fantasy. China, the US, France, India, Japan, Saudi Arabia, and Brazil all have their own unique issues and it’s extremely unlikely that all would ever agree to any “aggressive plan” that could feasibly reduce carbon emissions by some significant amount.
Even if the governments could agree on a plan, it would likely be counter-productive. What could the governments agree upon? The immediate thought is some sort of carbon limit scheme, but that would create immediate problems. Governments would have to implement various schemes to limit carbon emissions, but these schemes would inevitably end up having to focus on stiffing economic production. Indeed, it’s no coincidence that the “Great Recession” did more to lower emissions in a short period of time than decades of public policy.
So a top-down approach to the problem is in many ways, the wrong approach. It incentivizes poor decisions in the name of ‘saving the environment.’ Instead of innovating our way out, we would be devolving our way to lower carbon emissions through economic destruction.
Gordon Brown is absolutely wrong on this issues. It’s not ‘coordinated global action’ by the world’s governments that will solve climate change issues. It’s those “individuals” that he claims are incapable of solving it.
Empowering the Private Sector to Combat Climate Change
Climate change is a vital issue that needs to be solved by humanity. Yet, individuals in the private sector are more likely to solve the problem that misguided attempts by large, inefficient governments.
The real solution to climate change: enact policies that empower small entrepreneurs! All over the world, there are people who sincerely care about the issue of climate change and are willing to dedicate their entire life to solving it. They are determined to find a way to get us out of our downward spiral and won’t be happy until they succeed.
Not only is this endeavor attractive on a moral and practical standpoint of trying to create technologies that will help improve the world; it’s also likely to be quite a profitable endeavor to those who succeed with their technologies. Which is why there are also people out there who hold large sums of capital and are willing to commit that capital to these innovative entrepreneurs.
Of course, not “cleantech” entrepreneurs will succeed. In fact, most will fail, but there will be a few pioneers who perfect technologies that will help solve our problems. With a profit motive involved, these technologies will also be commercialized and more quickly gain mainstream acceptance.
It’s not “coordinated global action” that will achieve this. It’s domestic policies aimed at empowering innovative entrepreneurs that will help solve climate change issues.
In the broadest sense, policies that achieve the following would be beneficial:
(1) Eliminate subsidies for dirty techologies,
(2) Create more capital for small entrepreneurs (e.g. perhaps a lower capital gains tax of 5% for investors with a holding period of more than 5 years)
(3) Find ways to unleash the power of the private sector in state-owned enterprises, such as mass transit
(4) Stop limiting upward urban development and promote policies that encourage more of it
Of course, these aren’t the only ideas and I’m not even dogmatically saying that all my ideas would work. Rather, I’m suggesting that the direction of debate needs to shift on this issue.
We need to tackle climate change, but the way to do this is from a bottom-up perspective rather than a top-down one. We need to think of more ways to empower entrepreneurs who have ideas on how to reduce our carbon footprint. This will be more successful than a flawed, unenforceable multi-national agreement that deems from above that “thou shall not emit too much carbon.” Incentive people to solve the problem and they will eventually.
The article makes excellent points about national productivity. The public sector, by its nature, is not innovative or efficient. It’s always dragged down by political concerns, which tend to trump real economic concerns.
Secondary education in America has not improved much at all in the past several decades. The teachers’ unions have essentially created a situation where it’s impossible to assess people based on the quality of their performance. Instead, years of experience and political connections have become the primary factors affecting teacher compensation.
We’re seeing a situation where the private sector continues to become more productive via technological innovation and labor specialization, but the public sector continues to drag down the economy with inefficiency and extremely high (above-market) wages.
Finding a solution is difficult. There are certainly some public sector positions that should absolutely eliminated, but you can’t really replace teachers, firefighters, police officers, etc. And in spite of the fact that a privatized school system might theoretically be more efficient, if we totally privatized the system, we would be depriving millions of people of any form of education.
So instead, the only hope is to reform the public schools somehow. And I don’t think it will be simple, because entrenched interests (i.e. teachers’ unions) will block any and every attempt to improve the system. So instead, we get garbage reforms like “No Child Left Behind” that don’t actually improve anything.
The article also talks about public transit and the increasing inefficiency behind it. I’m a big critic of our current mass transit model. Many people argue that it’s not possible for the private sector to profit in that sphere, but I disagree. I think the public sector is so extraordinarily inefficient, and if a private company took over, costs could actually be lowered and service improved.
The problem is that politicians always try to cut public transit spending before anything else. Moreover, different political agencies often end up fighting over public transit systems, which then cripples funding and decision-making. Meanwhile, demand for mass transit is skyrocketing. Yet, supply is falling. There’s definitely an imbalance between the two.
It would actually be better to put some mass transit systems under private company operation. High-speed rail and intra-city rail systems in large metropolitan areas, in particular, would be the most viable candidates to survive in a more privatized system.
Regardless, I agree with the concerns expressed in the article. We are becoming too dependent upon the public sector and it’s lowering our economic growth and bankrupting governments. It’s alright if a private company goes bankrupt, because our legal system can handle that (unless it’s a big bank, apparently); but it’s much more difficult for us to handle a large state becoming insolvent.