Invisible Hands
I don't believe in invisible, unproven things. They may exist, and people surely religiously believe in them (literally) but when they fail, they do it so spectacularly and inexplicably. When an airplane crashes, it also does it spectacularly, but at least you can gather hard evidence and explain what happened, how it happened, and whether we can prevent it in the future. When one of the "invisible hands" - the of god and the one of the market fails, we can usually explain what happened, but we can rarely explain how it happened and we can never prevent things of happening in the future.
When an airplane crashes, the solutions that are being given may include re-engineering the failed parts, changes to the maintenance procedures or sometimes, simply decide to stop using the aircraft altogether, like the Concorde in 2003. But the believers in those invisible hands, will still religiously protect their beliefs, saying things like "we lost our faith, that's why we're being punished. We need to become more religious" in the case of god, or "it's governmental involvement, the private sector needs to run economy" when it comes to capitalism. In both cases, the solutions that are given are unproven at best, and the cause of original problem at worse.
In both case of the invisible hands, when you actually use common sense and scientific tools, you can actually determine the cause of the tragedy and determine what can be done to prevent or reduce future tragedies. Earthquakes for instance, are simply caused by tectonic shifts and they are not meant to kill us. In fact, life on earth wouldn't be possible without them. We cannot prevent them by praying, but we can build more resilient buildings and higher tsunami walls to substantially reduce the damage. We cannot prevent another stock market crashes, but we can control the banking system so they won't be able display risky investments as safe and we can dismantle monopolies or at least prevent them from abusing their power.
I refuse to believe that all kinds of governmental involvement is wrong. Governments must build an infrastructure for enabling social mobility, an infrastructure that includes an efficient public education, health, communication and transport systems. These activities, by definition do not show quarterly profits and require a huge initial investment, so the idea that the private sector can provide the same services as the public ones are simply ridiculous.
The main problem is that many governments fell in love with the idea of the invisible hand, and do expect the private sector to fill in the void, and of course, it doesn't. The result is a reduced middle class and a feeling of social detachment, which already causes social unrest and even uprising. For the time being, the protests you see in Israel are peaceful, but let's hope they won't deteriorate to what we now see in the streets of London.
The main problem is that many governments fell in love with the idea of the invisible hand, and do expect the private sector to fill in the void, and of course, it doesn't. The result is a reduced middle class and a feeling of social detachment, which already causes social unrest and even uprising. For the time being, the protests you see in Israel are peaceful, but let's hope they won't deteriorate to what we now see in the streets of London.
1. The invisible hand is not a deity, it's a metaphor.
ReplyDelete2. There is no scientific approach to macro economy. All debates for and against regulation are indeed religious in that to every argument there is an equally convincing counterargument.
3. Not only governments like the idea of the invisible hand, most economists do so too, even though they tend to vote for leftist parties. Actually, economists would probably say about every Western country that it regulates too much, and that's not because of governments, but because of people who elect them.
Link: http://www.econtalk.org/archives/2007/06/caplan_on_the_m.html
4. The current protesters don't know what they are doing, and what they demand is totally out of bounds for a non-Communist state.
And while we're there, the communication system in Israel is totally private, and what's wrong with it?
ReplyDelete1. I know that.
ReplyDelete2. There is no scientific approach, but there are plenty of case studies, and the fact is, that sometimes governmental intervention is a burden and sometimes it's a necessity. When there's too much regulation, we get government owned monopolies and therefore an inefficient market. When there's too little, we get privately owned monopolies, market failure and therefore an inefficient market. Pure laissez faire economy is as bad as communism.
3. Of course governments like the idea of the invisible hand, because it lets them govern less and reduces their responsibility. And yes, most neo-liberal economists (let's call them Friedmanians) say exactly that. However, because economics is not a science, economists shouldn't use the same approach to solve every single crisis.
4. My approach to those protests is somewhat different. The governments in the last 34 years did their best to ignore the middle class, and I'm surprised they didn't happen earlier.
Also, mark my words: if nothing will come out of these protests, the next protests will make the riots in London look quaint by comparison.
Ah, and about the communication in Israel: it's slow, the service is terrible and it's expensive. And I'm comparing us to that technological hub called Slovenia.
ReplyDelete...And last thing:
ReplyDeleteA private market does not necessarily mean a free market. If the market is not regulated, cartels and monopolies are forming very quickly. Believing that it won't happen is naive.
There was a middle class in Israel 34 years ago?? I thought there were only workers who got tiny but unionized salaries and dubious perks.
ReplyDelete> it lets them govern less and reduces their responsibility.
And why would that be in their interest?
Really, the whole argument over regulation sounds like "4 legs good, 2 legs bad". Everybody who knows something about economy understands that there must be some amount of regulation, and most of the market should be free, but the argument always sounds like "regulation good, free markets bad", or vice versa. People don't actually argue about WHAT should exist.
> A private market does not necessarily mean a free market.
I totally agree. But in Israel, monopolies exist under the aegis of the government, and only recently has the government broken some of them. It suddenly turned out that a phone system can be private just as well, and actually be more efficient.
And I didn't get that part about communication. Do you mean that in Slovenia you can say more words per minute over the cell phone?
Whatever your approach to the riots, note that you are talking about public education, health, communication and transport. But the protesters also want public housing! The next thing they'll demand public employment, too.
> if nothing will come out of these protests
Mark my words: something will come out, and it will be populistic and detrimental to the economy. You can't please all of them in a sane way. For example, one group wants cheap cottage cheese, and the other doesn't want the government to break the dairy cartel. Obviously you can't please both.
1. There is a postulate (which can either be accepted as true or denied or demanded to be proven) that in certain cases the whole is bigger than the formal sum of its parts. Further, oftentimes one does not see the whole while one is dealing with specific (local) parts. In my opinion this reasoning applies here.
ReplyDeleteSpecifically, the stock market which can be considered to be a mere sum of great many agents, some of which are individuals and some of which are organizations playing the stock trading game according to very specific rules. Yet the stock market is much more than just that. E.g. the financial police institutions of various countries wouldn't have existed if stock market was just that - a place where entities meet and trade. By the way, without certain degree of overseeing (call it regulation, if you will) stock markets would easily deteriorate to wild wild west conditions.
2. Once upon a time a wise man who worked for Microsoft for like 10+ years explained to me patiently and consistently that Bill Gates or Microsoft do not need to be punished for being successful. Nowadays riots are just that - attempt to pinpoint the scape goats and punish them.
No, I don't advocate huge profit margins that are out there. But I ask you to keep in mind this simple idea - these people are immensely successful, they're smart, hard working and so on and so forth. Punish them, push them down - you won't get too far although it may not happen overnight.
3. Specific form of government depends on great many things one of which is historical background. It stands to reason that our neighbors will have immensely hard times now trying to adopt new form of government. It is also likely that some will simply deteriorate back to condition that would be fairly similar to those before the so called "revolutions".
Most clear example to point is succession of power in Russia now - Putin, Medvedev and now Putin again with Medvedev being his prime-minister. Binary Czar might be a good term here (as in binary star system).
Oh and by the way, you cannot possibly prevent someone from doing risky banking stuff. It is possible only in theory but pretty impossible (or call it highly improbable) in practice.