Monday, June 18, 2007

Economic Systems

"People who don't read science fiction are the most gullible people on earth"-- A character in Spider Robinson's short stories.

I pretty much agree with Spider. I'd extend it to people that haven't played simulation type war games/board games/computer games are REALLY unaware of the world that they live in. There are so many assumptions underlying the cultural-economic environment we live in, unless you've played some games that let you fiddle with them, you are probably unaware that "some of the great truths of life depend greatly on your point of view". Some of these games are complex (Civilization, 1840, etc) some are supposed to be fun (Civ, Rail Barons, Industry Tycoon ) there is on that I know of that is simply a spread sheet that simulates the 5 year plans under Stalin's regime. It was written by a PhD economist and you can get amazingly surprising results. (Historically during one 5 year plan Stalin put out a call for copper so that he could jump start collective industry..... all across the country infrastructure was destroyed as copper wire was stolen to be handed in to build factories that would generate more copper wire............. errr.... ooops) Its not much of a "fun" game, it is more of a "real" game. The military is getting into "real" games to simulate things and train soldiers.

Anyway.... my point here is these games stimulated my interest in how different economies work so I went and did a lot of learning about them. I'm going to write about to as a way at getting around to the "Why are we trying to be farmers" bit. Until we are all on the same page though, its pointless. This is going to be a 3 part series of essays to attempt to: explain to my friends why it seems like I did a major gear change without using the clutch and explain to my wife's friends that I am really not a "holed up with guns writing manifestos" kind of lunatic. I suspect I'll have a 50% success rate. :)

So, lets discuss some of the quirks of capitalism. Capitalism is, in my opinion, the most powerful economic form possible. That doesn't mean its good, it means it is powerful. It can get things done faster than any other economic system, all you have to do is make the activity you want done profitable. Once someone can make money doing it, it WILL get done. There doesn't need to be any top down authority "forcing" the system. Power is great, when you need it. Do you plant a vegetable garden with a 250HP John Deer 8 wheel tractor? No, because all that power would do is wreck things. That is capitalism's greatest failing.... because all the power is distributed to the individual actors (people) it is difficult to control. The guidance system is known as "The Market". So when the market tells farmers to plant corn (like it is now), they go out and do it. This results in corn getting planted without the government having to say, "OK, now you guys in IA need to plant X hectares, you guys in CO, plant Z hectaces, and you guys in AK just sit there and look really cold ok?" I think we ALL agree that letting the government manage something is going to end up as a disaster..... letting them manage food production is going to result in mass starvation. (Just ask the Chinese about that Great Leap Forward)

So this "Market" thing....... is it a good control system? Well.... I will argue that there is 1 systemic problem with the Market and a few manufactured problems. The biggest problem I see with the market is that it ALWAYS assumes the future will be exactly like today, only cheaper (more on that later). Major Paradigm shifts are invisible to the market. Think about it, if you went to bank in 1910 and said, "I'd like a loan to start a company that will transport people around the world in tubes of metal that stay aloft in air by exploding a liquid fuel and pushing that out the back of a smaller metal tube" you would have been laughed out of the bank, or locked up as a loony. Steam ships were CLEARLY how people traveled and how they would ALWAYS travel. I'm not saying the market stiffles innovation. In fact, the market is good for innovation because there is a chance you will get rich for taking a risk. The factors that the market uses to assess that risk though (and the chance of getting your loan) is that tomorrow will be like today. "Black Swan" events always catch the market by suprise. If they didn't, we would never have crashes, only gentle corrections. Ok, I can live with that problem, as long as we ALL ADMIT IT EXISTS... we can plan around that. As a group we (the government) can say, "The Market Forces say this, but we foresee this outcome if we allow that so we will moderate the effect of the market in this manner." This is completely logical and good. It is putting brakes or a steering wheel on that John Deer tractor in hopes that you won't take out the barn once you plow up the garden! We in fact already do this. The "Ever Normal Grainery" during the New Deal or farm subsidies currently are all attempts to do this. (Whether they are GOOD plans or not is not my point....) Sin Taxes, hybrid car tax credits, small business loans, all of these are attempts to moderate or steer pure market forces. Usually I find they don't work they way the group that proposed them intended because as a whole, I find the people in our government are too ignorant of knock-on side effects, and corporate lobbyists always seem to get seemingly innocent lines entered into the laws that have subtle but HUGE effects.... and those effects are rarely good for you and me.

So that is the systemic flaw of the system, what about the problems we have manufactured? Well.... I started to get at them above. The attempts to "steer" the market are usually pretty bad. The biggest problem I have with the "free market" is that all profit is internalized and as many expenses are externalized. Case in point is a power plant. They can burn whatever fuel is cheapest. (well ok, when they design the plant, they have to pick one... but they are free to pick whatever they want) If a power plant can find a way to make money burning chicken feathers, and a good supply of chicken feathers, rock on, they will sell you power and make money. Now, who is paying for what comes out the top of the stack? Errr..... Not the power plant, at least not in America. Sure there is a Clean Air Act, and they have to conform.... sort of... but plently of stuff isn't regulated (like CO2) That is the problem with attempting to steer the system with legislation. Legislation is so slow compared to free market activity that its like plowing that vegetable garden with the 250HP John Deer by only being allowed to look BEHIND you. You are going to go in a few directions you didn't mean to. If you have the pedal pressed all the way to the floor you are going to go a long way in that direction before you realize you are going the wrong way. ANYTHING that a corporation can externalize: pollution, health care, Infrastucture, ect,ect... It will. The more costs it can push off onto the public, the greater its profit margin, thus the "better" it is doing. We can't measure "quality of life" as easily as we can $ we don't. The only control we then have over bad behaviour in pursuit of money is legislative control (SEC, Sarbanes-Oxley, Sherman Anti-trust, ect) but as I pointed out, the speed of legislation is slow compared to the nimble free market.

The other big problem with the free market as a steering system, is that it isn't free. Now, bafflingly, I argue for control of the market in the above paragraph and now I say the control is a problem. Well, yeah. the problem is that the controls that ARE in place are not good ones. The people that are writing legislation no longer represent you and me. They are whores to their corporate overloads. (Repuglican and Dumbocrat both) So now, we have a 250 HP John Deer being steered via the rear view mirror, but the guy driving is AIMING for your house. Most of the time he misses, but he wrecks your front lawn often enough for it to be really annoying. When he does manage to run your house over, the corporate vultures swoop down and pick through the rubble.

Anyone who has passed Econ 101 in college ought to be able to explain that for the market to send the correct signals, every actor needs perfect information. Pretty much, this means not only do people have to behave in a RATIONAL manner (hah!) they also have to know about all the consequences of their economic actions. In a free market, every action is an economic action so you pretty much have to be knowledgeable about 100% of your actions 100% of the time. Yeah Right. The nice thing about the free market is that it is a very robust very decentralized system (also one of its problems) so it still works with 90% information or even 30%. It just isn't right as often. So now..... we are driving on a John Deer, steering by looking in the rear view, and every now and then someone covers our eyes. (or worse, hold up a painting that looks like what we expect to see but is just a little bit wrong...)

OK, you don't have to believe me. I wish I was wrong but I've seen enough to be so sure I'm right that I totally changed the future course of my life. The next 2 essays will disscuss why people refuse to see the cliff that the free market has aimed our tractor at and what that cliff is. Here is a parting quote from our current president....... makes you think...

"I strongly support your vision, Mr. President, of encouraging your country to become a nation of consumers and not savers, which will inure to the benefit of our manufacturers, both large and small, and our farmers, as well." -George W. Bush speaking to China's President

PS: I'm really proud of my tractor analogy.... I don't care if you don't like it! :)