The reason that people work and have jobs is not to make money. This may seem to be the case on the surface but in reality making money is only a side effect of being employed. We strive to earn money because we are confident that the money we earn in exchange for our labor will allow us to demand goods and services that we want and need. Ideally we all agree to produce a good or service because someone else demands it. In reality government involvement in markets causes workers to spend time performing tasks that are wasteful. Tasks that do not generate a good or service that is being demanded in the real economy. The reason that governments do this is not because they are malicious, but rather because governments do not operate on a profit/loss mechanism like the private sector does (We shall save this idea for an article in the future).
Thus, full employment is not an indicator of economic prosperity. For example, the government could use tax dollars to hire thousands of workers to dig holes. They could then hire thousands more to fill the holes back in. The workers would receive pay for this, but society as whole would actually be worse off than before the project started. Money and labor has been channeled into a process that is of benefit to noone.
An economy runs best when the most efficient producers of goods and services rise to the top and the least efficient producers are bankrupted due to incompetence and inability to compete. What we are describing here is capitalism. If we lived in a more capitalistic economy, humans would progress much faster.
The problem facing our modern economy is primarily government interference in markets. This interference disrupts our overall efficiency and causes more people to have to work than ever before while at the same time our standard of living continues to decline. Everyone now needs a job because the currencies of the world are being devalued gradually over time. At the same time there are more government employees than ever who perform tasks that are of questionable usefulness to the greater good of society. These 2 factors combined causes more household members on average to have to work (Father, Mother, Children) whereas this was not the case in previous generations in the USA. But jobs are not what we need. We need the highest quality goods and services at the lowest prices possible.
Below are steps that we could take to improve our collective standard of living:
-Free market money (money or moneys chosen by the market, not by official decree and legal tender laws)
-Absence or minimization of government regulation (businesses would be regulated solely by consumer choice)
-No bailouts or secret loans from the Fed to businesses in distress
-No income tax loopholes to benefit one group at the expense of another
If we were able to make those bullet points mentioned above a reality, two things would happen. First, our standard of living would increase. Secondly, leisure or "free time" would also increase. The consequence is that people would not need be concerned about having both mom and dad and the children of a household all employed. Mom (or Dad) and the children would be able to stay home. Leisure time would increase as technology improves and performs the tasks faster and more efficiently than humans. Folks would have to do less work to generate more output. This is a very important point to remember. Again I'll restate, the reason we go to work is not because we desire money, its because we desire goods and services that we need. Somewhere along the way, we collectively decided that money was an end in and of itself which is not the case. If you were stranded on an island like Tom Hanks in "Castaway" a billion dollars would not help you. Remember this the next time you hear a government official talk about creating jobs. This is not something to be desired for all of the reasons stated above.
I agree with all the steps except the first. Are you noting currency already in circulation? Or getting at the idea that the markets could create a currency for the US, for example, other than the dollar? Or allow the markets to determine the official trading money (could the free market currency change daily/monthly? I think it would be bad for markets to adopt another countries currency, as the Euro is failing, the yen is constantly weak and the yuan is purposely deflated by the Chinese government which prints their money worse than our fed. While our economic situation is not good, we are still about 5 years from Europe and 10-15 from Greece....
ReplyDeleteJust curious if you could expand on the first point in what you mean by free market money. If we just got rid of the Fed would the dollar return to being oversaw by the actual government? Or are you talking about a one-world currency based on the free market? I think the last one is very scary as that is what George Soros (and the UN for that matter) is after and why he crashed the English Sterling and Czech (I believe) currency in the 80's by purchasing insane amounts of tender and selling them all at once to crash the market -- and his ideas are spooky if you read into them. Wouldn't your idea of Free Market Money be more prone to speculative trading, like oil is now and people would never know the true value of their currency. Add in a billionaire like Soros buying huge amounts of tender low and selling high and completely crashing the entire global economy if we have a market-based currency.
BTedesco,
ReplyDeleteFree market money would be any commodity or commodities chosen to be used as money in the market. Typically, the market has chosen some form of metal(s) (gold, silver, platinum, etc.) as its form of money. When people are free to choose what they use as money, they aren't going to choose fiat paper because outside of the fact that it is being used through state force, it really holds no function or value to people. Before something is chosen as market money, it is going to already hold some sort of value and function in the market and we can see, for example, that metals contain these properties; whether it be their use in the electronics industry, jewelry, the medical industry, and so on. Metals are almost always chosen because they are scarce and also require a lot of labor to extract from the earth, which means that we really wouldn't see wild fluctuations in their price, since they can not be created out of thin air like fiat currency. While they are scarce, they are still abundant enough that there is enough to go around for people to use and be easily recognizable by anyone.
The most important thing to note, though, is that whatever is chosen by the market, it would be done so through voluntary exchange; not force. Voluntary exchange is the only way to figure out what it is that the market really demands and to know what the true price of a commodity is.
But what do you do with the dollar then? I am 29 and hopefully can earn a lot more money through out my life, but what do you tell someone who is 50 or 60 and close to retiring that their money is useless? I think a voluntary system creates more havoc - it's a good idea but given how government has screwed everything up it's not possible.
ReplyDeleteMaybe I'm dense on financial issues, but it seems if you went to a worldwide system and use a metal - say gold. There is not enough gold to convert the entire population of the world's money into value so you would be basically leaving possibly billions in poverty because it would come to a point where there would be no more of a commodity to exchange money for. I think the dollar system being independent is good for us, it's just the people in charge who refuse to acknowledge inflation/deflation and what that does to prices of goods. I guess I just don't get having a currency based on free market/stock market. I don't think it's good for my currency to be of same value as Greece's, for example. I think there is a place for government to oversee currencies, but the people in charge need to be VERY conservative (monetary policy-wise, not political party-wise) and I think that is impossible, so I guess I don't see a way out when you compare that idea to the idea of a single-value currency where the market could easily be built up and crash (George Soros....) and create a worldwide depression as no country would have the independent power to help the poor. I don't know if that makes sense, but it sounds right in my head.
First thing to understand is that if the world began using gold as money, prices would adjust to the amount of gold available. You would then see prices termed in weight. There is absolutely enough gold in the world to go around, plus, there are other metals that could and would most likely be used with gold, to help deal in smaller priced transactions. Gold, being that it is more limited in quantity then other metals, would most likely be used in larger priced transactions. Again, the important thing to note is that we can't say for sure how exactly this would play out or if gold would even be used or not. It would simply be up to the market to decide through voluntary exchange.
ReplyDeleteIn regards to free market money "wreaking havoc"; Does Apple wreak havoc on the economy by voluntarily creating iPods? Does Nike also wreak havoc on the economy by making sneakers for its customers? These are all examples of voluntary exchange, so how is it that these companies are able to do what they do, without wreaking havoc on the economy? These may seem like silly questions to ask but why can't we apply the same logic to how the market would determine what type of money it would use to exchange for goods and services? Why is it that voluntary decisions on what money is to be used is all of a sudden going to be a disaster, while literally millions of other exchanges that are voluntarily made in the market occur with ease?
It sounds good in theory to have a single entity control the creation and flow of money but the bottom line is, it fails because no one can have ultimate knowledge in anything. If a central bank isn't getting the necessary signals through voluntary means that it needs to create more money, it simply becomes a guessing game on their part and even if they had the greatest intentions in the world, they will almost always fail in meeting that demand.
One more important point to note is that free market money is money that would be allowed to evolve or change over time. There would be no such thing as fixing exchange rates because again, this is money that can not be created or destroyed with the push of a button, just to keep exchanges fixed between two economies because those states have a "deal." If a given economy felt that maybe copper just isn't working anymore, well, they'd be free to come up with a different commodity to exchange with. This freedom would allow for a much smoother transition, instead of having to worry like we do today, that at any moment, the house of cards is going to collapse and we are all going to be stuck with pieces of paper that have no other use to us.
I think that this approach and your world, which seems to only be a basic widget making world, dramatically oversimplifies the economy and overlooks many interactions where government intervention is designed to benefit everyone. I will elaborate on some examples, don't interpret my disagreement as an endorsement for how the government currently works or as a complete disagreement with your ideas, only a theoretical take on why it is important and essential in many cases.
ReplyDeleteFirst I will start in the widget world you built your case around. While a lack of government intervention would improve efficiency and drive down prices to benefit the product consumers, however how do the employees ensure a quality work environment? For professionals like Chemists, doctors, actuaries, physicists, etc. they are able to regulate their work environment because they are in short supply and the demand remains great, however the manufacturing world is full of unskilled labor and the market has sufficient unemployment that the unskilled labor loses it's bargaining power entirely. This is exactly how every industrial nation started and why there are so many social critiques of early 19th century American industries and hence why government intervention became so much more involved. How do you propose the employees maintain a suitable work environment without any oversight given that it requires bargaining power that unskilled labor force does not have?
Next, how do you propose minimizing the welfare loss associated with non-pareto optimal goods like monopolistic situations? Such situations are most common in energy and cable industries where natural monopolies can easily occur due to barriers to entry like infrastructure costs. There is an inability for consumers to demonstrate their preference and select efficiency by purchasing so what controls would maintain an efficient yet cost effective situation that benefits companies and consumers?
continued...
Next, continuing with energy like drilling or coal power how do you limit pollution that damages the livelihoods of many people in surrounding areas? The problem is that the consumers and the business owners often live and work nowhere near the impacted area so do not select against it because they are not directly impacted. A real example is the pollution of the Adirondacks by coal power plants in Ohio. The consumers and business had no connection so the market could not effectively regulate the situation, which is one reason that the government attempts to intervene on behalf of those that do not have a purchasing influence.
ReplyDeleteAssuming in this hypothetical world people aren't spending all their money continuously they will still need a market for financials. A market economy has proven to fail numerous times like in the example of Long Term Capital Management. The problem is the investors and general public falls victim to asymmetric information and often and inability to understand complex financial economics. That results in companies over leveraging and taking excessive risks (again principle-agent problem) because they are not directly financially responsible. This of course has rippling economic impacts when they go wrong.
Now two health examples then I'll stop rambling. For doctors and patients there is an inherent principle-agent problem that results in sub-par outcomes in a market economy. If the doctor works in a market economy they are benefited by performing tasks they can charge for, then they have an incentive to perform those tests even if they have very little marginal benefit. Due to asymmetric information the patients have an implicit trust in the doctor to do what is in their best interest and because people can not rationally bargain with their health they have no leverage. The result is very high medical costs and little to no marginal gain. This actually has been seen in recent studies of high cost medical areas, all of which have been found to be much more expensive than those with ethical based salaried doctors as the anchor firm(MAYO clinic).
Lastly my other health is insurance, for this argument we will say prescription drugs. Even the savviest individuals cannot self finance for the potential of say getting cancer, so they purchase insurance and pay premiums that exceed their costs in the short run but protect against insurmountable costs in the long run. The problem is insurance companies have no interest in insuring the sick and often jump through hoops trying to discourage them from being part of the risk profile. The nature of insurance is that it requires a large number of participants to spread risk so that the healthy pay a little extra so that the sick can have manageable health costs. The only reason insurance companies cover the sick is because the law requires it. You could say that one company will be ethical and the consumer will vote that way with their purchase but that is irrational. I say that because if one company only insures healthy they will be able to offer very cheap premiums and thus all the healthy will price shop for that plan, leaving only bad risks in the "ethical" companies risk profile. The result is that the "ethical" company will go out of business and the sick are essentially left to die in debt.
Enough rambling and I did keep those shorter than what they could have been but I'm interested in how you respond to those situations. I like what you are doing with the basic economic concepts but I feel like in this case you oversimplified the role of government in business.
Hello PASalty,
ReplyDeleteIn regards to the idea of fair working conditions, the labor market is now more globalized than ever. Just like hired employees compete for the best jobs, employers compete with eachother for the best employees. No goverment intervention required there. You might make the case for child or slave labor and suggest that governments should exist to prevent these situations. My counter would be that these poor work conditions exist under the most tyranical government regimes.
Competition is the most efficient regulating force in a market. Government intervention interrupts natural competition making the game "rigged".
Pollution is a tougher issue because as you pointed out, someone upstream can pollute with impunity someone downstream or downwind, maybe half of a world away (See for example China causing acid rain in Canada).
PASalty,
ReplyDeleteI disagree with your primary premise which is this concept:
"I think that this approach and your world, which seems to only be a basic widget making world, dramatically oversimplifies the economy and overlooks many interactions where government intervention is designed to benefit everyone"
I once heard an analogy where a man suggested that creating a government, but then telling the government not to grow or become instrusive (Our Constitution and Bill Of Rights) is like creating a cancer within a person and putting a sticky note on it saying "please dont grow".
In regards to the other idea, an economy is only the free exchange of widgets and services. The currency or money only serves as a transaction facilitator or medium. Said in another way, all else remaining equal, increasing or decreasing the overall money supply does not increase or decrease the stanard of living for the general populace.
If you view the last 10 years through this lense, it makes sense why we are no better off after the housing boom and subsequent collapse. It was all an illusion created by credit and money expansion. So many businesses and so much time and labor dedicated to a dream that was not real. Now those who partipated are in most cases worse off than they were when the boom started.
Competition for employees only works in a skilled labor pool which is what I was arguing. Unless you would contend that McDonald's needs to offer competitive wages in order to keep the "best" fry cook? The fact is unskilled labor is not working a job because they want to, but because they need to do it. While someone like myself works out of necessity my career path is not a necessity and my companies profits are directly impacted by my ability to perform a superior job, therefore my company knows I have many other options and therefore needs to compete. That being the case a company has a rational incentive to provide unskilled workers the lowest possible wage and benefits package because there is a pool of unemployed that will work more hours at lower wages if someone leaves. Would you have called 19th century US government tyrannical? That is when we had some of the worst working conditions in history (remember Upton Sinclair's "The Jungle"?). Abuse and deplorable conditions existed in meat packing, railroad, and other factories and it was a time that companies were allowed to be more "uninhibited" than ever by the government. The same thing existed in all industrialized nations because businesses have an incentive to exploit employees, leaving only occupations that require a skill only a limited few possess to be adequately regulated by competition. Perhaps we fundamentally disagree on whether unskilled labor has bargaining power but history has shown when companies are left to their own devices the ones that suffer most are the poor/unskilled.
ReplyDeleteGood points PASalty. Let's consider the conditions that would be necessary for a fry cook to have no better employment options. There would basically have to be a monopoly in the area that he lived, and the monopoly would have to exist in the sector which the cook was employed. If this is the case, the employee can abuse the employee along the lines of "If you dont like it there are 5 others who will take your job right now".
ReplyDeleteIf there's a McDonalds and an Arby's right next to the Burger King, the chef can at least compare his work experience to others he knows in the business and find out if they are receiving a better deal than him. Even though I'm sure the training time it takes to become competent at cooking fries is very low, most employers would choose to keep the status quo (a reliable, competent employee) vs. taking the risk and stress of sending him home and dealing with an employee who's day to day traits are unknown.
Your argument seems to relate more to a slave labor type market and I'm just not sure you can have a slave labor work force without the help of government tyranny.