The Corean Chronicles
The Hidden Costs
Over the past decade, especially, the advocates of "the market system" have pushed and pressed that free markets are the best and most efficient way of allocating resources and determining social and political priorities. Their rhetoric is true, yet extraordinarily misleading at the same time. Market systems, even malfunctioning ones, do allocate resources far more effectively than any "command and control" system, as the failure and/or transformation of virtually every dictatorial or government-directed system has demonstrated.
Unfortunately, this "efficiency" is only comparatively better than other systems and certainly not nearly as efficient as its advocates claim. Winston Churchill once commented to the effect that democracy was the worst system of government, except for everything else that had been tried. So, too, is the so-called "free market" system one of the worst ways of allocating resources -- except for all the alternatives.
So-called "free market" systems have a number of severe systemic problems. Some have become very obvious over the past year or so. One defect is that prices are determined on the margin at the moment. This means, in real terms, that unregulated prices can spike or crash literally in minutes, and that the effects on society can be devastating. Another is that the balance of supply and demand, if not mitigated by society, can result in millions without jobs or incomes, and a high concentration of wealth in the hands of a few.
A third, and largely overlooked, and, I believe, even greater flaw in so-called market pricing is that such pricing is highly inaccurate in assessing the costs of goods and services. This inaccuracy comes from the fact that the prices of goods and services do not reflect the so-called externalities, or as I would term them, more accurately, the hidden costs. The examples of such costs are numerous. Until the creation of environmental laws, factories were allowed to degrade and pollute the environment without restriction, and millions of people either died or had their health permanently injured. Without employment safety laws, employers could, and did, keep costs down by using the cheapest and often the most dangerous equipment and practices and did not have to shoulder any significant fraction of the costs of workplace injuries. These types of externalities have been known now for decades and are commonly recognized, even if the means by which they have been addressed are often deplored by the more conservative advocates of "free markets."
The problem of hidden costs, however, is far from being completely solved, or even addressed in many cases. In some areas, this is recognized, as on the environmental front, where advocates of the "free markets" continue to oppose measures to deal with global warming and air pollution. In other areas, there's little or no awareness of such costs.
Take the issue of influenza or swine flu. The causes are known. The means of preventing its spread are also relatively well-known as well, but health authorities are becoming more and more concerned about the danger of pandemics. Why should this be a problem? If sick people just stayed home or in the hospital until the diseases would run their course, how could they infect others? Except all too many people can't do that. They don't have health insurance. They won't get paid if they don't work. In this time or downsizing and ever greater worker efficiency, there's often literally no one else to do the work. Take a very simple example. A project/report of some sort is due. Because of downsizing, there's exactly one expert/analyst left who can do it. If the report isn't done, all sorts of negative events occur... violations of law, penalty costs, loss of revenue-bearing contracts. The key person has a mild case of the flu, comes to work, works through the illness and gets the job done. In the process, he or she infects three or four other people, one of whom infects an asthmatic colleague or friend who dies. Does that death, or all the other 13,000 flu deaths reported this year so far, ever show up as a negative cost on the business's or agency's balance sheet?
How many salmonella deaths have resulted from unsafe food industry practices directly attributable to "cost-minimization"? How many heart-attacks from work pressures caused by too few people doing too much work? There have been scores of lawsuits over the past three decades, in which major corporations were found guilty of manufacturing products that led to user deaths or guilty of practices that created deaths or ill health for thousands of people -- and yet the same "free market" cost-minimization pressures persist and the same kinds of practices continue.
So... yes, the so-called free market is better than the alternatives so far tried, but let's not have any more rhetoric about how wonderful it is and how much better it would be if the government just got out of the regulation business. We've already been there, and millions of innocents paid the price... and to some degree, millions still are. There's definitely room for improvement, because, so far, markets don't capture all the hidden costs of production and operation, and until they do, so-called free markets won't be nearly so accurate as adherents claim they are in balancing prices and costs.
Unfortunately, this "efficiency" is only comparatively better than other systems and certainly not nearly as efficient as its advocates claim. Winston Churchill once commented to the effect that democracy was the worst system of government, except for everything else that had been tried. So, too, is the so-called "free market" system one of the worst ways of allocating resources -- except for all the alternatives.
So-called "free market" systems have a number of severe systemic problems. Some have become very obvious over the past year or so. One defect is that prices are determined on the margin at the moment. This means, in real terms, that unregulated prices can spike or crash literally in minutes, and that the effects on society can be devastating. Another is that the balance of supply and demand, if not mitigated by society, can result in millions without jobs or incomes, and a high concentration of wealth in the hands of a few.
A third, and largely overlooked, and, I believe, even greater flaw in so-called market pricing is that such pricing is highly inaccurate in assessing the costs of goods and services. This inaccuracy comes from the fact that the prices of goods and services do not reflect the so-called externalities, or as I would term them, more accurately, the hidden costs. The examples of such costs are numerous. Until the creation of environmental laws, factories were allowed to degrade and pollute the environment without restriction, and millions of people either died or had their health permanently injured. Without employment safety laws, employers could, and did, keep costs down by using the cheapest and often the most dangerous equipment and practices and did not have to shoulder any significant fraction of the costs of workplace injuries. These types of externalities have been known now for decades and are commonly recognized, even if the means by which they have been addressed are often deplored by the more conservative advocates of "free markets."
The problem of hidden costs, however, is far from being completely solved, or even addressed in many cases. In some areas, this is recognized, as on the environmental front, where advocates of the "free markets" continue to oppose measures to deal with global warming and air pollution. In other areas, there's little or no awareness of such costs.
Take the issue of influenza or swine flu. The causes are known. The means of preventing its spread are also relatively well-known as well, but health authorities are becoming more and more concerned about the danger of pandemics. Why should this be a problem? If sick people just stayed home or in the hospital until the diseases would run their course, how could they infect others? Except all too many people can't do that. They don't have health insurance. They won't get paid if they don't work. In this time or downsizing and ever greater worker efficiency, there's often literally no one else to do the work. Take a very simple example. A project/report of some sort is due. Because of downsizing, there's exactly one expert/analyst left who can do it. If the report isn't done, all sorts of negative events occur... violations of law, penalty costs, loss of revenue-bearing contracts. The key person has a mild case of the flu, comes to work, works through the illness and gets the job done. In the process, he or she infects three or four other people, one of whom infects an asthmatic colleague or friend who dies. Does that death, or all the other 13,000 flu deaths reported this year so far, ever show up as a negative cost on the business's or agency's balance sheet?
How many salmonella deaths have resulted from unsafe food industry practices directly attributable to "cost-minimization"? How many heart-attacks from work pressures caused by too few people doing too much work? There have been scores of lawsuits over the past three decades, in which major corporations were found guilty of manufacturing products that led to user deaths or guilty of practices that created deaths or ill health for thousands of people -- and yet the same "free market" cost-minimization pressures persist and the same kinds of practices continue.
So... yes, the so-called free market is better than the alternatives so far tried, but let's not have any more rhetoric about how wonderful it is and how much better it would be if the government just got out of the regulation business. We've already been there, and millions of innocents paid the price... and to some degree, millions still are. There's definitely room for improvement, because, so far, markets don't capture all the hidden costs of production and operation, and until they do, so-called free markets won't be nearly so accurate as adherents claim they are in balancing prices and costs.
—L.E. Modesitt,
Jr.: 5/15/2009 11:07:00 AM
Comments:
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Hmmm, interesting. Seems like this is very similar to your article about "fairness" regarding taxes. Everyone seems to agree that the "free market" is the best system, but that it requires some amount of regulation. However, no one seems able to agree on how much regulation is the right amount.
Being an economist seems similar to being a blindfolded dart thrower. You know there's a target out there, but you can't see it. Some job loss is good, because it encourages employees to be efficient at their jobs by theoretically trimming off the least productive workers, yet no one wants to see double digit unemployment. Having a small upper class is good incentive for people to work hard and "move up" in society, but too much wealth concentrated in too few people leads to corruption. And so it goes.
Being an economist seems similar to being a blindfolded dart thrower. You know there's a target out there, but you can't see it. Some job loss is good, because it encourages employees to be efficient at their jobs by theoretically trimming off the least productive workers, yet no one wants to see double digit unemployment. Having a small upper class is good incentive for people to work hard and "move up" in society, but too much wealth concentrated in too few people leads to corruption. And so it goes.
I have a lot of gripes with this essay. First, no nation has ever had a truly free market economic system, so an accurate assessment of its strong points and weak points has never occurred.
Second, you pile too many things onto the term "free market." Free market is about free tradeing of goods and services. Manufacturing is different from the free market. Requiring manufacturers to adhere to worker safety regulations and pollution regulations does not violate the principles of a free market.
Third, you dump the non-existent problem of anthropogenic global warming onto free market trading, which is just absurd.
Fourth, you blame the free market for global pandemics. The freedom to travel isn't the same as free markets. The first is a personal liberty; the second is a system of trading.
Fifth, you address product liability only part-way. I agree that this is a free market issue. Companies that poison customers or workplaces that induce too much employee stress are punished in a free market because of open communication. Food companies that sell contaminated foods lose market share or go bankrupt from the combination of decreased market share and costly lawsuits. (Lawsuits are part of a free market.) High stress workplaces have high employee turnover and have difficulty hiring new workers. They lose efficiency and productivity, their costs go up, and their previously successful cost minimization measures rebound on them.
Some of the flaws you ascribe to free market trading such as job losses and rapid price changes are integral parts of the system. For example, we had far too many resources allocated to home building: nearly everyone who truly could afford a home owned one, but they were still building more. The recent bust in the housing market resulted in hundreds of thousands of layoffs in the home construction field. This is a free market signal that those workers need to find another career. In central planning systems, those workers would be kept idle and unproductive for months or years while some bureau decided what to do with them. Rapid price changes signal a sudden imbalance between supply and demand. Price increases encourage conservation of a scarce commodity or service so that those who need it most (and will pay the most) get the product or service while others with less need look for a less costly alternative. High prices spur more production (or training), and the balance between supply and demand changes until a new equilibrium is reached. This obviously cannot occur immediately: a rise in gold prices doesn't instantly result in new mines opening, and a greatly increased demand for physical therapists doesn't suddenly produce thousands of 22-year-olds with BS degrees in PT. But, in a true free market, such changes will occur faster than with any other human economic system.
Second, you pile too many things onto the term "free market." Free market is about free tradeing of goods and services. Manufacturing is different from the free market. Requiring manufacturers to adhere to worker safety regulations and pollution regulations does not violate the principles of a free market.
Third, you dump the non-existent problem of anthropogenic global warming onto free market trading, which is just absurd.
Fourth, you blame the free market for global pandemics. The freedom to travel isn't the same as free markets. The first is a personal liberty; the second is a system of trading.
Fifth, you address product liability only part-way. I agree that this is a free market issue. Companies that poison customers or workplaces that induce too much employee stress are punished in a free market because of open communication. Food companies that sell contaminated foods lose market share or go bankrupt from the combination of decreased market share and costly lawsuits. (Lawsuits are part of a free market.) High stress workplaces have high employee turnover and have difficulty hiring new workers. They lose efficiency and productivity, their costs go up, and their previously successful cost minimization measures rebound on them.
Some of the flaws you ascribe to free market trading such as job losses and rapid price changes are integral parts of the system. For example, we had far too many resources allocated to home building: nearly everyone who truly could afford a home owned one, but they were still building more. The recent bust in the housing market resulted in hundreds of thousands of layoffs in the home construction field. This is a free market signal that those workers need to find another career. In central planning systems, those workers would be kept idle and unproductive for months or years while some bureau decided what to do with them. Rapid price changes signal a sudden imbalance between supply and demand. Price increases encourage conservation of a scarce commodity or service so that those who need it most (and will pay the most) get the product or service while others with less need look for a less costly alternative. High prices spur more production (or training), and the balance between supply and demand changes until a new equilibrium is reached. This obviously cannot occur immediately: a rise in gold prices doesn't instantly result in new mines opening, and a greatly increased demand for physical therapists doesn't suddenly produce thousands of 22-year-olds with BS degrees in PT. But, in a true free market, such changes will occur faster than with any other human economic system.
# posted by 
: 4:09 PM
: 4:09 PM
"Everyone seems to agree that the "free market" is the best system, but that it requires some amount of regulation."
Sorry, I know of at least one dissenter! :-)
Never been a truly communist state, why, because of the failings of humanity. Why does the free market fail, well strangely enough for exactly the same reasons.
The depths of depravity reached by democracy being highlighted in politics on both sides of the pond. Over hear snouts in the trough, over there a president is following W policies, after electoral rhetoric!
I do wonder if Mr Modesitt is an agent provocateur, specious arguments espoused in rhetoric and sophistry, used to provoke responses. He then gets to read and chortle away to himself. Maybe even gets material for his books!
If I read any books where a character is a medic with an over inflated opinion of his own abilities and an opinion on everything, then I'll know I was correct in my deduction!! :-)
TTFN
Ian
Sorry, I know of at least one dissenter! :-)
Never been a truly communist state, why, because of the failings of humanity. Why does the free market fail, well strangely enough for exactly the same reasons.
The depths of depravity reached by democracy being highlighted in politics on both sides of the pond. Over hear snouts in the trough, over there a president is following W policies, after electoral rhetoric!
I do wonder if Mr Modesitt is an agent provocateur, specious arguments espoused in rhetoric and sophistry, used to provoke responses. He then gets to read and chortle away to himself. Maybe even gets material for his books!
If I read any books where a character is a medic with an over inflated opinion of his own abilities and an opinion on everything, then I'll know I was correct in my deduction!! :-)
TTFN
Ian
So, Ian, I'm a little confused. You'd take Communism over Capitalism even with human failings? Or are you saying that were it not for human failings, Communism would be a better system?
For the record, I think your "agent provocateur" theory has merit.
For the record, I think your "agent provocateur" theory has merit.
Hi Iron,
Well second attempt, see if message sticks this time!
I believe that either system is doomed to failure, due to the inadequacies of a few. Though sometimes I think an argument can be espoused down to the failings of all.
Well possibly any system will fail when mankind is involved. We will evolve a dystopian society, but maybe that's what we deserve.
There have been capitalist states but never a communist one, just ones given that label. Often by countries with agenda that have little connection with the truth.
I have enjoyed reading the recluse novels because of the use of perspective amongst other things. Strikes me the black and white can be construed as caricatures, but sometimes pluses and minuses of each of the systems; cap and com, mixed up.
That said I'm a semi literate old drunk so what do I know. But bar room philosophy as its ups and downs.
Recently attacked on youtube for quoting Dawkins and not giving my source, a psychology teacher over in the states. We discussing the merits for and against evidence of global warming. The quote in question being "Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.", but hey at least I know I'm a semi-literate buffoon!!
TTFN
Ian
PS A Glass of whiskey in hand so I've waxed more loquaciously than I did at 04:00 this morning.
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Well second attempt, see if message sticks this time!
I believe that either system is doomed to failure, due to the inadequacies of a few. Though sometimes I think an argument can be espoused down to the failings of all.
Well possibly any system will fail when mankind is involved. We will evolve a dystopian society, but maybe that's what we deserve.
There have been capitalist states but never a communist one, just ones given that label. Often by countries with agenda that have little connection with the truth.
I have enjoyed reading the recluse novels because of the use of perspective amongst other things. Strikes me the black and white can be construed as caricatures, but sometimes pluses and minuses of each of the systems; cap and com, mixed up.
That said I'm a semi literate old drunk so what do I know. But bar room philosophy as its ups and downs.
Recently attacked on youtube for quoting Dawkins and not giving my source, a psychology teacher over in the states. We discussing the merits for and against evidence of global warming. The quote in question being "Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.", but hey at least I know I'm a semi-literate buffoon!!
TTFN
Ian
PS A Glass of whiskey in hand so I've waxed more loquaciously than I did at 04:00 this morning.
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