Thursday, February 23, 2012

No Cash on The Table

Frank reiterates his main point that individual and group interests do not necessarily coincide and that market failure occurs even when all mutually beneficial trades have been made. He also reminds us of the hockey helmet rule example, which I would like to briefly address. The NHL and the government are two different entities. Nobody is forced to play hockey, while it can be argued that the government is the only entity that can legally use force to make people take certain actions. So, at the end of chapter when he writes that the difference between NHL rules and governmental restrictions are differences of degree, not kind, I disagree.

His main example in chapter three is that of labor-managed firms (why we don't see more of these). He is correct in stating that the notion that worker-managed entities would be better is wrong because this "narrative implied that there were prodigious sums of cash on the table." In other words, if this is so good, we should see more of these types of entitites but we do not. I actually found myself agreeing with his responses to his colleagues (those in favor of labor-managed firms) like, for example, "...the very idea that a capitalist banking system migh persistently deny funds to creditworthy borrowers strains credulity..." and "But to suppose that a banker would pass up the opportunity to make a profitable loan for that reason is to completely misunderstand the essence of capitalism." My own response to his colleagues would have been that there are many who can follow but only few who have the skills to lead. The reason the CEO gets paid and should get paid much more than the basic worker is that the skills the CEO has are relatively more scarce than the skills the basic worker has. Sounds harsh, but the truth usually is.

However, I have to take issue with his comment on pages 33-34: "The problem is analogous to the tragedy of the commons that leads to overfishing...This is another form of market failure that results from the wedge between individual and group incentives described by Charles Darwin." The tragedy of the commons is not a failure of the market; rather, it is a failure due to lack of clearly defined property rights.

I also agree with Frank's observation on page 35 that ideology can cloud logical or critical thinking. It amazes me how many people on the left do not admit to the clear benefits of capitalism because their hearts feel something wrong. As I heard once on Stossel interview dealing with sweatshops, I wish people would think with their brains rather than with their hearts! Maybe I missed something, but his invisible hand explanation of workplace saftey seems correct (i.e., that if workers really wanted more safety, they would be willing to pay for it. If not, then they truly didn't value it even though they SAY they would).

Of course, Walmart had to be thrown in---the prime example of the evil "big guy" killing off "mom and pop" and "exploiting" the "little guy." My response to market skeptics regarding the locking in of employees is that IF workers knew the rules of the game before taking the job, then if they still voluntarily chose to work for Walmart, they were not being exploited. To be exploited in my view is to be forced to do something or if there is fraud or misrepresentation.

His main point (again, that the interests of individuals are often in conflict with those of the broader group and that life is graded on a curve...relative position v. absolute position) using school districts and bigger houses is I think a bit off. A better solution, of course, is to allow students/parents to choose the school (if you even assume that government should forcibly take money in the form of taxes from some people to give to others--those with children).

Finally, he argues, "The fact that individual and collective incentives diverge when relative income matters also calls into question the traditional economic doctrine of revealed preference." For some of you who might not be familiar with this term, it basically says that your actions speak louder than your words. For example, in my classes I use various examples of what people say and what people continue to do like "hating their boyfriend/girlfriend," "hating their job," or "hating school." I argue that IF you REALLY "hated" X than you would break up, quit, or drop out! My students sometimes respond with, Weeeelllll, you know," and I respond with, "No, I don't know that is why we are having this conversation!" In essence, your words say one thing but your continued action proves otherwise! And, as free-market libertarian, I don't believe that I have a right to cause indirect harm to others if "harm" is used in the true sense of the word--violating the property rights of others.


  1. Well stated. How can one argue for the right to cause indirect harm anyway? As one person at our last SWEET discussion pointed out, it's a contradiction of terms. If there is intent, which there must be for one to argue for it, then it is not indirect harm. I see the coercive force of government causing more "indirect" harm (or as I like to call it, harm) than any individual does. Additionally, when an individual is causing harm, the victim often has some forms of recourse to correct the situation. When the state causes harm, you'll be lucky if you can even get your case heard.

  2. How about something like the harm caused from global warming (assume for the moment that you believe the warnings of climate scientists)? Isn't this tragedy of the commons, and how exactly would we define property rights on something like the atmosphere? This seems like a clear case where individual and group interests diverge (you could even expand the notion of group to include future generations, who obviously have a stake in how we handle these issues now). One could argue classical decision theory completely ignores future generations, and encourages us to be more inclined to take risks now when the cost will not be exacted in our lifetime. Anyway, I only bring this up because I don't see how the notion of property rights can be meaningfully expanded to include all situations where individual/group interests diverge.

  3. I think his analysis of workplace safety was overly simple, to be honest. If the factory or work is somewhere that is economically deprived and where there is high unemployment, people will be likely to take whatever they can get. Just think coal mining in the mountains, where there are few other opportunities and lots of people with few skills and little education. In such an area, with an abundance of unskilled labor, people will take whatever job they can get.

    There is a reason these kinds of jobs are moving to south east asia and China.

    So, it's not like they are deciding between a safer job with less pay and a more dangerous job with higher pay. They are deciding between a safer job with less pay and it's accompanying deprivation, risk to health, etc..., and a little higher pay with a greater risk of injury. In areas like this there will always be those willing to do just about anything (economists have never experienced life like this) just to survive. Even if someone wanted lower pay and more safety, they wouldn't have that choice. It's not like there is a "market" in car factory jobs or something. The idea that you could just go down the street to work for the car factory with better safety is a contrivance. So... what do you do? Eventually you end up as desperate as the other poor suckers working at the unsafe factory and you try to get a job there (if you're lucky).

    One things for sure... regulation may not help, but the factory owners will just pick up and move to where ever human misery and desperation is the highest and open the factory there.

    I don't necessary disagree with the conclusions of some economists, but the reasoning can be hopelessly naive. In their efforts to simplify their models to fit the world they just leave so much stuff out (a lot of it just common sense).