Why markets are better than policy

With congress hitting an all time low approval rating of 9% it should be crystal clear that markets are far superior to policy. In this article I compare the free market to USA’s representative government, but markets will always be more efficient any type of government.

Profit Incentive
In a free market – profits are awesome. Profits to companies are indicators of how valuable their goods or services are to their customers. On the opposite end, losses show companies that their products are not desired from the consumers. If a company continuously provides products at a loss they will go out of business. People should only be concerned with companies making excess profit if it has come from the hand of the government via subsidies, challenges to competition, bailouts, etc. Unfortunately, today that is all too common.

In a free market, companies make decisions to increase profits for their own benefit – but ultimately they cannot be profitable unless they are providing goods that consumers find value. A profit motive is a win-win for consumers and businesses. The market also provides natural checks and balances – if a company is incredibly profitable it will encourage other companies to duplicate and compete against the original company.

Take for example the MacBook Pro (I’m currently computer shopping). In 2008 it released the aluminum unibody enclosure when other laptops on the market were made of plastic. This process had it’s limitations, like a battery that wasn’t removable, but it presented more value to the consumer with it’s solid feel and clean lines.

This new technique was a risk in the marketplace, and they have been rewarded with higher profits. Other companies (Dell and Lenovo recently have come out with unibody solutions) have noticed the gains and have mimicked the MacBook Pro. The Apple solution came out in October 2008 and only 5 months later in March of 2009 Dell released the Adamo with features similar to the MacBook.

Competition requires speed and staying in tune with the marketplace. If companies do not stay up to date with what their consumers want, then they will find market share dissipating and subsequently profits.

The ineffectiveness of voting
Voting is a load of shit to speak frankly. It is representative of only people who take the effort to vote. By default it is best for individuals to not be involved in politics. The time invested in staying up to date and following politicians could be spent earning money, spending time with family, or any other activity that products real results for an individual. Unless they are the only person voting, an individual has absolutely no influence for an election.

There is no incentive for people to follow politics and subsequently ignorance becomes commonplace. When ignorance becomes common, elections ultimately will become a popularity battle with debates of no merit. Elections have become about who slept with who, what religion someone is, or what drugs they did in college. These attributes have no real determining factor on their skill level to govern.

The real problem with policy is that it doesn’t offer the same signals to representatives as the markets do for companies. Their decisions are based on polling and expected voter turnout. Polling and voting is based on the thoughts and emotions of an individual, but not the actions of an individual.

Politicians are elected to 2, 4, or 6 year cycles and don’t have to worry about being ousted within those years. Because politics is a “what have you done for me lately” field, politicians can pass shitty laws early in their tenure and more representative bills later in the tenure. Even that doesn’t really matter.

Since 1975 congresses’ approval rating is at or below 40% approval. Meanwhile their reelection percentage is usually from 85% – 90% success. I do not understand how policy can be effective if there are no means to remove undesirable politicians.

OPM – Ya you know me
Well, it’s not quite OPP, but it’s pretty close. Other People’s Money (OPP) is what governments function on. The acquire this through forceful theft – if you don’t pay your taxes, you end up in jail. There are four main quadrants in the world of money.

My money, spending for myself
My money, spending for others (Think of gift buying)
Other’s money, spending for myself (Think of non-profit charities)
Other’s money, spending for others (Think government)

The most effective means of spending money is when you are purchasing for yourself. You know what it took to earn the money, and thus you know what is the most valuable use of the money. The further away the end consumer is from the core earner the more distorted the market will become.

A highly efficient market would only be people of the first category, and the least efficient is the last category – the government. They have no basis for how much effort it took to earn the income, nor do they have a way to gauge the best way to spend the money. This lack of attachment to money or to the products/services is what leads to the downward spiral of large government and deficits.

For the good of society
Proponents of government will say they are for the general good for the society, but they have no real indicators to tell them what is actually good for society. Voting is ineffective, and sadly the only option to get something done is to build powerful lobbying organizations to get “their share” of the pie.

The other misconception is that if the government does not provide the service, than it will not be provided by the free market. You can look back on history to see the number of private industries that have been crowded out by inefficient government programs – schooling, roads, insurance, charity, etc. It’s hard for private organizations to compete with an entity that is making money by force (or even printing it in some cases).

Moving forward
So we won’t have a free market any time soon, but we can work toward that process. Support movements and directions that take power away from policy and give it back to the people. Anything that is a subsidy, bailout, handout, government program, tax, or regulation is a form of policy. Bring sanity back to the world – bring in the markets.

10 Comments

Comments for Why markets are better than policy are now closed.

Jonathan
December 20, 2011 at 9:19 am

I think you are confusing politics and policy. Also the characterization of schools, Roads and charity as being provided efficiently in a market has no historical , political, or economic precedent. They are all characterized as either public, common pool, or merit goods and as such are not provided efficiently by markets. That is not opinion, that is economics 101. To make the Ron Paul-esque argument that markets never fail, that externalities do not exist, and that a free market is self regulating is to ignore the past 75 years of economic thought. I respect your opinion but I think a good bit of this position is more hyperbole than reasoned argument.
- Eric Bandholz
  December 20, 2011 at 9:48 am
  
  Jonathan, my question to you is how can policy makers decide more efficiently than the markets on how to spend the resources – whether it be schools, roads, or charity? How can knowledge of a select few be greater than the knowledge of millions? It’s the seen vs unseen – while you may see “success” with public solutions, you don’t see what other opportunities it took away.
  
  Failure is the blueprint of the markets – it’s required to function. The problem with governments is they have no way to experience failure – except cataclysmic failure that result in revolutions and loss of lives. They have no market indicators.
  - Jonathan
    December 20, 2011 at 10:55 am
    
    Your premise is wrong. It is not that the mass populace of consumers decide as a group, they decide as individuals. It is the definition of a collective action problem, everyone making decisions which are individually rational are not necessarily collectively rational. I will give you two examples. First, national defense. We have this thing called national defense which we are taxed to enjoy. But why? National defense is good for everyone. By that logic people should not be taxed for it but should voluntarily pay for it. Here’s the problem, one person not contributing their fair share will not break the system and they still get to enjoy national defense. It is therefore individually rational that they not pay. If everyone thinks in an individually rational manger then the collective good is not provided for. Hence we force people to pay taxes for the provision of national defense
    Second, education. More educated societies are more productive, more peaceful, and have a higher standard of living. However, few individuals can afford to pay for aan individual teacher to tutor their children from age 5 to 18. Additionally, education is nearly impossible to value because the returns to education in monetary terms are disproportionately tied to extraneous factors such as career choice, as opposed to years if education, but the societal benefits of a more educated society still hold. So again they come together in a collective called a school. Knowing that they receive these benefits they should be willing to collectively pay for the enjoyment of the benefit. Of course the same collective action problem which exists in the national defense example exists in this example. Hence we tax people to provide a service which would not be provided by the markets.
  - Jonathan
    December 20, 2011 at 11:00 am
    
    On a related governments do experience failure which is not cataclysmic. There’s a significant body of literature on non-market failure. Read Kenneth Arrows book on collective action, then rad Charles Wolf’s piece on Market and Non-Market Failure. Also Elinore Ostrom would be good, she won the Nobel prize in economics for study on this very topic.
  - Eric Bandholz
    December 20, 2011 at 12:58 pm
    
    How do you know that collectively, the current national defense and education systems are the best solutions for America? How do you know what the appropriate amount to spend on national defense? I don’t think your are answering my questions.
    
    Ok, yes national defense is good – but how much national defense?
    
    Ok, yes education is good – but how much should it cost?
    
    How does the government know what the appropriate amount is to spend on these programs. My whole point, like in the article, is the government doesn’t know – and thus is wasting resources that could be spent more efficiently. Believe it or not, those same services the government provides can be provided by the markets.
  - Jonathan
    December 20, 2011 at 1:33 pm
    
    Of course it is possible for the markets to provide them. My point is that the market does not provide them. The two examples I gave were examples of public goods which the market does not price because it assumes several things that simply do not exist: perfect mobility, perfect information, purely linear utility functions, etc. it is a nice argument in theory but it does mesh with economic realities. Additionally, efficiency is not the standard that things such as education, national defense, public safety, etc. are judged by. They are judged by efficiency in addition to accountability, effectiveness, responsiveness, etc specifically because their purpose is to serve the public as a whole, not the market,
  - Eric Bandholz
    December 20, 2011 at 1:49 pm
    
    Markets do not provide these services because they have been crowded out by the government. It’s hard to compete with free.
    
    Who is doing the judging of efficiency, accountability, effectiveness, etc.?
    
    How are these people certain their decisions are best for the country?
Jonathan
December 20, 2011 at 5:04 pm

Eric it is seriously getting to the point of philosophical differences and using platitudes instead of facts. The first statement, “markets have not provided these services because they have been crowded out by government” is a flat out fallacy. Its the type of thing Ron Paul says because he doesn’t have a leg to stand on in factual arguments. It is economic fact that these things were attempted by these things have been tried by the private sector and were under-provided or not provided efficiently (Examine the decline of parochial schools and the discussion of education surrounding the education of blacks post 1955, or for a modern example examine the current state of Azerbaijan – no taxes, no regulation and the country is a hell hole polluted to shit by factories and plutonium dumps). As for who is doing the accounting – well efficiency is a relative scale so you could do that and judge it as efficient or not since it is simply a ratio of input : output. But in the formal sense, the CBO, the GAO, private corporations such as RAND, ICF International, ICF Global Insight, Pacific Institute of Research and Evaluation, numerous evaluation firms around the country. If you ask about the standards they use then the discount rate is 5% per American Economic Association, the factor loadings are .5 or higher per the American Psychological Association and the significance thresholds are .05 with a t score of less than 3 per standard statistical analysis.
And how are they certain? That is the biggest red herring you can possibly use. Nothing is proven in a scientific analysis, more proof is simply offered for or against theories. When a theory has more proof then it becomes fundamental. But to ask for certainty is demonstrating a lack of understanding of how analysis works. If you say that markets provide what is best then I would ask you how you know? You would say because it is what has the highest demand. I would then ask if the consumer is perfectly informed, which if you are discussing an unregulated market, you could not answer yes because the seller has an incentive to lie to the consumer about potential unseen externalities (maybe my product is killing kids in India, but you will never see it). This is not even open for discussion, this is economic fact that is devolving into a discussion of theories that were not believed even when Adam Smith wrote the precursor to The Wealth of Nations (A Theory of Moral Sentiments) in which he discussed all the points I am currently making. This is not even getting into the logical proofs of Keynsian Economics of utilizing game theoretic or experimental economic (again a Nobel prize winning topic) which support my points.
Jonathan
December 20, 2011 at 5:06 pm

On another note I am digging the style section
- Eric Bandholz
  December 20, 2011 at 5:39 pm
  
  Glad you like it .