Relevant and even prescient commentary on news, politics and the economy.

Did you hear the one about a corporation and a democracy?

Time for a bit of comic relief. (video below the fold)  Julianna reporting on Net Neutrality.  Remember when President Obama said the days of lobbyists setting the agenda was over?

I’m posting this here because this is about “markets”.  It is about competition.  It is about freedom.    The free market competition of…wait for it…IDEAS.  It is not corporations or products that compete they only represent the materialization of what truly is protected in this nation, of what is the singularity within the US Constitution: IDEAS.  Everything, outside of nature its self is derived from ideas.  I was taught this about economics in high school in the early 70′s.  Was I taught incorrectly?

 

Here’s the thing about ideas competing.  The business model is not the end all and be all for the means by which to determine their value, as some have worked so hard to have society and the world believe.  That an idea can not be immediately or expediently monetized is not determinate of its worth to life and the reduction of the risks of living.

It is not just about the money.

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Markets are "natural" …financial intermediation

Lifted from the comments from an Ezra Klein article in the Washington Post comes an interesting idea that is not only currently debated, but also ties into ‘markets are “natural” idea’…

Paul Andrews comments:
Yes – lots of saving and borrowing, often in goods rather than money. When money is included its often only a fiat monetary base exchanged by the government for goods, with no banking sector and therefore no deposits created by lending, no M1, M2, M3. No shadow banking sector etc.

Refer to this BIS summary on fiscal dominance from December 2011

A quote: “Starting with financial intermediation, recall that banks play no role whatsoever in macroeconomic models of the pre-crisis era. These traditional models are based on the distinction between nominal and real quantities, and there are interest rates. But the only friction is the one associated with nominal price changes, so inflation and inflation control become the focus. (If it is costly to change prices, inflation creates a deadweight loss.) And, since the model is devoid of banks, there is no private debt. As I suggested at the beginning, the macroeconomic models of the future, with their added focus on financial linkages, need to have a rationale for debt as distinct from equity.


We need to understand why the predominant financial contract is a loan or a bond rather than equity. In fact, we need a clear understanding of the optimal debt/equity ratio for the economy as a whole. We know that high levels of debt can lead to disaster for a society, but beyond notions from crude empirical work, we don’t have any idea what the right level of debt is. A rich enough macro/monetary/financial model will tell us the answer.”

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More on Markets and Neoliberalism from Crooked Timber

Actual markets in the American economy are extremely rare and unusual beasts. An economics of markets ought to be regarded as generally useful as a biology of cephalopods, amid the living world of bones and shells. But, somehow the idealized, metaphoric market is substituted as an analytic mask, laid across a vast variety of economic relations and relationships, obscuring every important feature of what actually is. And, then we wonder why the “thinking” and policy debates that result are stupid and corrupt.
—  Bruce Wilder

Emphasis added.   This is in the context of a critique of neoloberalism, here described by Henry Farrell:

In fact, it is not free markets with vigorous competition among producers, but instead, a mixture of big firm oligopoly and cosy and frequently corrupt relationships between state officials, who have been told to subcontract out parts of government, and the businesses which supply these new services, in what is at best a murky approximation to a real marketplace. You can read this as a statement that classical liberalism has some good points as well as some bad ones. You can equally well read it as saying (and this is the more fundamental point), that regardless of whether or not classical realism had some good arguments, these don’t have anything much to do with actually-existing-neoliberalism which is a crony capitalist fantasy.

This lays bare the greed, dishonesty, corruption and manipulation inherent to neoliberalism, and simultaneously exposes the concept of “the market” as an absurd quirk of the typical economist’s imagination.

Each of these meaty comments is highly worthy of recognition.  The cephalopod reference made the first one utterly irresistible, and prompted this post.

The bad news is that there doesn’t seem to be any way out.


Here, John Quiggin provides a good functional definition of neolibealism – the first I’ve ever seen – and a very thoughtful critique of neoliberalism as a political cum economic ideology.

The core of the neoliberal program is
(i) to remove the state altogether from ‘non-core’ functions such as the provision of infrastructure services
(ii) to minimise the state role in core functions (health, education, income security) through contracting out, voucher schemes and so on
(iii) to reject redistribution of income except insofar as it is implied by the provision of a basic ‘safety net’.

Quiggin judges neoliberaism to be a failure, for different reasons in different places.  I’m going to quibble with his definition of failure, type iii, though: a failure to deliver the promised outcomes.  With a focus in the inherent dishonesty and corruption inherent to neoliberalism, I can only view it as highly successful in the U.S.  This is because there is a real hidden agenda lurking behind the false public agenda.
 
Wilder describes how it works in a follow-up comment: (Be sure to read the whole thing.)

Neoliberalism, it seems to me, uses the myth of the market, to rationalize rule-making, which serves the rentiers (is dynamically inefficient) and which promotes authoritarian, and therefore unfair, resolution of conflict.

Quiggin describes the type iii failure in the U.S:  “The basic problem is that, given high levels of inequality, very strong economic performance is required to match the levels of economic security and social services delivered under social democracy even with mediocre growth outcomes.”  Of course, no such strong economic performance is forthcoming.

However, the real agenda is not general economic security.  Quite to the contrary, it is to maximize and maintain a high level of inequality, such that the small, elite minority has absolute control over the impoverished majority, precisely because their economic security is severely limited.  I cite as evidence the extreme form of 21st Century Republican party neoliberalism, which even attacks the existence of a basic safety net.  Note also their ongoing attacks against labor unions, health care reform, and education at all levels.

The job is not yet complete, but I have to view the record of neoliberalism in the U.S., to date, as a smashing success.

I posted this on my blog in slightly different form as a Quote of the Day entry. But it makes such a fitting companion piece to Dan’s from earlier today that I decided to put it up here, as well.

 H/T to Unlearningecon

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Discussion at Crooked Timber on ‘what are markets’

Well, sort of on markets.
There is an interesting conversation going on at Crooked Timber our public debate in the econosphere and political rhetoric . Henry posts on the use of arguments over the term neo-liberalism and finishes with:

For what it’s worth, I think that the open information agenda, and the political inequality agenda have a lot more in common than most people think (I have been planning for some time to do more writing on this over the next year). I think it would be a lot more useful to frame the argument as one between different ways of restructuring markets so as to tackle problems of inequality at their source than as one between neo-liberalism and its critics

Lifted from comments,  Bruce Wilder offers this observation:

To a large extent, we are all intellectual victims of economists, dead and otherwise, who really do not know what they are talking about. The main problem with the standard analysis of the “market economy”, as well as many variants, is that we do not live in a “market economy”. Except for financial markets and a few related commodity markets, markets are rare beasts in the modern economy. The actual economy is dominated by formal, hierarchical, administrative organization and transactions are governed by incomplete contracts, explicit and implied. “Markets” are, at best, metaphors.

The elaborate theory of market price gives us an abstract ideal of allocative efficiency, in the absence of any firm or household behaving strategically (aka perfect competition). In real life, allocative efficiency is far less important than achieving technical efficiency, and, of course, everyone behaves strategically.
In a world of genuine uncertainty and limitations to knowledge, incentives in the distribution of income are tied directly to the distribution of risk. Economic rents are pervasive, but potentially beneficial, in that they provide a means of stable structure, around which investments can be made and production processes managed to achieve technical efficiency.
In the imaginary world of complete information of Econ 101, where markets are the dominant form of economic organizations, and allocative efficiency is the focus of attention, firms are able to maximize their profits, because they know what “maximum” means. They are unconstrained by anything.
In the actual, uncertain world, with limited information and knowledge, only constrained maximization is possible. All firms, instead of being profit-maximizers (not possible in a world of uncertainty), are rent-seekers, responding to instituted constraints: the institutional rules of the game, so to speak. Economic rents are what they have to lose in this game, and protecting those rents, orients their behavior within the institutional constraints. Those constraints are in the nature of a public good, and if that public good is well-provided, the behavior is socially beneficial and technically efficient.
It is within this context, that risk and innovation (aka, changing institutional structure) can pay off.
So, yes, licensing barbers can make perfect sense. It creates a small economic rent, and if that rent is tied effectively to barbers being scrupulous about safe and healthy technical practice, that’s a economic benefit. The gain is in technical efficiency, not allocative efficiency.

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Corporate/shareholder value, energy market and global warming

Updated: Renewable Germany bailing out Nuclear France

 
I just read the following in an article by a Mr. Bill McKibben and thought it to be an interesting perspective on why climate change/global warming is being so vigorously denied.

If we spew 565 gigatons more carbon into the atmosphere, we’ll quite possibly go right past that reddest of red lines. But the oil companies, private and state-owned, have current reserves on the books equivalent to 2,795 gigatons — five times more than we can ever safely burn. It has to stay in the ground.
Put another way, in ecological terms it would be extremely prudent to write off $20 trillion worth of those reserves. In economic terms, of course, it would be a disaster, first and foremost for shareholders and executives of companies like ExxonMobil (and people in places like Venezuela).
If you run an oil company, this sort of write-off is the disastrous future staring you in the face as soon as climate change is taken as seriously as it should be, and that’s far scarier than drought and flood. It’s why you’ll do anything — including fund an endless campaigns of lies — to avoid coming to terms with its reality.
Never thought of the resistance to moving away from carbon fuels as an issue of having to write off company value in order to save the planet. As shown with the housing bubble, writing off inflated value (inflated for what ever reason) is a rather difficult thing to do. I mean, when you have so much down stream of that artificial value dependent on it (think currency based on oil), the engineering challenge is like playing Jenga only no one will be laughing if you fail and the tower falls.  Also, you have a timer running in this version of Jenga.

I believe Mr. McKibben refers to the issue as a bubble in that the current price of raw carbon fuel is based on the idea that fuel in general is becoming less available. But fuel or energy is not less available. It is only one source of fuel that is becoming less in quantity. The only means to keep this conflation of less carbon based energy means less energy fuel in total is to deny the application of science in the energy market place as it relates to a competitor product. It is artificial price manipulation via psych-ops.
In other words, the only way to keep the carbon energy market alive is to not have a free energy market. Part of assuring not having a free energy market is to deny the need for a free energy market, thus, deny climate change do to human extraction of carbon from the ground and it’s ever increasing rate of conversion to a gas of CO2. It is artificial price manipulation via psych-ops.
Let’s take the write off issue one step further. How does the value of a company such as Exxon/Mobil which is based on ever rising price do to ever declining product with ever increasing demand keep this model for valuing the company if the product becomes essentially limitless? Now we’re up against our entire paradigm as to how we understand free market value and thus construct value.
Carbon based energy is currently view as land. No new land is being made and demand is rising thus ever increasing value. The proper model for carbon fuel is that of a market where over time the product becomes obsolete. This I think is the fault in thinking that has created the aberrant paradigm which lead to the bubble Mr. McKibben sees. Our entire energy market, viewed in this way is a complete illusion as seen from the owners side of the energy equation and a complete delusion as seen from the market economist side of the energy equation, though I would say the economist delusion has lead the owners to create their illusion.
Just one more problem with running an economy based on the efficiency of money as oppose to the efficiency of people.

Update:

From Real Economics I read an article from Der Spiegel regarding France struggling with electricity shortages do to the cold spell. Seem France, not normally experiencing cold winters uses electricity for heating homes. This year they needed 7000 megawatts per hour more power. 100 gigawatts one evening was need, the equivalent of 80 nuclear power plants. Germany was sending them a net 3000 megawatts/hour because:
It is interesting, said the federal environment minister, that Germany, especially in these days with a very high demand, can even export power—thanks to photovoltaic and wind energy. “We had in the last days a capacity of up to 10,000 megawatts of solar power, which corresponds to the output of ten nuclear power plants, and up to 11,000 megawatts of wind power,” said Röttgen.
Read another take here at Lenz Blog.
This is significant, because back in May of 2011 all the rage was how France was bailing out Germany after Germany announced its nuclear generation shut down. As with Jonathan Larson at Real Economics, no one is saying this means we can scrap all other power generation tomorrow as this Spiegel article notes the lack of solar generated power in Germany during a spell this winter and the need to import electricity.
The January article (not pro solar at all) notes:
Until now, Merkel had consistently touted the environmental sector’s “opportunities for exports, development, technology and jobs.” But now even members of her own staff are calling it a massive money pit.

How quickly fortunes can change. All the more reason to view carbon based energy in the energy market as a product that can be made obsolescent.  You know, a true free market with competition which purpose is to serves the efficiency of people and not money. Maybe then even Germany would not be so reactionary when their plan stumbles.  Heck, it took the Wright Brothers over a 1000 flights, just to learn how to fly!  Over 200 wings and airfoils!  They did not concern themselves with the issue of scaling it up for use by a planet of 6 billion people.

 
Stick to your plan Germany because you have the correct intention.

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What The Rude Pundit Said

Christopher Dodd ruins his reputation:

Go read about [SOPA and PIPA], if you haven’t, because it’s pretty insidious stuff, not just because of the governmental control, but because of the corporate power behind it….

Former Senator Chris Dodd, now head of the Motion Picture Association of America (motto: “You can only be our leader if you’re a male with a full head of white hair”), issued a statement attacking the websites that are participating in today’s strike/blackout. It says, in part, “It’s a dangerous and troubling development when the platforms that serve as gateways to information intentionally skew the facts to incite their users in order to further their corporate interests.”

You got that? The whore who fronts for an industry owned by multinational megacorporations like NewsCorp, Sony, and Viacom is actually attacking BoingBoing.net owners Happy Mutants LLC for using the internet for some evil agenda to steal Chipmunk movies just because they went on a one-day strike. That’s a bit like Ted Bundy accusing a student nurse of having a messy dorm room just before bludgeoning her to death.

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Free market mechanics and healthcare…

by Michael Halasey

Free market mechanics and healthcare…

Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.

I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….

Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.

To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.

This impracticality also lends itself to probably the biggest problem. That is irrational behavior. Any of us who have taken even undergraduate economics remember the discussions of rational actors, and how prices were sensitive to rational behavior. Much of health care involves emotionally charged, heated, and oftentimes difficult decisions. Most patients and families can hardly be expected to act in a rational fashion about receiving the news of a terrible diagnosis such as cancer. Real world experience reveals this to be true. I wish I could count how many times I have presented various treatment options to patients, only to hear “Do whatever it takes”.

Hayek once wrote that spontaneous order was a result of market economies, and that it was “a more efficient allocation of societal resources than any design could achieve.” This of course, assumes rational behavior, and assumes that a market can be symmetric.

Because of this behavior, and because people view healthcare not as optional, but as a necessity, price elasticity scores generally trend around 0 or -1. This indicates an inelastic market.

Of course, the next time I have a 21 year old kid who comes in after a farm accident without insurance, and is badly injured, I’ll make sure to tell him that perhaps he should have shopped around.

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