Posted on 01/25/2024 5:15:11 AM PST by FarCenter
The free market is falling apart. That we all know. Lamentations on the current state of affairs abound. The free market has immiserated the middle class. The free market has created oligarchs. The free market has de-industrialized the Western world. The free market has been gamed by China.
Industrial policy is now in the air. “You started it” fingers are being pointed. Industries are being ring-fenced. Tariffs and subsidies are being threatened and implemented. How did it come to this? Was Marx right? How did the free market fail us so badly? Where did it all go wrong? How right was Marx?
Sorcerers have crawled out from under rocks to explain the free market’s demise through witchcraft and incantations like multiple equilibria, crowd psychology, behavior economics and, horror of horrors, reflexivity.
And it’s not just markets, it’s the entire neoliberal scaffolding! Populist parties with angry “burn it all down” wings are surfacing across the democratic world. The youth are carrying around dog-eared copies of Das Kapital. And, as if to rub it all in, China just sent its largest delegation in years to Davos.
The biggest error the West can possibly make at this point is to overreact – to throw out the baby with the bathwater. The free market is failing because the West, after the Soviet Union fell apart, consecrated it with undeserved theological reverence.
The market was never an infallible god at whose altar anyone should ever have worshipped. It is a dirty, messy, imperfect, friction-filled contraption that will grind up fingers and spit out dead bodies if not carefully attended. Well-tended, markets can deliver a 40-fold increase in GDP in four decades, wipe out poverty, put Taikonauts into space and still fail to produce a competent football team.
In 1956, Richard Lipsey and Kelvin Lancaster published a paper titled The General Theory of Second Best. In elegant simplicity, the paper laid out how, given simple constraints, free markets can deliver outcomes far from optimal. Lipsey and Lancaster managed to flip the tables on neoliberal economics well within the boundaries established by Ricardo, Smith, Mill and Hayek. There was no need to conjure “irrational” black magic behavior or summon treacherous political ideologies.
The theory of second best states that when even one of the conditions required for the optimal outcome is constrained (an uncorrectable market failure), the next best outcome may require a set of conditions wholly different from (and possibly antithetical to) those required to achieve the first best outcome. And in fact, attempting to keep remaining conditions when just one is constrained may result in very suboptimal outcomes.
For example, while the neighborhood pub may be the optimal Friday night restaurant choice – IPA for Dad, salad for Mom and burgers for the kids – it can become highly suboptimal given a simple constraint. If the pub runs out of IPA on draft and only has bottles, Dad – who hates pub food – is going to be one cranky patron no matter how much mom likes her salad and the kids like their burgers. A completely different restaurant like the pizzeria across the street may become the new optimal – if all concerned get to enjoy themselves – if slightly less so than the pub.
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The most famous American cadre-driven undertaking is either the Manhattan project or the Apollo program – it‘s a tossup between them. Both of these endeavors were assigned to doers – Leslie Groves, Robert Oppenheimer, Abe Silverstein, James Webb – and both succeeded spectacularly.
There have been various others like DARPA or Sematech but, over the years, cadre-style active management in the US has fallen to the wayside as The End of History zeitgeist decided that passive noninterference espoused by the Washington Consensus would surely produce superior results.
This pits America’s entrepreneurs against China’s entrepreneurs and its cadres.
As superhuman as Elon Musk may be, Tesla’s profitability was questionable until it built its gigafactory in Shanghai. China’s cadres moved heaven and earth to install 1.8 million EV charging stations across the country versus 128,000 in the US. In 2023, China accounted for 58% of global EV sales compared with 12% in the US. And, as of the fourth quarter of 2023, BYD surpassed Tesla as the world’s largest producer of fully electric vehicles under the leadership of its equally superhuman but far less obnoxious founder, Wang Chuanfu.
It has always been a second-best world and the US will be operating with a handicap if it continues to cling to End of History fantasies. America’s entrepreneurs are no match for China’s entrepreneur/cadre partnership. Gina Raimondo and her bureaucrats at the Department of Commerce may be a start but, so far, they are still bureaucrats and not cadres and Huawei’s running circles around them.
Bringing back American cadres like Leslie Groves, Robert Oppenheimer, Abe Silverstein and James Webb may be necessary if the US wants a shot at remaining first-best in a second-best world.
Adam Smith believed in tariffs when trading partners refused to drop theirs.
The idea you can theoretically know what "optimal" results are, is laughable.
The “free market” seems to have morphed into “lots and lots of socialism” — and we see nothing but that all around us.
And, yeah, that stuff is failing.
And I guess the lesson they expect us to learn from this is that free markets are bad and that the solution is “lots and lots of socialism”.
I believe in a blocked currency such as India has.
Central planning is failing in China.
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Hyper-central planning is failing. We have “central planning” here in the US to some degree. There will always be a “sweet spot” for markets and government incentives/regulations. The real problem with the US is culture; and right now US culture seems to be lovin’ gov’t handouts.
There is also the border/shore foreign ownership blocking provision of the Mexican constitution.
If Canada and the US had similar provisions, the price of housing in Toronto, Vancouver, NYC, Boston, SF and LA would be much less.
We need to define our terms. I think we agree.
What is best is a "sweet spot" as you have said, where individuals know the rules, and can rely on the rule of law to make long term plans.
Yes, the culture of handouts has been pushed for decades, since about the mid 1960s, I would say.
“Gov’t handouts”
We need real property and income tax caps to protect the middle class (those having incomes in the range of full-time federal employees).
The federal income tax on higher incomes needs to be dedicated to the payoff of federal debt.
The ability of Democrats to buy votes must be constrained.
Economic systems and social contracts are tied. Capitalism doesn’t work in a command economy because it’s too easy to use force to corrupt it to benefit one group or another.
Social contracts in the West are breaking badly. It’s gone from ‘each of us has a duty to play fair’ to ‘not my circus, not my monkeys’
An example. My cable provider for decades sent techs out who provided a service and also added assistance - being pleasant, hooking up a sound bar, saying ‘a tip isn’t necessary etc. The last three techs (over a period of less than three years) were ‘rough’... and each of them - as a “bid for a tip” offered a ‘free’ extra remote for my TVs. In short, they were offering what didn’t belong to them - at the company’s expense and gave minimum service. That’s a sea change. I’m seeing that in other companies too. Culture and economic system function in sync... or fail.
“Free market” is not really achieved anywhere, due to government controls and regulations
I will argue that the President Xi ordered central planning is in fact succeeding famously.
To create the envisioned return to pure communism, President Xi is embarked on a program to destroy all evidence of capitalism on Chinese society. This involves totally wrecking the existing economy and social structure and then rebuilding from scratch what he has termed China Socialism.
The CCP implemented Red Lines on the banks that destroyed the real-estate development on which the whole economy and regional governments depended. Very recently, the new auto industry manufacturing industry was similarly destroyed. All foreign business is either leaving or has left. Retail businesses in the major citiees have shut their doors. Manufacturing is also ceased. Factories closed.
The resulting unemployment is incalculable. All Government economic numbers are just bogus and totally without foundation.
If China and the CCP actually survive, the result is going to be a China that is unrecognizable
‘not my circus, not my monkeys’
That attitude comes from diversity.
True - sometimes iron and clay don’t mix.
Everybody Wang Chuanfu Tonight!
True - sometimes iron and clay don’t mix. And Biden is making sure we don’t have time to assilate new citizens. It’s Biden and the democrats who are destroying the country.
The prices of the apartments was and is out of the reach of most prospective buyers.
Many buildings were built at a time when Chinese labor was cheaper.
The basis was build using $1/hour labor and sell when buyer incomes are $9/hour.
Now the labor is $6/hour and the people making $9/hour worry about being replaced by Indian labor.
Also, urban land in China is owned by the government. People would be buying apartments with say 15-30 years left on the ground lease. That is not an attractive option for a couple in their 30s.
This election should be interesting.
How do you say ‘Have you mailed in your ballot?’ in Lao?
Uzbek? Pashtun? Dari?
Diversity can cause problems.
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