Posted on 09/13/2002 7:43:40 AM PDT by traditionalist
What is corporatism? In a (somewhat inaccurate) phrase, socialism for the bourgeois. It has the outward form of capitalism in that it preserves private ownership and private management, but with a crucial difference: as under socialism, government guarantees the flow of material goods, which under true capitalism it does not. In classical capitalism, what has been called the "night-watchman" state, government's role in the economy is simply to prevent force or fraud from disrupting the autonomous operation of the free market. The market is trusted to provide. Under corporatism, it is not, instead being systematically manipulated to deliver goods to political constituencies. This now includes basically everyone from the economic elite to ordinary consumers.
Unlike socialism, corporatism understands that direct government ownership of the means of production does not work, except in the limiting case of infrastructure.1 But it does not represent a half-way condition between capitalism and socialism. This is what the West European nations, with their mixed economies in which government owned whole industries, tried to create until Thatcherism. Corporatism blends socialism and capitalism not by giving each control of different parts of the economy, but by combining socialism's promise of a government-guaranteed flow of material goods with capitalism's private ownership and management.
What makes corporatism so politically irresistible is that it is attractive not just to the mass electorate, but to the economic elite as well. Big business, whatever its casuists at the Wall Street Journal editorial page may pretend, likes big government, except when big government gets greedy and tries to renegotiate the division of spoils. Although big business was an historic adversary of the introduction of the corporatist state, it eventually found common ground with it. The first thing big business has in common with big government is managerialism. The technocratic manager, who deals in impersonal mass aggregates, organizes through bureaucracy, and rules through expertise without assuming personal responsibility, is common to both. The second thing big business likes about big government is that it has a competitive advantage over small business in doing business with it and negotiating favors. Big government, in turn, likes big business because it is manageable; it does what it is told. It is much easier to impose affirmative action or racial sensitivity training on AT&T than on 50,000 corner stores. This is why big business has become a key enforcer of political correctness. The final thing big business likes about big government is that, unlike small government, it is powerful enough to socialize costs in exchange for a share of the profits.
The key historical moments in the development of American corporatism can be easily traced. It got its start from the realization, during the Progressive period around 1900, that the night-watchman state was too weak to make the large corporate actors of the economy play fair. The crucial premise that enters here is that the capitalist economy cannot be trusted to be self-regulating, as it previously had been. This collapse of trust was also implicit in the 1913 creation of the Federal Reserve system. What the Great Depression did was destroy a second kind of trust: that the economy would reliably deliver material goods without government intervention. With these two different kinds of trust gone, corporatism becomes not only worthwhile, but necessary. Crucially, it becomes psychologically necessary, independently of whether government can deliver on its promises, because people instinctively turn to government as their protector.
Anyone who is serious about getting rid of corporatism must explain how they are going to restore these two kinds of trust or persuade people to live without them. In particular, it is almost certainly useless, as verified by the fact that government has grown under every postwar Republican administration, to try to nibble away at big government without renegotiating the social contract that underlies it. If we don't have a plan to renegotiate this social contract, we must face the fact that the electorate will demand that it be respected. Newt Gingrich, who thought that the failure of Clinton's health plan signified the electorate's rejection of "socialism," learned this the hard way.
Clearly, the New Deal was the biggest jump forward into corporatism, though this was not fully understood at the time. Many people, both pro and con, misunderstood it as a move towards socialism.2 As is well known, Roosevelt was an empiricist, not a systematic thinker, and many elements of the New Deal that were tried, such as the notorious National Recovery Administration, were rightly discarded. But the fundamental proposition, that government should take responsibility for ensuring the flow of material goods to the people, was rapidly embraced by the American people, which continues to embrace it today whether it admits it or not. When people demand that the government "do something" about a falling stock market, they are playing at capitalism while practicing corporatism.
The fundamental essence of corporatism is not technocratic but moral: what does government have the responsibility to do? What do people have the right to demand be done for them?
The economic Left likes corporatism for three reasons:
It satisfies its lust for power.
It makes possible attempts to redistribute income.
It enables them to practice #2 while remaining personally affluent.
It enables them to realize capitalist profits while unloading some of the costs and risks onto the state.
The ability to intertwine government and business enables them to shape government policy to their liking.
They believe the corporatist state can deliver social peace and minimize costly disruptions.
Let's look at some specific examples of corporatism:
The Export-Import Bank. This government agency helps finance exports of American products. The aim, laudable enough, is to create jobs in the US. But there is still the problem that doing this requires the government to consume capital, which might have created more jobs, (or just more wealth) if it had been allocated elsewhere. So this is classic corporatism: government allocating capital to private industry on the basis of political favoritism.
Agricultural price-supports. Contrary to myth, most of the money goes to agribusiness, not small farmers.
Industrial bailouts, like the recent one of the airlines. People do not trust the market to provide the airline service they think they "need." The truth is this country has more carriers than the market can support and a few should be allowed to die. No-one who really believes in free-market economics accepts the argument that jobs can be saved in the long run in this fashion.
Corporate bankruptcy law. This law assigns an artificial value, not supported by economics, to keeping dying companies alive, rather than letting the carcasses of competition's losers nourish the winners. It is responsible, for example, for preventing a needed cull of the airline business by letting Continental Airlines pass through its protections not once but twice.
Tariffs, quotas, and other trade restrictions. These transfer wealth from consumers to producers in the affected industries, whatever their other possible merits.
Affirmative action is generally viewed as a social-policy question rather than an economic-policy one, but it fits neatly into the corporatist model: government forces private industry to distribute jobs to a favored political constituency. If people really believed in markets, they would realize that irrational discrimination imposes a cost on employers, who therefore already have an incentive not to engage in it.
Fannie Mae, the government agency which raises money for mortgage loans in the private capital markets. This agency has deliberately been spinning out loans to sub-par borrowers who are doomed to default on them. It has become a major prop holding up real-estate prices, and is thus a key culprit in the ongoing mortgage bubble. Conservatives accept it on the grounds that home ownership makes people more conservative. But this may not be true forever if private ownership of housing becomes a public entitlement. This is part of an ongoing phenomenon that corporatism helps to drive: the erosion of the determination of political preferences by the ownership of property.3
Sallie Mae, the government agency which supervises student loans. The government has a system of directly-financed public universities, but is has also in effect annexed private universities. Cleverly, it uses a relatively small amount of public money to package the flow of a much larger amount of private capital to tuition. The principal problem with this is that it has become a subsidy machine for the spiraling cost of higher education. There is also the problem that any institution receiving federal funds becomes susceptible to regulations that otherwise wouldn't be legal. Bribes-if-you-do are a much less disruptive means of manipulating behavior than sanctions-if-you-don't, and corporatism hates disruption and loves business as usual.4 One way to interpret corporatism is as a systematic way for government to distribute bribes for submission to its authority.
In local government, corporatism is principally a matter of real estate. Let's take New York as an example, just because I know it best and the pattern is clearest here, though similar dynamics work in other locales to a greater or lesser degree. Basically, real estate development here has become so over-regulated and over-taxed that it is virtually impossible to do profitably without government help. Government is aware that it has strangled development, but still wants it to occur because voters want jobs, campaign contributors want their projects, and projects create patronage opportunities for politicians. Therefore, government selectively lifts the burden of taxation and regulation on certain projects to push them into the black. It does this with tax abatements, loan guarantees, zoning changes, condemnations, outright subsidies, tax-exempt bond issues, exemption from regulations, and selective public infrastructure investments. As a result, only projects with political support can happen, and every skyscraper is a monument to the political deals that enabled it to get built. The result is capitalist in the sense of being privately owned, but it is not a free market. Government is expected by developers to keep a steady flow of profits going (while keeping politically-unconnected competitors out of the game.) It is expected by construction unions to keep a steady flow of construction jobs. It is expected by the public to deliver shiny new skyscrapers full of jobs.
In science and technology, corporatism principally takes the form of federal government financing of research expenditures whose value is difficult for the private sector to capture on its own. Government pays for universities to provide industry with the raw feedstock of new discoveries that can be commercialized. State governments have entered this game on a lesser scale. Tax credits for research and development may also be interpreted as a public subsidy.
In the capital markets, the quintessential corporatist institution is the Federal Reserve Bank. Legally, it is not technically a government agency at all but a cartel of private banks. Prior to 1913, the maintenance of a viable capital market in the U.S. was not a government responsibility.5 From the 30's to the 70's, the Fed tried to institute the grand corporatist project of Keynesianism, but abandoned it when inflation proved it unworkable. Nevertheless, the responsibilities of the Fed have tended to grow as people expect it, for example, to bail out a falling stock market with cheap credit, as I have mentioned before.
Bankers are quite well aware that they can make speculative loans to financially weak nations and count on being bailed out by the government if anything goes wrong. Naturally, this creates a moral hazard, not to mention a misallocation of capital. But given that the Left wants to see capital allocated to the Third World, the Right wants banks to be profitable, and the public fears a crash, the bankers can always count on a bailout.
One can see how corporatism is likely to expand in the future. The privatization of Social Security is off for now, but remains inevitable, simply because there is no sustainable way to provide for a future income stream other than saving money now. But the stock market decline of the past few years has destroyed public trust that this market will always provide a reliable store of value, meaning that people will inevitably turn to government to make it provide one. What form this will take, cannot be predicted, but any privatization of Social Security will be accompanied by some governmental mechanism to stabilize investments. At best, this may mean diversification requirements. At worst, it may mean some horrible politicization of the capital markets.
The concept of corporatism provides a good way to analyze the failure of HillaryCare. With its attempt to involve private insurance companies, this plan clearly made a (clumsy) attempt to conform to the corporatist model. It was supported by big companies like GM, which saw it as a way to offload its huge health-care costs. Fundamentally, I think it would have worked if it hadn't been such an arrogant, secretive, heavy-handed, all-at-once undertaking. We are gradually getting the corporatist equivalent of socialized medicine in this country anyway. Corporatized medicine will mean nominally private health plans for the employed that are so heavily regulated in what they can charge and what they must provide that they might as well be run by government. It will mean requirements for all businesses to give their employees health coverage (something big business will love because it will destroy a lot of their small-business competitors.) It will mean regulation of drug prices, which will eventually make drug companies wards of the state. Lastly, Medicare and Medicaid will expand, with the help of state plans, to cover whomever is left, with a tacit subsidy to emergency rooms to cover the last dregs.
As I said, all these can be viewed as ways in which the corporatist state buys people's cooperation. But one cannot play this game without becoming susceptible to it, so that people buy the state's cooperation, too. Naturally, this produces the partly-valid complaint that we have a government for sale to the highest bidder. But in a society where people, institutions, and social groups are politically for sale to the highest bidder, what else could one possibly expect?
Both Right and Left like corporatism in practice and are very cozy with it. But they are also ambivalent about it in theory, because it contradicts many of their cherished ideological beliefs.6 At the level of ideological self-characterization, neither side has fully grasped what corporatism is nor can quite bring itself to admit that it endorses it. Thus in its utterances, the intellectual Left is still reflexively anti-corporate and the Right anti-government. Part of the twisted genius of Bill Clinton was that he came closer to admitting we live in a corporatist society than any previous president. Bush, who made his personal fortune off a public-private deal concerning a stadium, is just as good at playing the game in practice, but on the ideological plane he mistakenly thinks that what the corporatist synthesis takes from socialism is "compassion." Hence his painfully sincere efforts to be politically correct and nice about everybody, since he intuitively grasps that Americans will not accept the rhetoric of pure capitalism.
Realizing that our society is corporatist is the key to undoing many conservative misunderstandings. For example, we tend to be puzzled when the rich support the Left, which under classical capitalism they generally didn't. But in a society where government takes care of business, they often have a lot to gain from big government. Not to mention the fact that whole classes of the wealthy, i.e. lawyers, doctors, lobbyists, environmental consultants, defense contractors and others, make their money either helping people deal with government or are indirectly funded by government. Ownership of property used to make people conservative because they intuitively grasped that the means of the conservation of property were bound up with the means of the conservation of everything else: religious orthodoxy to social mores to cultural tradition to the Constitution. But now that corporatism has co-opted threats to property ownership, they don't feel the need for these things anymore.
I consider it highly unlikely that corporatism can be overthrown, though objectionable parts of it can certainly be fought. I will discuss what it means to be conservative in a corporatist environment in a future article. The key thing for us to understand is that many of our assumptions about what furthers our cause and what doesn't were derived under the conditions of a more capitalist society and increasingly no longer hold.
1 This is not to say that government is necessarily the most efficient owner of infrastructure; I am well aware of the arguments for private toll roads and investor-owned utilities. It's just that, compared with the state-owned steel mills and supermarkets of pre-Thatcher Europe or the Soviet Union, they are not obvious failures. The quality, cost and productivity of publicly-owned utilities compares acceptably to privately-owned ones. And privatization of natural monopolies has problems of its own, as we saw in the California electricity crisis, even if these problems are caused by politics and do not refute the free-market ideal itself.
2 The final irony of corporatism is that it represents the triumph of the one 20th-Century ideology that is considered so utterly discredited that most educated people don't even bother to learn what it believed about economics: fascism. The exact means by which the end was carried out were very different in Mussolini's Italy, Franco's Spain, Hitler's Germany, or Tojo's Japan, and the manner was occluded by a lot of violence caused by other things, but the fundamental dynamic is the same as here: government assumed responsibility for guaranteeing the flow of material goods by private means after public confidence in the market's ability to do this collapsed. The fascists did it to avert communism. We did it for less desperate reasons, but the idea is similar. (The German and Japanese Nazis were not fascists, strictly speaking, but the core of their economics, separate from their use of plunder, was similar. See my article on what the Nazis were really about.)
3 See my review of BoBos in Paradise. The Republican share of the rich vote is declining.
4 The political class loves corporatism because it enables them to establish themselves in stable, profitable brokerage-relationships in which they manage the exchange of favors between government and the public in exchange for political support. This is a much easier way to stay in office than focusing their efforts on contentious issues and the public's fickle opinions about them.
5 This responsibility devolved in practice onto the Morgan Bank on Wall Street, which organized ad-hoc groups of banks to stabilize markets and enforce standards when needed. See the fascinating account in Ron Chernow's The House of Morgan.
6 The recently faddish book Empire is an attempt to understand global corporatism from a neo-Marxist point of view. Although rich in hit-or-miss insights, its Marxist assumptions prevent it from getting it right. Marxists have been observing the emergence of corporatism, and desperately trying to update Marxism to accommodate it, for a long time now, the most philosophically interesting attempt being that of Jürgen Habermas in Legitimation Crisis. Such attempts can only be accurate insofar as they pass out of Marxism entirely.
1. The Export-Import Bank….But there is still the problem that doing this requires the government to consume capital, which might have created more jobs, (or just more wealth) if it had been allocated elsewhere. The onus is on the author to show that it does not: one cannot criticize on the basis of what might have been.
2. So this is classic corporatism: government allocating capital to private industry on the basis of political favoritism. Where is political favoritism here? As a nation we are interested in exports. As a nation, we hire a national agency --- the federal government --- to facilitate that. What's political about that?
3. Agricultural price-supports. Contrary to myth, most of the money goes to agribusiness, not small farmers. See the comment on the public goods below.
4. Industrial bailouts, like the recent one of the airlines. Ridiculous: this was essentially a wartime measure.
this country has more carriers than the market can support and a few should be allowed to die. Of course, but not at the time of national crisis. Very disingenuous argument here.
No-one who really believes in free-market economics accepts the argument that jobs can be saved in the long run in this fashion. Again dishonest: this was a bailout at a time of national crisis. No one argued that the inefficient airlines are going to be maintained.
5.Corporate bankruptcy law. This law assigns an artificial value, not supported by economics, to keeping dying companies alive, Again false: in court proceedings, experts are called to evaluate these matters.
6. Tariffs, quotas, and other trade restrictions. These transfer wealth from consumers to producers in the affected industries, whatever their other possible merits. The goal here is precisely to take these "other merits" into account. What's so negative or unusual here? One always judges alternatives by the bottom line, not the individual components.
7. Affirmative action is generally viewed as a social-policy question rather than an economic-policy one, but it fits neatly into the corporatist model: government forces private industry to distribute jobs to a favored political constituency. Again, what is political here? Did not Republicans support this measure as well?
8. If people really believed in markets, they would realize that irrational discrimination imposes a cost on employers, who therefore already have an incentive not to engage in it. Well, so does the lack of discrimination in housing; so does the whole bunch of labor laws (like paying for overtime). This is why we moved away from the robber baron days.
9. Fannie Mae, the government agency which raises money for mortgage loans in the private capital markets. This agency has deliberately been spinning out loans to sub-par borrowers who are doomed to default on them. Evidence, please, and specifics.
10. It has become a major prop holding up real-estate prices, and is thus a key culprit in the ongoing mortgage bubble. Fannie Mae existed also when there was no bubble. This statement violates the basic premises of causal reasoning.
11. Conservatives accept it on the grounds that home ownership makes people more conservative. But this may not be true forever Again, argues against ghosts here.
12. Sallie Mae, the government agency which supervises student loans. The government has a system of directly-financed public universities False, some universities are financed by the respective state governments. The government does not have such a system.
but is has also in effect annexed private universities. Cleverly, it uses a relatively small amount of public money to package the flow of a much larger amount of private capital to tuition. What on earth does this mean? Any specifics?
The principal problem with this is that it has become a subsidy machine for the spiraling cost of higher education. SO what's wrong with that?
13. There is also the problem that any institution receiving federal funds becomes susceptible to regulations that otherwise wouldn't be legal. Any examples? Pure demagogue.
14. In local government, corporatism is principally a matter of real estate. Let's take New York as an example, No, New York is not an example of anything; it is a complete idiosyncrasy.
15. In science and technology, corporatism principally takes the form of federal government financing of research expenditures whose value is difficult for the private sector to capture on its own. Wrong. It is not a question of difficulty: private sector has no incentives to invest in fundamental research.
In the capital markets, the quintessential corporatist institution is the Federal Reserve Bank…the responsibilities of the Fed have tended to grow as people expect it, for example, to bail out a falling stock market with cheap credit.. Well, if our increasingly uneducated and ignorant population expects this, it does not follow that the Fed actually act. To the contrary, Greenspan repeatedly said on Capitol Hill, "The Fed looks at the economy, of which the behavior of the stock market is only a small part."
Bankers are quite well aware that they can make speculative loans to financially weak nations So why don't they make loans to these nations exclusively?
The author would be well advised to learn the simple fact that there is a whole host of goods that the markets do not provide. For provision of these, so-called public, goods the coercive power is needed. If he wants to complain about the government, he should at least explain to us what the alternative is: the markets do not necessarily constitute such.
More importantly, it would be nice if he at least advanced arguments, but he regurgitates propaganda instead. A mini reincarnation of Pat Buchanan: smart-sounding words with not much meaning and a lot of distortion behind them.
Econ 101. The market would not allocate resources the same way as the Export-Import Bank. We know this because otherwise you would not need an Export-import Bank. Now why would the market allocate resources differently? Because the risk-adjusted rate of return on invested resources is higher when those resources are allocated differently. Why is it higher? Because, provided there are no externality or public goods questions, and there are none when it comes to exports, invested resources create more wealth when allocated differently. Hence the export-import bank destorys wealth by allocating resources differently from the manner in which they would generate the highest rate of return.
Where is political favoritism here? As a nation we are interested in exports. As a nation, we hire a national agency --- the federal government --- to facilitate that. What's political about that?
Actually, no, we are not interested in exports in and of themselves. As far as economic policy is concerned, we are interested in creating as much wealth as possible. Of course we care about things other than money, but the import export bank does not concern itself with such things. I already showed how more wealth gets created if resources are allocated differently from the manner in which the Export-Import Bank allocates them.
Hence, the Export-Import Bank is a subsidy, granted at the expense of taxpayers and consumers, to a special interest group: exporters.
3. Agricultural price-supports. Contrary to myth, most of the money goes to agribusiness, not small farmers. See the comment on the public goods below.
I don't think you understand what public goods are. Fram products most certainly do not qualify.
4. Industrial bailouts, like the recent one of the airlines. Ridiculous: this was essentially a wartime measure.
Was the Chrysler bailout a wartime measure?
this country has more carriers than the market can support and a few should be allowed to die. Of course, but not at the time of national crisis. Very disingenuous argument here.
Actually, it is quite true. Even before 9-11, a number of carriers of carriers were losing money.
No-one who really believes in free-market economics accepts the argument that jobs can be saved in the long run in this fashion. Again dishonest: this was a bailout at a time of national crisis. No one argued that the inefficient airlines are going to be maintained.
But they were. The airlines received more money than they lost as a result of the post 9-11 grounding, and this extra infusion of cash certainly at the very least delayed some bankruptcies.
5.Corporate bankruptcy law. This law assigns an artificial value, not supported by economics, to keeping dying companies alive. Again false: in court proceedings, experts are called to evaluate these matters.
I see you are not familiar with the economic literature on bankruptcy. I suggest you read it before making comments.
6. Tariffs, quotas, and other trade restrictions. These transfer wealth from consumers to producers in the affected industries, whatever their other possible merits. The goal here is precisely to take these "other merits" into account. What's so negative or unusual here? One always judges alternatives by the bottom line, not the individual components.
Your view of the way laws are made is quite naive. Tell me, what beneift do we derive from protecting the sugar industry? Why is it that it is always the most politically powerful industries that get trade protection?
7. Affirmative action is generally viewed as a social-policy question rather than an economic-policy one, but it fits neatly into the corporatist model: government forces private industry to distribute jobs to a favored political constituency. Again, what is political here? Did not Republicans support this measure as well?
Republicans support Affirmative Action for political reasons just like the democrats. They fear being called racist. Why is that so surprising?
8. If people really believed in markets, they would realize that irrational discrimination imposes a cost on employers, who therefore already have an incentive not to engage in it. Well, so does the lack of discrimination in housing; so does the whole bunch of labor laws (like paying for overtime). This is why we moved away from the robber baron days.
Racial discrimination in housing, unlike in the job market, is usually rational. The presense of certain minority groups who tend to suffer from social pathologies tends to drive down property values. In addition, I would venture to say that most people or any race would prefer, other things equal, to live an a mostly white neighborhood, though most are not honest enough to admit it.
Job discrimination is not economically viable unless the customers care who is doing the work. This might be a factor in a restaurant business and similar lines of work, but studies have shown it is not a factor in most industries.
The consensous of the economics profession is that most labor laws, such overtime and minimum wage laws, on the whole hurt workers. Workers' standard of living did not improve since the begining of the 19th century because of such laws. They improved because of increased productivity. This can be shown by the fact that most workers do not work for minimum wage and do not work much overtime.
9. Fannie Mae, the government agency which raises money for mortgage loans in the private capital markets. This agency has deliberately been spinning out loans to sub-par borrowers who are doomed to default on them. Evidence, please, and specifics.
The financials for Fannie Mae are publiclly available. I suggest you look them up.
10. It has become a major prop holding up real-estate prices, and is thus a key culprit in the ongoing mortgage bubble. Fannie Mae existed also when there was no bubble. This statement violates the basic premises of causal reasoning.
Actually, real-estate follows a cycle whereby bubbles are inflated, burst, and inflated again. The last bubble burst in the early nintees, inflated again, and will burst within a few years. All institutions which dump cheap credit into the housing market feed this bubble, and Fannie Mae is one of them. The Fed is another.
11. Conservatives accept it on the grounds that home ownership makes people more conservative. But this may not be true forever Again, argues against ghosts here.
He justifies this later in the article.
12. Sallie Mae, the government agency which supervises student loans. The government has a system of directly-financed public universities False, some universities are financed by the respective state governments. The government does not have such a system.
So state governments aren't governments?
but is has also in effect annexed private universities. Cleverly, it uses a relatively small amount of public money to package the flow of a much larger amount of private capital to tuition. What on earth does this mean? Any specifics?
Private universities are hooked on federal money. They get it in many different forms, from NSF grants to pell grants to NIH grants, subsidized loans, etc, etc, etc. This money comes with strings attached, and hence the universities, even though private, must subject themselves to a great deal of government control. The government often uses this control to force universities to adopt certain policies. Affirmative action is just one of many examples.
The principal problem with this is that it has become a subsidy machine for the spiraling cost of higher education. SO what's wrong with that?
Nothing if you're on the receiving end, as I plan on being. Plenty, if you're a middle-class kid who has to go 100K or more into debt just to get a college enducation.
13. There is also the problem that any institution receiving federal funds becomes susceptible to regulations that otherwise wouldn't be legal. Any examples? Pure demagogue.
Affirmative action. There are others.
14. In local government, corporatism is principally a matter of real estate. Let's take New York as an example, No, New York is not an example of anything; it is a complete idiosyncrasy.
The same thing occurs in all other big cities: Chicago, Boston, Philadelphia, just to name a few.
15. In science and technology, corporatism principally takes the form of federal government financing of research expenditures whose value is difficult for the private sector to capture on its own. Wrong. It is not a question of difficulty: private sector has no incentives to invest in fundamental research.
Really? Then why do the pharmaceutical companies engage in it?
In the capital markets, the quintessential corporatist institution is the Federal Reserve Bank…the responsibilities of the Fed have tended to grow as people expect it, for example, to bail out a falling stock market with cheap credit.. Well, if our increasingly uneducated and ignorant population expects this, it does not follow that the Fed actually act. To the contrary, Greenspan repeatedly said on Capitol Hill, "The Fed looks at the economy, of which the behavior of the stock market is only a small part."
Actually, the Greenspan did prop up the stock market bubble. I worked at the NY fed from 1999-2001. There was a big debate going on between the New York staff economists and Greenspan's staff ecnomoists. There were a few articles in the financial press about it. You should look them up. Greenspan's boys were arguing that the Fed needed to keep the stockmarket value high in order to sustain consumption levels. We argued, based on historical data, that consumption levels already had fallen to levels that would be compatible with a substantial reduction in market value. It turns out we were right, but Greenspan didn't listen to us and he continued to prop up the unsustainable valuations.
Bankers are quite well aware that they can make speculative loans to financially weak nations So why don't they make loans to these nations exclusively?
Because bailouts don't remove all the risk but enough to cause the banks' portfolios to be allocated inefficiently.
The author would be well advised to learn the simple fact that there is a whole host of goods that the markets do not provide. For provision of these, so-called public, goods the coercive power is needed.
Agreed, but none of the things you mentioned above, except for some types of basic research, qualify as public goods. I suggest you obtain a good micro-economics textbook and read the chapter on public goods. Here's one I recommend. It has become the standard in college micro-economics classes.
Because, provided there are no externality or public goods questions, and there are none when it comes to exports, There are some: the one I has in mind is foreign policy.
Further, as far as I know --- and I do not claim to be intimately familiar with the workings of that institution --- The I/E Bank acts as an insurance company where none would be provided by the market (spreading the risk over the pool of taxpayers).
Also, are you saying that selling a good outside the economy is the same as internally?
Hence, the Export-Import Bank is a subsidy, granted at the expense of taxpayers and consumers, to a special interest group: exporters. How do consumers pay for it?
most of the money goes to agribusiness, not small farmers. See the comment on the public goods below. In different times, the country instituted the price controls to ensure that there is no hunger, even at the bottom of the cycles. In other, words, minimal nutrition is judged here as a public good, much like the lighting in the street.
T: I don't think you understand what public goods are. Farm products most certainly do not qualify. And you certainly are not in the habit of asking clarifying question before rushing to conclusions. I never referred to "farm products" as a public good.
4. Industrial bailouts, like the recent one of the airlines.
Ridiculous: this was essentially a wartime measure.
T:Was the Chrysler bailout a wartime measure? I referred to the author's writing: the example given is a non-example, as I stated. In fact, I found it to be as offensive as claiming that you like to kill people having observed you in a wartime battle. this country has more carriers than the market can support and a few should be allowed to die.
TQ: Of course, but not at the time of national crisis. Very disingenuous argument here.
TActually, it is quite true. Even before 9-11, a number of carriers of carriers were losing money. So what does it have to do with what I said?
TQ:No one argued that the inefficient airlines are going to be maintained.
T: But they were. The airlines received more money than they lost as a result of the post 9-11 grounding, and this extra infusion of cash certainly at the very least delayed some bankruptcies. That well may be. Firstly, this is NOT what the author argued against: not the size but the very fact of the bailout. Secondly, even if what you said is true, it only points to a technical mistake of estimating the damages.
I see you are not familiar with the economic literature on bankruptcy. I suggest you read it before making comments. And I suggest that, as the standard practice dictates, you state what specifically you disagreed with before referring to the literature. I am amazed that someone so familiar with the intermediate microeconomics does not follow this practice habitually.
6. Tariffs, quotas, and other trade restrictions. These transfer wealth from consumers to producers in the affected industries, whatever their other possible merits.
TW: The goal here is precisely to take these "other merits" into account. What's so negative or unusual here? One always judges alternatives by the bottom line, not the individual components.
Your view of the way laws are made is quite naive. That well may be, but you cannot conclude that before you improve your learning skills. All I said that the standard criterion of decision-making is to select that which give the best overall result and not a particular component. I am sorry you have not recognized it when you saw it.
7. Affirmative action is generally viewed as a social-policy question rather than an economic-policy one, but it fits neatly into the corporatist model: government forces private industry to distribute jobs to a favored political constituency.
Again, what is political here? Did not Republicans support this measure as well?
T: Republicans support Affirmative Action for political reasons just like the democrats. They fear being called racist. Precisely. This, in turn, says that such is the overall preference of society. Hence, no one particular party benefits from it: this is expected by the electorate, rightly or wrongly, from both parties.
8. If people really believed in markets, they would realize that irrational discrimination imposes a cost on employers, who therefore already have an incentive not to engage in it.
TQ: Well, so does the lack of discrimination in housing; so does the whole bunch of labor laws (like paying for overtime). This is why we moved away from the robber baron days.
T: Racial discrimination in housing, unlike in the job market, is usually rational. Precisely: it is individually rational but abhorring. Culture, however, is a public good.
Sorry you missed that: Varian does not give it as an example. Perhaps you should also read up on control and begin to consider problems of moving a system from one equilibrium to another. This is precisely what the country has faced: moving from the old standard of racial prejudice and discrimination to a society free from these obstacles to mobility. Your framing of the problem, does correspond to the intermediate level of economics.
Job discrimination is not economically viable unless the customers care who is doing the work. Really?
You are continuing to be stuck at the intermediate level. What about the workers who actually produce the good? Was the race of the co-worker not an externality in their utility functions? Recall also that these people are your agents that are better informed than you, who as principal may yourself be entirely indifferent.
The consensous of the economics profession is that most labor laws, such overtime and minimum wage laws, on the whole hurt workers. Come on, be at least truthful: most people focus on the low-income labor when talking about the minimal wage. Incidentally, please look up the difference between "minimum" and "minimal." Varian, in particular, my have an appendix on that. Workers' standard of living did not improve since the beginning of the 19th century because of such laws. Wow! You are a really great spokesman for the profession! The econometric studies have indeed established this causality?
Perhaps, you should familiarize yourself with threats to the validity of quasi-experiments. Cook and Campbell (1956) may be a good start.
TQ: Fannie Mae existed also when there was no bubble. This statement violates the basic premises of causal reasoning. Comte has identified three necessary conditions for establishing causality, of which the third, concomitant variation is familiar to many. I referred to the first one. Again, I am amazed that someone purporting to read the econometric literature cannot recognize and, moreover, gives an irrelevant argument:
All institutions which dump cheap credit into the housing market feed this bubble, and Fannie Mae is one of them. The Fed is another. But, by the same argument, they help at the bottom. So, the task of someone that subscribes to the argument that these institutions must be abolished is to show that they hurt more than they help. Pointing to mere existence of costs is insufficient, much like arguing that one should not sell to more consumers just because it will also involve more costs. This is a logical fallacy, regardless of one's beliefs.
12. Sallie Mae, the government agency which supervises student loans. The government has a system of directly-financed public universities
TQ: False, some universities are financed by the respective state governments. The government does not have such a system.
I: So state governments aren't governments?
Your critique gets from bad to worse> The issue of centralization is essential when discussing government. I have objected to the author's use of the singular. I further emphasized that point, italicizing the word "The." Now, where on earth did you get that I do not consider state governments to be governments?
but is has also in effect annexed private universities. Cleverly, it uses a relatively small amount of public money to package the flow of a much larger amount of private capital to tuition.
TQ: What on earth does this mean? Any specifics?
The government often uses this control to force universities to adopt certain policies. Affirmative action is just one of many examples. Correct, and this is the essence of regulation: one receives a subsidy (which may be negative) when exhibiting the desired behavior.
This is not what the author said, however: it is not clear at all what he meant, and that is what I noted.
I: Nothing if you're on the receiving end, as I plan on being. Plenty, if you're a middle-class kid who has to go 100K or more into debt just to get a college education.
This is a statement I mostly hear from the demagogues of the populist kind. The economists, in contrast, to break down the costs of higher education.
13. There is also the problem that any institution receiving federal funds becomes susceptible to regulations that otherwise wouldn't be legal. Any examples? Pure demagogue.
T: Affirmative action. There are others.
Wrong. Racial discrimination is illegal regardless of whether an institution receives funding. Again, in line with the very essence of regulation, the subsidies provide incentives for the desired behavior.
Further, one may object to a specific regulatory policy, such as the affirmative action. This is NOT what the author said. He objected to the very fact of regulation. And this is the point to which I gave a reply.
TQ: 4. In local government, corporatism is principally a matter of real estate. Let's take New York as an example, No, New York is not an example of anything; it is a complete idiosyncrasy.
T: The same thing occurs in all other big cities: Chicago, Boston, Philadelphia, just to name a few.
I am not aware of Chicago, for instance, having price controls on rental property. Probably you meant similar tendencies. But whatever you meant, I do not know anyone who would object to the view that the NYC is pathological when it comes to real estate. The author shows also that his tendency to use exceptions as examples is not an inadvertent mistake. I am sorry that, not only you do not catch this tendency yourself, you do not recognize it even when someone points it out. TQ: It is not a question of difficulty: private sector has no incentives to invest in fundamental research.
I: Really? Then why do the pharmaceutical companies engage in it?
I wish all of your post was written in the spirit of your reply here: with clarifying questions before rushing to judgment.
Pharmaceutical companies do not engage in fundamental research; whatever they do is very applied. In industry, there were places, until recently, which were borderline: T.J. Watson Center and Bell Labs. Some parts of these institutions were actually doing fundamental research. Recently, it appears that both were curtailed (a disclaimer: I have only anecdotal evidence for the last statement).
In the capital markets, the quintessential corporatist institution is the Federal Reserve Bank…the responsibilities of the Fed have tended to grow as people expect it, for example, to bail out a falling stock market with cheap credit..
TQ: Well, if our increasingly uneducated and ignorant population expects this, it does not follow that the Fed actually act. To the contrary, Greenspan repeatedly said on Capitol Hill, "The Fed looks at the economy, of which the behavior of the stock market is only a small part."
T: It turns out we were right, but Greenspan didn't listen to us and he continued to prop up the unsustainable valuations.
Congratulations! It is always gratifying to be validated, even after the fact. I appreciate your sharing this detail, which I find important. At the same time, it tells me that (i) Greenspan has not disregarded the stock prices, and (ii) may have given too much weight to "consumption out of wealth." The author, in contrast, made it sound that it was the objective of the Fed --- even worse, that they did that in response to the public (those d-mned, corrupt bankers, in bed with the politicians).
The author would be well advised to learn the simple fact that there is a whole host of goods that the markets do not provide. For provision of these, so-called public, goods the coercive power is needed.
I:Agreed, but none of the things you mentioned above, except for some types of basic research, qualify as public goods. Sorry, in the previous post I did not think I gave any examples thereof. I:
I suggest you obtain a good micro-economics textbook and read the chapter on public goods. Here's one I recommend. It has become the standard in college micro-economics classes.
Thank you. I would gladly follow your suggestion, but that book probably contains too few derivatives. Some time ago, I acquired the book by Tirole but found that it contains too many essential errors that make individual-rationality difficult to acquire event intuition.
Normally, I go out of my way to refrain from emotions and value judgments when replying to posts on this board. I regret that the present post did not follow this rule: I very much objected to the hectoring tone and hasty, damning conclusions in yours. Perhaps, misinterpretations of this kind are a consequence of the nature of the boards such as this: somehow, I feel that, if we were to talk in person, we would find quite a bit in common. I do sincerely thank you for the extent of your reply to my post.
Regards, TQ.
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