Saturday, June 15, 2013

Principles, part 2

So again we must remember that markets function as a means to serving an public ends. It’s perfectly acceptable to use free markets to attain maximum production through attainment of higher resource use and production efficiencies. Where it is not acceptable is through labor costs arbitrage. Because all labor is human labor, any country that espouses values of human rights cannot be taken seriously if it allows the free markets to take advantages of disparities in working conditions. If American companies move to China because China has more of the resources they need, or somehow has more efficient business techniques, that is fine. But it is not ok for companies to use this arbitrage opportunity to escape democratically mandated public policy goals, such as pollution controls or labor standards. Not only does this race to the bottom rarely improve human lives in the aggregate, the gains are mostly realized by capital/management. Domestic prices do not decline as much as input costs do when production is offshored. Clothing may be the most obvious example. They are produced incredibly cheaply, and then sold at enormous markups. The gains are captured by the corporation’s management and expressed as bloated executive salaries and shareholder dividend payments. In no way can this be considered public policy; it is in fact just a serious of games played by the political economic elites of the world.

It can often be hard to tell if a modern phenomenon is truly an expression of free markets at work, or political priorities.  A good example was the case of Chinese tires. The Chinese were selling tires in the US that were very cheap, and these low prices were undercutting American producers. The problem is that this is not just market operations, as a causal observer might conclude. It was in fact an expression of an implicit political move by the Chinese government. The government provides some form of subsidy to the Chinese tire industry which allows them to sell tires in the US at below cost of production. American tire companies do not have this privilege, and cannot compete with the subsidized tires. The Chinese government has no natural interest to be doing this. The only reason is that they are actively trying to knock out American competition, so they can expand their share of the world tire market. After the American competition is knocked out, the subsidy can be eliminated and the Chinese can command a larger share of this market. If continued unchecked, this could have the effect of knocking out the American tire industry, not because they could not compete, but because the market was rigged. The US government then imposed an anti-dumping tariff, which was meant to offset the subsidy provided by the Chinese government. While the tariff almost certainly raised the domestic price of tires, it had the effect of saving 1000’s of US jobs in the tire industry, which was especially valuable in an election year (2012).


But I have been in Washington long enough to realize that it is impossible to draw the line at where the government ends and free markets begin. Every trade association and major corporation has a small army of lobbyists who work day in and day out to make government work to their competitive advantage (there are some 22,000 lobbyists in DC). This is in no way a free market. It is called crony capitalism, and observers of today’s economy acknowledge that this is an accurate description of our economy, writ large.

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