Thursday, January 3, 2008

Biting the Invisible Hand that Feeds You

Running around in the back of my mind for quite some time now has been a curious little thought. I take it out and play around with it every once in awhile, but have never given it the attention it deserves. In this post I intend to finally let it see the light of day and perhaps flesh it out a bit.

In college I had to take what I thought was an inordinate amount of economics classes. I did fine, got straight A's and all of that, but always found the whole "science" to be rather obvious. I think I referred to it as the "well duh" science. One of the people I learned about was a fellow by the name of Adam Smith. I'm sure most people who have taken a history or economics course have heard of Adam Smith and the free-market economy he espoused in his well known treatise The Wealth of Nations. I'm not really interested in regurgitating Adam Smith but what I am interested in doing is examining the rather strange road we seem to be headed down. A road that pays ardent lip service, at the least, to free-market economics but at the same time seems intent on (perhaps inadvertently) destroying its foundations.

At its most basic a free market is one where people offer up goods and services in exchange for as much money as they can get for them and people buy goods and services as cheaply as they are able. Things like quality modify the perceived value of the goods and services and over time competition serves to balance things out in an almost magical way. This magic was named the Invisible Hand by Adam Smith and the term Laissez-faire denotes the idea that the economy should just be allowed to act.

Here in the United States most people seem to accept the idea that we should have a free-market economy, and to a large degree I suppose we still do. But, the strange thing that has been happening for a number of decades now is that more and more money is being taken through taxation by the government without the government giving back something of equal value in exchange. Originally the idea was for the government to give back things like roads and schools and a military in exchange for the money it took. If this exchange were even close to being equal in value one could probably say that it fit, at least to some extent, into a free-market economy. The problem, of course, is that the government doesn't even attempt to give back anything of value anymore. Sure we have roads, schools and a military, but the government is doing a horrible job of producing those things in an efficient fashion and most of what it takes in doesn't even go to goods and services that have any value.

What the government is doing more and more over time is taking money through taxation and not giving back any goods and services at all. Instead it is giving that money to other people to spend on goods and services through all sorts of welfare, aid, grants etc. or is giving the money to producers of goods and services via subsidies without asking for anything back. The intentions behind all of this government largess are certainly good and noble for the most part but they have the unfortunate side affect of undermining the ability of the "magic" to balance and control the economy.

Lets contrast a free-market economy with socialism and communism. I will use the term socialism for the sake of convenience from now on, but the things I describe may technically be associated with only one or the other system. Socialism at its most basic is a system where the government controls the means of production. In a pure socialist system there would be no private ownership of property or of businesses. The government would instead own and control all property and all means of production. In other words, the government would own and control all the houses, land, hospitals, factories and schools and would, in essence, be the "employer" whom everyone would work for. In the Utopian vision of socialism everyone would work for the simple joy of working, thus providing the goods and services necessary for the functioning of a society. These goods and services wouldn't cost anything but would be freely available to everyone.

In reality, however, every attempt at pure socialism has failed due to the innate selfishness of mankind. Most people, discovering that they are no longer responsible to provide their own homes, food, clothing and so on, will understandably be tempted to sit around and enjoy themselves rather than working at some job simply for the joy of contributing to society. As such it is always necessary for the government to coerce people in various ways into performing the necessary tasks. Thus, in socialism, you find yourself working because you are forced to but without any tangible rewards for performing the work, or even more importantly for performing it well. Whereas in a free-market economy people are only paid if they work and can increase their pay by working harder and/or smarter. Thus a persons innate selfishness is a powerful component of the "magic".

Now on to the main point I am trying to make. More and more in this country we find the government being asked and expected to provide a way for everyone to have more or less equal access to all goods and services. You would think that the logical solution to this would be to move more and more towards socialism, and indeed that is a charge that is often levied by conservatives and libertarians in our country. What I have noticed, however, is that many times this isn't the path that is taken. Instead we have a situation where the government seems to act more like a benevolent grandparent. Instead of taking over and controlling various industries and service providers like it would in socialism it instead leaves them in private ownership but either gives the individual receiving aid the money to pay for the goods or services or pays for them on behalf of the individual.

Now, that seems like a pretty nice deal for the individual, but where did the benevolent grandparent get that money. It got the money by taking it from other individuals or by taking it from the providers of goods and services. Now if the government were providing the goods and services directly, as in socialism, at least you'd have some sort of consistent system set up. But when you ostensibly have a free-market economy but yet you have this powerful force stepping in and taking money without giving anything back and giving that money to other people, directly or indirectly, to pay for goods and services, you have a very strange amalgamation of capitalism and socialism. It is my contention that this amalgamation, as it continues to grow, will destroy the necessary underpinnings of our economy.

Let me illustrate my contention by examining two very real problems that have been created by this amalgamation: higher education and health care.

Public, K-12 education in this country is socialized, for all practical purposes, so the government actually is the provider and the employer. In this we at least have a consistent system, although the argument about quality suffering under socialism can easily be made in regards to public education. Higher education, however, is still a much more private enterprise. But, the government still is expected to provide assistance to all sorts of people who can't afford to pay the price for higher education. Instead of socializing the system the government simply offers money through various programs to those deemed worthy of receiving it. The unintended consequence of this is that the price of higher education invariably rises due to the unnatural influx of money into the system. This rise in prices is the natural result of a free-market, but since it isn't due to natural, free-market, causes it can't be regulated by the "magic" and the government has to increase the amount it puts into the system in order for people to be able to afford it. This, as you can see, turns into a an unnatural spiral of increasing costs which can only be fixed by either removing the unnatural influx of money or socializing higher education entirely.

The same thing is at work in our health care system as more and more people are being given money by the government to pay for their health care via Medicare, Medicaid, Chip, prescription drug benefits and other types of government aid. Again, as money is unnaturally inserted into the system, costs inevitably rise due to market forces and the "magic" is unable to regulate the system. When we look at all of the proposed fixes to the problem most simply involve the government handing out more money to help people pay for health care. As we have seen, this will only make the problem worse, and again the only solution is to remove the unnatural influx of money or completely socialize health care.

Let me emphasize the fact that socializing health care or higher education means that universities, hospitals, labs, pharmaceutical companies and even your neighborhood doctors office would all be owned and operated by the government.

Another unintended consequence of the government taking money through taxes and giving it to people to pay for goods and services is the impact it has on those from whom the money is taken. If you are an individual who can afford, perhaps barely, to provide for your own education and health care, the removal of more and more of your income through taxes has a multiplied effect. The immediate effect is that you have less money to spend on education and health care, not to mention everything else. The secondary effect is that when the government gives that money to someone else to pay for education or health care it results in the cost of those things further increasing. As you might imagine, the logical outcome of this is that more and more people will move from the ranks of those able to pay their own way to the ranks of those needing assistance. And also, as the costs increase, the threshold at which people become eligible for the aid rises which also adds more to the ranks of those receiving the aid. We are left with an almost comical scenario: on the one side are the ever increasing ranks of those who are receiving an ever increasing amount of aid, on the other side are the ever decreasing ranks of those who are paying ever higher amounts and who are also paying ever more in taxes since the ranks of those who can pay costs and taxes are decreasing and the costs and taxes are increasing because of the growing ranks of those who can't pay the costs and taxes and thus receive the ever increasing amounts of money to pay the ever increasing costs from the ever decreasing ranks of those who have to pay ever increasing costs and ever increasing taxes... well, you get the point.

It is inevitable that at some point everyone will be on the same side of the equation and the system will have collapsed. The unfortunate reality is that since this whole process has been underway for several generations and may go on for a few more, by the time the system is completely unsustainable there will already be so many people who have grown accustomed to having a benevolent grandparent (government) taking care of them that fully socializing the system will be the only solution deemed acceptable.

I believe that very few people in this country have any desire to live under a socialist system. I also believe that very few people, even those on the left and in government, really want to move us into pure socialism. Oh sure, there are a few radical types that want that, but by and large I think most people are horrified at the idea of living under socialist or communist rule. I think most people, even the supposed elites, just don't realize that socialism and capitalism are like oil and water, ultimately you have to pick one or the other. I think people, with the best of motivations, want a more equal and egalitarian society where you don't have the pitifully poor on the one hand and the ridiculously rich on the other.

People just don't realize that by taking the seemingly obvious road of providing government assistance and regulation of the monetary system through taxation that we are only making the problems we are trying to fix worse and ultimately will have to experience a very painful transition back to free-market capitalism or succumb completely to socialism. It is necessary, although difficult, to approach these types of problems by looking at real results instead of at good intentions.

In a later post I will discuss the interesting proposition, which I believe to be true, that a free people, largely unhindered by taxation, are better able, and more willing, to help those in need then any large, ponderous government could ever be. You only have to look at the amazing things done by churches, charities and even the super-rich philanthropists, to see the truth of this statement. Imagine how much more they could do if unhindered by a huge burden of taxation and regulation by a government that is horribly inefficient and whose very act of redistributing money ultimately destroys the entire economic system and magnifies the very problems it seeks to fix.


Leigh Johnson said...

Noam Chomsky has some interesting things to say on this subject....

Leigh Johnson said...

Strangely enough, Thomas Malthus' 'Essay on Population' from 1798 addresses this very point quite eloquently. You can read the chapter here:
From the 3rd paragraph down, Malthus discusses the 'Poor Laws' of England and how they are a self-defeating process.

Dan G said...

I agree with Chomsky that words have lost their meaning. I certainly feel, for instance, that I am a much truer liberal than most on the American left.

He makes a good point about philosophies being too idealistic. However, I believe that history has proven that the Utopian visions Chomsky subscribes to are almost entirely impossible to achieve. Free market capitalism, on the other hand, may not be perfectly achieved in this country, nor may everyone under it be perfectly free, but it largely works and we are largely free. Much more so than in any other time and place in history.

Our continual insistence on seasoning our free market with ever heavier doses of socialism (regardless of the humanitarian motive) is not making things better nor is it making people more free. Much the opposite in fact.

Dan G said...

You are right about Malthus addressing this point. Isn't it interesting how we continue to make the same mistakes, all with the best of intentions.

I do have a quibble with him however. Perhaps in his time there really were actual shortages of food and other goods. However, at this time, in the United States, there is plenty of food and other necessities for everyone. It is not any actual shortages that underly our problems with poverty.

Free market capitalism, in order to work, must be ruthless. You don't work, you don't eat. It is this, ultimately, that causes people in this country to go hungry. And this is no more cruel then a parent teaching their child about responsibility. A parent who babies a child and never forces them to take responsibility for their own actions is not doing the child any favors. A society which enables poverty by too readily handing out goods with no strings attached is equally guilty of exacerbating the problem regardless of their good intentions.

Should we have a safety net? Yes. Should anyone have to go hungry? No. But living in poverty shouldn't be comfortable. It should be the exact opposite. It should be so nasty that there is no alternative but to make every effort to get out of poverty. Is that easy? Of course not, it could take years.

There will always be some who are truly disabled in one way or another and have no means of survival. We of course have a responsibility for them. However, I submit that a huge majority of those who are living in poverty in this country are perfectly capable, just like I was, of improving their station in life. The major obstacles they actually face are the very social programs ostensibly designed to help them.