Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Trying the market, or “No, you are.”

Jerry Stratton, April 9, 2010

Paul Krugman has looked into the abyss, and has seen the problems of government-enforced market exchanges. And blames it on the market?

If there’s a single central insight in economics, it’s this: There are mutual gains from transactions between consenting adults. If the going price of widgets is $10 and I buy a widget, it must be because that widget is worth more than $10 to me. If you sell a widget at that price, it must be because it costs you less than $10 to make it. So buying and selling in the widget market works to the benefit of both buyers and sellers. More than that, some careful analysis shows that if there is effective competition in the widget market, so that the price ends up matching the number of widgets people want to buy to the number of widgets other people want to sell, the outcome is to maximize the total gains to producers and consumers. Free markets are “efficient”—which, in economics-speak as opposed to plain English, means that nobody can be made better off without making someone else worse off.

It’s a free market. That means both sides are free to turn down the exchange. If the exchange goes through, then both sides have gained something they’ve wanted.

The correct ending to that paragraph is:

Free markets are “efficient”—which, in economics-speak as opposed to plain English, means that people are made better off without making other people worse off.

I’m still not sure Krugman didn’t just mistype. He describes free exchanges perfectly up to that sentence. He’s saying “this side is better off, that side is better off, gains are maximized for both sides. In summary, one side must be worse off.” It’s very possible he shifted thoughts in that last sentence and ended up typing something he didn’t mean, and the layers of fact-checking at the New York Times didn’t catch it1.

But it might make sense if we take it in the context of current events—even if we assume it was the Times who let the typo slide. Krugman is describing a free market at the beginning. His summation accurately describes a government-forced market: when the government has to force people to make choices they wouldn’t otherwise make, whether it’s buy expensive health care payment plans in the guise of insurance, or bail out General Motors, then, in fact, one side is worse off. Often, both sides are. The government will take its cut from everyone, in the form of taxes, restrictions, and forced transactions.

Added taxes from the program are part of the costs of what you buy (or get for “free”) from the program. So are the bribes you need to pay for enhanced service. It is often true to say that when the government gets involved, when one person is made better off it is at the expense of someone else. Saying it necessarily happens in a free market is a lot like kids saying “No, you are” when someone says something to them they don’t like.

He’s not the first to describe the market as optional. Some people seem to think that “the market” is somehow just one way of doing business. That people have tried the market in power, in health care, or in cable TV, and “it didn’t work.”

Bullshit. We never “tried the market and it didn’t work” any more than we tried gravity and it didn’t work. Most likely we tried fooling the market, and it didn’t work. Because you can’t fool the market any more than you can fool gravity. Here in San Diego, for example, we were on the ass end of California’s attempt to fool the energy market. The state government set up an exchange, the state government created strict rules for using the exchange and strict price controls on the purchase end of the exchange. The state government forced everyone on the purchase and sale end of the exchange to go through that one state exchange and forced them to make only one kind of purchase, forbidding long-term contracts (contracts would have been a form of going outside of the state’s exchange). And then, when this highly-regulated state exchange caused costs to skyrocket, they said that the free market approach failed.

Right. And when you shoot a bullet into the air and it lands on someone, that means gravity failed. No. When you build a bridge using your own made-up laws of physics, don’t be surprised when the bridge collapses. It isn’t gravity that fails when that happens. Gravity is the way the world works. In the same way, the market is the way people work. People who want something will pay whatever resources they are willing to pay to get that something; people who have something they’re willing to sell will sell it for whatever resources they’re willing to accept.

Even in the depths of the old Soviet Union, the market continued to work. People paid what they were willing to pay for apartments, for cars, for bread, for televisions, for jeans. And other people took what they were willing to take for the same things. The difference is that in the Soviet Union, what they were willing to pay and what they were willing to accept took the form of bribes, of sex, and other favors.

The more we try to deny the market its normal avenues, the more twisted its form will be. But the market always exists. When we tried to deny the market in alcohol, the market in alcohol continued to flourish. It took different forms: more concentrated alcohol, more dangerous alcohol, bribes to police officers, and speakeasies next to schools.

I have never felt any desire to bribe a clerk for the last hidden pair of jeans at Target. In the very unlikely occurrence that they only have one pair left and someone else gets there first, Target will have more jeans tomorrow.

When we create a system that blocks people from openly paying for services or products, and openly selling services or products, we create a perverse system; such a system will become perverse in all senses of the word. The people who sold alcohol during prohibition were not the same people who sold alcohol before and after prohibition. They were the kind of people willing to make money in the shadows.

If we create a system where third parties make money on pollution transactions, those third parties are going to try to ensure that there are lots of pollution transactions. And the money those third parties make will be part of the costs of whatever we buy that went through their perverse system.

If we create a system where people who want health care now can’t buy it openly without waiting forever for a slot to open up, they will find a way to buy it illegally. And the people who choose to take the bribes will be the kind of people who are willing to take bribes. That’s when we have transactions where some people lose.

April 17, 2010: Krugman: Government intervention always hurts people

Update: Looks like I was right. When Krugman wrote that “no one can be made better off without making someone else worse off”, he was saying that a free market ensures that each side gets a good deal. When we try to give one side a better deal, such as through government regulations, this necessarily means that the other side is worse off.1

That paragraph should definitely have been picked up on by the Times’s editors; as it stands, the last sentence is a giant topic jump from the rest of the paragraph. It makes no sense in normal English and it’s unexplained as a term of art.

If I have the terminology right, he wasn’t saying that the free market necessarily makes one side worse off. He was saying that intervention into the free market necessarily makes one side worse off.2

So, for example, if I’m willing to pay no more than $100 for health insurance, and there’s a company out there willing to sell me the insurance I want at $100, we both win. They get my business and I get my insurance. But if the government comes in and forces me to buy insurance from that company for $120 (probably by requiring services that I’m never going to use), then I’m made worse off.

And it isn’t just me that’s made worse off. It’s everyone who buys health insurance. I’m being forced to pay an amount that would have otherwise caused me to find a different source for health insurance. This reduces the competition that normally would maximize service (quality health care) while minimizing the price of that service.

  1. In fact, he continues on to argue that even though the transaction between the two parties are both beneficial, it’s possible for us to construct situations where people not involved in the transaction are getting shafted. That rhetorical shift doesn’t make sense if one of the original two parties was also shafted. I really think it was either a typo or a bit of Freudian slip-editing on the part of the Times.

  1. <- AP kills Reid?
  2. ACLU’s Texas textbooks ->