A riddle: "How many libertarians (or economic "conservatives") does it take to change a light bulb?" The answer: "None, they just sit in the dark and wait for the invisible hand to do if for them."
Bill Hawkins of the United States Business and Industry Council noted that "... as the 'invisible hand' turns off the lights in one factory after another in America, the intellectually dishonest [libertarian] has the temerity to deny that it is dark at all."
Ignoring, turning a blind eye toward, or denying the existence of certain economic realities yield harmful results. "Free market" libertarians should just admit that these are the results they want, rather hiding behind the rhetoric of their flawed ideology.
Note that every major societal economic problem has at its root "conservative" ideology.
Economics 101 (Classical Economics)
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| The "Invisible Hand" feedback structure of markets. Figure 5-26 of Business Dynamics |
The Economics 101 feedback of Supply and Demand regulated via Price is a powerful mechanism. See The Invisible Hand for more on this.
The diagram shows the feedback loops by which price regulates supply and demand. These are Balancing Loops (negative feedback loops) for which going completely around a loop ends with a change in the opposite direction to oppose the original change. Balancing Loops are regulating feedback loops, like thermostatically-controlled heating and cooling systems.
Reading the Demand Loop: When Price decreases compared to the Price of Substitutes, the Relative Value (Price of Substitutes - Price) of product, commodity or service increases. This increases Demand, which prompts increases in Price. An increase in Price decreases Relative Value. In this case the Price of Substitutes is the counterpart of a thermostat.
Read the Supply Loop in the same manner. See Reading Systems Diagrams for more on this language.
The World Doesn't Work According to Econ 101
This is the powerful "Invisible Hand" God of Economics 101, but that's not all there is to it.
From by John Sterman, p. 174.
5.5.1 Market Failure, Adverse Selection, and the Death Spiral
Many real world markets are imperfect due to limitations of information, costs of entry and exit, and inflexibility of resources. These imperfections create feedbacks that sometimes overwhelm the negative loops normally balancing supply and demand, leading to inefficiency or even the complete failure of the market.
Market failure!!! Gasp. Can this be? Yes. In this text Sterman addresses speculative bubbles, adverse selection, and "policy resistance" (explained at Primacy of the Whole) using a traffic congestion example.
Here are examples of complications ignored by Economics 101 market fundamentalists.
Ignoring: Adverse selection (see Health Care Dynamics)
Result: Failing privatized health insurance system with 47 million people (and increasing) without health insurance (with people and children dying because of it). Because of adverse selection, privatized health insurance systems are doomed to fail; it's only blind ideology that has left the U.S. as to only major developed country without national health insurance. Reduced national competitiveness due to increased costs for companies in competition with other developed countries with national health insurance. More deaths and higher costs due to poorer health of a large population without adequate health insurance (loss of positive externalities).
Note: When children are caught by this, or have poor or irresponsible parents, tough; they were stupid to pick the wrong parents. Equal opportunity? Forget it.
Ignoring: Negative externalities (see portions of Explaining Liberal Principles, Global Warming: An Inconvenient-to-Understand Truth, Growth Facts of Life)
Result: Pollution, global warming and climate change, potholes, traffic jams, congested highways and excessive traffic deaths, and other infrastructure backlogs. Loss of farmland to development because developers are able to externalize costs onto the public and farmers can't ... so more profit can be made from development than for farming. Inadequate workplace safety regulations allow externalizing costs of doing business onto employees in the form of injuries and death (e.g., in coal mines). All result from socializing costs and privatizing profits. Economic "conservatives" love it ... it's their form of socialism.
Ignoring: Positive externalities (see portions of Explaining Liberal Principles)
Result: Less economic development because of inadequate investment in education. Economic inefficiency due to poorer health of the population.
From Wikipedia: Positive externalities are frequently associated with the free rider problem. For example, individuals who are vaccinated reduce the risk of contracting the relevant disease for all others around them, and at high levels of vaccination, society may receive large health and welfare benefits; but any one individual can refuse vaccination, still avoiding the disease by "free riding" on the costs borne by others.
"Free riding" is a major problem. "FreedomWorks" objects to manditory union dues: "All employees would have to pay union dues whether they want to join the union or not." The rationale is that a democratic union spend funds for things some don't like; of course "FreedomWorks" doesn't want funds going to "liberal" causes. It promotes the idea of optional union dues because it knows that free-riding employees opting out of paying them would lead to the death of the union. The counterpart, that would lead to the death of govenment, would be to make taxes optional. The similar rationale would be: taxes go to pay for some things I don't like (e.g., Bush's illegal invasion and occupation of Iraq).
"Conservatives," however, oppose the idea that shareholders approve corporate political expenditures. See that companies oppose a 'Corporate Political Accountability Act' and see the CA Chamber of Commerce Statement Opposing the 'Corporate Political Accountability Act'. Gee, that would be too burdensome for corporations, but not for unions ... oh, wait .... they want unions to be burdened.
Ignoring: Inelasticities (see Farm Policy Failure)
Result: Because both supply and demand for farm commodities are quite inelastic, the "free market" fails for farming, which is why there is such great pressure for farm subsidies. They're larger now than they were when the Republicans passed the "Freedom to Farm Act" in 1996. This makes farming quite unlike manufacturing and puts a stake in the heart of right-wing claims that manufacturing employment should decline just as farm employment declined.
Ignoring: Delays (see portions of Explaining Liberal Principles)
Result: Extreme Volatility of prices because changes in price have inadequate short-term effects on either supply or demand or both. Example: Oil prices can go very high, but supply cannot quickly increase, because it takes time to develop new wells. Demand cannot quickly fall because of building patterns and a large stock of inadequately efficient cars. There's also inelasticity due to inadequate regulation to prevent oligopoly that allows a limited number of producers to restrict supply (e.g., the five major multinational oil companies with profits exceeding those in the history of the world).
Ignoring: Impact of Net Present Value calculations (see portions of Explaining Liberal Principles)
Result: The value of long-term investment returns are devalued so significantly that capitalism tends to not invest very far into the future. It's generally only government that does such investment. For example, no self-respecting capitalist would ever invest in education, which is why education is heavily-subsidized by government. It takes 20 years to attain higher education; because the Tyranny of NPV calculations determine that future returns are worth zip ... it's just not worth it. Besides, the investment in some persons will not pay off ... it's a very risky investment.
Ignoring: Path Dependence
This dynamic, also called "Success to the Successful", has two major effects.
Result 1. The rich "get richer and the poor get poorer" (see Wealth Happens). This happens even when everyone starts out with equal ability and resources. (See at The Conservative Mind that "conservatives" believe that poverty is part of the "eternal order of things ... which never can be removed by legislation.")
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| The Rules of the Game feedback structure |
Result 2. Unregulated competition evolves into monopoly and oligopoly. Anyone who's familiar with the game, Monopoly, is familiar with how this works. Those who worship competition also oppose antitrust laws and worship deregulation, which ends in monopoly and destroys competition. This should cause some cognitive dissonance, but it does not. Stronger companies lower prices, control distribution chains and use other anticompetitive practices to drive weaker competitors out of business. This benefits consumers for a time, but when the competitors are gone, the monopolist raises prices to achieve higher profits that would otherwise be possible. Those profits make it possible to influence government to pass laws and further deregulate to further increase their profits; see the Rules of the Game structure above -- example: the Copyright Term Extension Act whereby Disney got major extended-copyright protectionism for Mickey Mouse.
The Fallacy of Composition (described at The Trade Deficit and the Fallacy of Composition)
Result: One major example is the "transfer of the factors of production" (not trade) that provides cheap imports but undermines wages over the long run, runs up a massive "trade" deficit that puts the nation in debt to foreign nations, sells off of the nations assets for foreign interests, and undermines our economic and military security.
Note: See at The Death of the Middle Class that, had compensation continued to track productivity, compensation would have been 68% higher in 2004 and we wouldn't need those cheap products from China ... cheap prices that have cost us dearly.
Ignoring: Federal Reserve "command & control" manipulation of the economy. (See There's no 'free market' for Labor.)
Result1: Less demand for those who work for a wage than supply. Chronic low wages and joblessness (that create poverty). Ignoring this Fed manipulation provides political cover for libertarians and economic "conservatives" to complain that unions and a minumum wage interfere in the "free market" for labor (which does not exist).
Result2: This effect similarly results in a low tax base (the "regional wage" counterpart to wages for individuals) that creates infrastructure backlogs. This is because regions must compete with "low taxes" and less "burdensome regulation" for the jobs the Fed does allow to be created.
Note: The Federal Reserve is a private corporation owned and run by private banks; it is not "federal." Economic "conservatives" put this vital economic function, that largely controls the economy, in private hands and then you're allowed to vote on the less-important everything else.
The Fed controls economic "brake" ... when, in it's view, there is too much job demand that might increase wages, it will take actions to slow the economy. It's supposed to give equal weight to promoting full employment. It does not; employment statistics are massively manipulated to understate unemployment (see Unemployment: Official, Effective, Real and #24. Employment & Unemployment with updated graphs). See the Fed's admission that it promotes worker insecurity to hold down inflation.
For a systems diagram illustrating how the Fed works and its effects on the economy, see the section on "The Economic Environment and National Economic Policy" in a Systems Thinking Perspective on Manufacturing Base Restoration.
Ignoring: Speculative Bubbles
Result: Economic Boom & Bust. From by John Sterman, p. 173. He's noting that "locally rational" is not rational for the system (the collective) because the "positive feedbacks" destabilize the system; this is an example of the Fallacy of Composition.
Not all markets consist of negative feedbacks alone. In many markets the locally rational behavior of individual entrepreneurs creates positive feedbacks as they interact with one another and with the physical structure of the system. One common example is the speculative bubble. There have been many dozens of major speculative bubbles in the past few centuries, from the infamous tulip mania of 1636 and South Sea bubble of 1720 to the manias and crashes of the past few decades, including gold, silver, realestate, impressionist paintings, and internet stocks.[2]
[Sterman's footnote: [2] Perhaps the best treatment of speculative bubbles is Charles Kindleberger's (1978) Manias, Panics, and Crashes. See also Galbraith's (1988) The Great Crash on the 1929 stock market crash.]
John Stuart Mill distilled the essence of the dynamics of speculation in the following passage from his famous text Principles of Political Economy, originally published in 1848.
When there is a general impression that the price of some commodity is likely to rise, from an extra demand, a short crop, obstructions to importation, or any other cause, there is a disposition among dealers to increase their stocks, in order to profit by the expected rise. This disposition tends in itself to produce the effect which it looks forward to, a rise of price: and if the rise is considerable and progressive, other speculators are attracted, who, so long as the price has not begun to fall, are willing to beleive that it will continue rising. These, by further purchases, produce a further advance: and thus a rise of price for which there were origianlly some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify. Afte a time this begins to be perceived; the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. Then the price begins to decline: the holders rush into the market to avoid a still greater loss, and few being willing to buy in a falling market, the price falls much more suddenly than it rose.
In other words, individually rational behavior is collectively irrational. As noted this is another example of the Fallacy of Composition. It's also an example of how considering feedbacks loops in a system is necessary for understanding its behavior.
In addition to the internet stocks, dot-com bubble Sterman mentions, the Fed's abrupt lowering of interest rates following the dot-com collapse produced the housing and the mortgage bubbles, which are now in turn collapsing. Our right-wing government, including the privatized Federal Reserve, believes there should be no interference, no regulation to avoid bubbles (after all, "the market" -- aka, God, to "conservatives -- knows best), but there should be plenty of involvment in having taxpayers assume the risk of bailing out those who have engaged in risky behavior and speculation, e.g.,
In short, libertarians and economic "conservatives" want
- people to be without health insurance and die
- pollution that fouls water and air
- climate change and global warming
- you stuck in traffic
- you hitting potholes or driving across a bridge that collapses
- farmland to be lost
- inadequate investment in education for economic development
- inadequate health insurance for economic efficiency
- extreme price volatility
- inadequate long term investment
- extremes of wealth and poverty
- low pay for those who work for a wage
- massive federal and "trade" deficits
- a nation sold off to foreign interests
- economic boom and bust from speculation and taxpayer bailouts
This is what "conservative" economic policies deliver. They should have the courage to admit this is what they want, because it serves the wealthy few. Only by subterfuge can they succeed in getting their policies adopted.
When they say they want "freedom," they mean their limited idea of "economic freedom," not a society that functions for the benefit of all citizens. And certainly not the freedom of one-man, one-vote democracy.
Only Pain and Pleasure Rule ... therefore, Keep Them in Poverty
In Greenspan's Fraud, another major facet of "conservative" thought and its impact is described (p. 51). The impact: keep them poor because that's the only reason they will work.
Jeremy Bentham's Influence
Another British writer [besides Adam Smith] who influenced Alan Greenspan as well as classical economists was actually a philosopher named Jeremy Bentham, who believed that human actions are guided purely by pleasure and pain, and nothing else. "Nature," wrote Bentham in oft-quoted words, "has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all we do, in all we say, in all we think: every effort we can make to throw off our subjection, will serve but to demonstrate and confirm it."
In his view, no one does anything if it does not bring pleasure, or avoids pain. If people could find no joyful activities or feared no discomfort, they would simply be inert, motionless, and lazy. These are the fundamental empotions that underlie all other emotions. Work or effort is basically tedious, and not itself a source of pleasure. A person's innate desire is for ease or comfort, not labor. In other words, workers are basically lethargic and uninterested in doing anything except under the pressure of hunger or for eschewing pain. "The practical outcome of this doctrine," assert economists Hunt and Sherman, "was the widespread belief at the time that laborers were incurably lazy. This only a large reward of the fear of starvation and deprivation could force them to work." In economics jargon, peasure became utility and pain became disutility. The economists came to believe that everyone tries to maximize utility and minimize disutility.
Such utilitarian beliefs form the psychological basis of classical economics and its policy prescriptions. Smith proved that capitalism or free markets formed an efficient system, so that the economy should be left to itself, because government intervention only creates poverty and stagnation. But the creed that laborers would offer little labor unless goaded by hunger led the latter-day classical econmists to oppose labor unions and minimum wage laws. This is because if government or union actions raise wages above the subsistence level, workers would withhold their labor, so output and profit would decline.
Therefore, classical economists believed that wages should be kept as low as possible. This, they argued, would also keep workers fully employed, because low wages induce companies to hire more workers, ensuring a high-employment economy. Of course, profits would then be high, but high profits also serve the social interest. From high profits arises capital accumulation, which in turn promotes new technology, raises labor productivity, and causes further increases in profit. This is a virtuous circle that generates high efficiency, high employment, and high growth.
This despicable ideology is exactly what "conservatives" pursue to this day: the Federal Reserve assures more "people who need jobs" than jobs to keep wages at or below subsistence level, taxes on wages are higher than taxes on interest and capital gains ("conservatives" would eliminate the latter two totally, if they could get away with it), and opposition to government intervention in the market and opposition to unions that might make life better for those who work for a wage.
This is why, in The Conservative Mind from Burke to Eliot by Russell Kirk, 1953 we find the statement below. It's considered the foundational book that inspired the conservative resurgence in America.
Poverty is part of the "eternal order of things ... which never can be removed by legislation."
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