Six differences between liberals and libertarians [op/ed]

[Samuel]

State intervention under dictatorships doesn't tend to correct market failures, because the State doesn't have incentives to do that.

Yes it does. The more the economy lags, the weaker they are to their rivals. They want to fix the failures so the economy is strong and the populance supports the leader who delievers.

No. You can define best as the allocation where the marginal unit of the resource has it's maximum possible valuation. In other words, that people are willing to pay more for this resource than in any of it's alternative uses.

So whatever uses the rich prefer is the best use?

Well, the existence of people that are starving (involuntarily) is not pareto optimal: Because they are labor that is not being used.

What if the demand for labor is already meet? Than starving individuals help insure that the current workers keep wage demands low.

No. The government needs to be omniscient and benevolent to do what the market failure economists ask for it to do: To correct any market imperfection.

The concept that the State must intervene to correct any market failure is based (implicitly) on the assumption that the State is perfect.

It needs to be perfect to completely eliminate them. TO fix them, it just has to be less imperfect than the failure.

And looking at it, we can notice that the market tends to correct it's imperfections, while the State doesn't have strong tendencies of inefficiency correction, even thought they have some (democracy at least). So I think that the market is preferable to the State.

No it doesn't. The market corrects inefficiencies. Market failures are NEVER normally corrected.

The high HDI of Cuba is a classic example of the defects of HDI: Their HDI is high because of high life expectancy and many years of schooling.

In Cuba people live longer because they are under low calorie rations, such increase in life expectancy occurred after the breakup of the USSR, they lost their source of money and the rations of the population were reduced. And they have many years of schooling because the state needs to do some very good brainwashing to maintain the stability of the regime

BS. For starters, Cuba had a high HDI before the fall of the USSR- it wasn't from a low calorie diet. In fact they have recovered and still keep their high LE.

As for brainwashing, how is that relevant? Does the wealth not count as well because the party is "bribing" people with it to keep them happy and the regime stable?

But, that doesn't mean it is useless, since normally countries were people live longer and have more years of schooling are good countries. And also, on average these countries have more economic freedom.

I'm sure that is comforting to the people in "non-average" states.

[J]

Before we go any further here, what definition of "correct market failures" are you working with?

It means to intervene to correct any type of situation were the outcome if not Pareto optimal.

In this case I see no reason to go any further since I regard your definitions as wholly unworkable.
I'm not going to waste my time.

[Iosef Cross]

A good empirical evidence for the success of economic policy that can be considered libertarian is the relative growth of the US to the rest of the world for the last 150 years.

In 1860, second to Bairoch's estimates, the US corresponded to 7% of the world's industrial production. By 1913, after half of a century of "libertarian policies" the US had 31% of the world's industrial production. By the time of the Great depression the US had 40% of the world's industrial production.

Today, the market value of the US's industrial production is only 20% of the world's, roughly the proportion of 1890. The fact is that before the great depression, the US grew faster than the rest of the world, after it, the US started to grow slower than the rest of the world. That's because of the negative influence of the increasing interventionist policies of the US government after the depression.

[Iosef Cross]

Before we go any further here, what definition of "correct market failures" are you working with?

It means to intervene to correct any type of situation were the outcome if not Pareto optimal.

In this case I see no reason to go any further since I regard your definitions as wholly unworkable.
I'm not going to waste my time.

That's the definition economists usually use.

Of course, trying to talk about a subject without having some basic understanding of it is a waste of time.

[Iosef Cross]

Samuel, I don't want to be rude, but your understanding of what I am talking about is apparently severely limited.

[J]

A good empirical evidence for the success of economic policy that can be considered libertarian is the relative growth of the US to the rest of the world for the last 150 years.

So resource availability and geopolitics had absolutely to do with that?

That's the definition economists usually use. (re: Pareto optimal and market corrections)

So what? It's a broken measure. An economic entity is considered Pareto optimal if a single person is a zillionaire and the other 10,000 are his starving debt slaves.

Of course, trying to talk about a subject without having some basic understanding of it is a waste of time.

[Surlethe]

A good empirical evidence for the success of economic policy that can be considered libertarian is the relative growth of the US to the rest of the world for the last 150 years.

In 1860, second to Bairoch's estimates, the US corresponded to 7% of the world's industrial production. By 1913, after half of a century of "libertarian policies" the US had 31% of the world's industrial production. By the time of the Great depression the US had 40% of the world's industrial production.

Today, the market value of the US's industrial production is only 20% of the world's, roughly the proportion of 1890. The fact is that before the great depression, the US grew faster than the rest of the world, after it, the US started to grow slower than the rest of the world. That's because of the negative influence of the increasing interventionist policies of the US government after the depression.

This analysis is so wrong I don't know where to begin.

You are taking a complex, dynamic system and simplifying its causes to a single factor. That's entirely unrealistic and you know it. What about, for example, the fact that labor has historically been extremely expensive, a factor tied to high capital investment? The near-limitless natural resources available at low cost? You are also (conveniently) ignoring the extremely high protectionism by the national government and local government market intervention.

Moreover, you are also ignoring the development of China, India, and Indonesia. Post-imperial development will act to crowd out US industrial production. Even more, you are ignoring that the US no longer has a competitive advantage in industrial production, so of course its industrial production will fall relative to the rest of the world.

Here's another idea. Crunch the numbers for Soviet industrial production growth (aggregate and as proportion of world industrial output) between 1917 and 1941, then 1945-1975. How does that empirical evidence compare to your hypothesis? (PS- a single example is not "evidence". Evidence would be to find a pattern that corresponds to predictions you make.)

[Surlethe]

I'm dropping the business cycle argument because it bores me and I don't want to delve into the academic debate.

However, Iosef, I want you to defend Pareto optimality. Does it assume that willingness to pay accurately measure value derived from a good or service?

[K. A. Pital]

You can explain economic phenomena with a variety of models. Some models conclude that markets are perfect, other models doesn't. If you like markets, you can use the perfect market model, if you don't, you can use the imperfect market model.

Both types of models have plenty of empirical evidence supporting them!

What empirical evidence can support the perfect market, which does not exist in reality with all the information, transaction, etc. costs and entry barriers? Are you really that dumb?

It means that the resources existing in the economic system tend to be allocated to satisfy consumer needs. Who is the consumer? Anybody that has something to trade for.

And you always have something to sell, like you time. That's what wage earners do. I wouldn't call that "economic coercion".

That's a tautology. Even the biological needs of a human in poverty are not satisfied, much less his subjective needs.

State intervention under dictatorships doesn't tend to correct market failures, because the State doesn't have incentives to do that.

Why? That is a blanket statement. Where is the evidence? How is dictatorship even relevant to the question?

Well, the existence of people that are starving (involuntarily) is not pareto optimal: Because they are labor that is not being used.

It's Pareto-optimal - you cannot increase their well-being without decreasing the well-being of another.

These starving people would emerge as a consuming market, and resources would be allocated to satisfy their needs.

However, that does not happen. Therefore, something is wrong with your idea. Why should anyone offer anything to the starving people, if their productivity is lower than the alternative labor pool? What if they are not cost-efficient producers, in terms of world competition?

That makes it rational for the market to condemn them to poverty and death.

No. The government needs to be omniscient and benevolent to do what the market failure economists ask for it to do: To correct any market imperfection.

Wrong.

We need to look at relative levels of imperfection.

Exactly.

So I think that the market is preferable to the State.

Off to Somalia you go then.

Second: HDI is an imperfect measure of development, as all other measures. So, you need to use it with care. The high HDI of Cuba is a classic example of the defects of HDI: Their HDI is high because of high life expectancy and many years of schooling.

How the fuck can you even exclude that from comparison?

In Cuba people live longer because they are under low calorie rations

So does Africa and some LA nations and they starve and have a poor life expectancy.

And they have many years of schooling because the state needs to do some very good brainwashing to maintain the stability of the regime.

Education is good, isn't it? Learning math, medicine, all those sciences. It should be taken into account.

You have provided no evidence the HDI is worse than other indicators. In fact, you provided strong evidence taht the HDI is the most objective measure including a vast variety of human welfare indicators.

Moreover, you completely ignored the subset of my comparison where I mentioned First World states with a greater degree of intervention having higher HDI than others. You chose to ignore it consciously?

I didn't meant that economics is moving straight towards libertarian positions on economic policy, that all new developments point out to libertarian positions in policy

You meant exactly that. You said that it's moving there. Now you concede - that is good.

[Surlethe]

These starving people would emerge as a consuming market, and resources would be allocated to satisfy their needs.

However, that does not happen. Therefore, something is wrong with your idea. Why should anyone offer anything to the starving people, if their productivity is lower than the alternative labor pool? What if they are not cost-efficient producers, in terms of world competition?

That makes it rational for the market to condemn them to poverty and death.

How much starvation in a Third World country is because the market is not allocating resources to it and how much is because some tinpot dictator is refusing foreign firms entry into that country's markets? It seems like it would be difficult to consistently make that determination.

However, to ultimately support your point, there are examples where the market definitely misallocated resources - to wit, the Irish Potato Famine. From what I've heard from profs, Ireland was a net exporter of food all throughout the Potato Famine; the landlords found it more profitable to send their food overseas than to sell it to their fellow-citizens. So they did.

[K. A. Pital]

How much starvation in a Third World country is because the market is not allocating resources to it and how much is because some tinpot dictator is refusing foreign firms entry into that country's markets? It seems like it would be difficult to consistently make that determination.

I'm not sure about starvation, but undeniably given a set value of FDI, which cannot rise or fall swiftly, it will get allocated to the "best", i.e. most market-efficient use. It will not get allocated to alleviation of suffering, unless said alleviation provides profit (most desireably short-term high profit; long-term, small profit opportunities lose in the battle for investment, regardless of their usefulness to society).

Iosef Cross said it himself, actually, and in very good terms - unless there is a profit opportunity, the market is impotent - and vice versa. The situation is actually even worse - the market continously selects resource allocation between profit opportunities A and B, and if B's chances are worse than A's, well, tough luck for B. The market is a fundamentally Darwinian system of resource allocation.

Also, when the question is allocation of oil superprofits, a significant share goes to luxury consumption in oil-producing nations. This does not indicate an efficient allocation.

The very problem of luxury consumption in general vs. widespread poverty in general indicates that a Pareto-optimal allocation can at the same time be horrendously flawed from a moral point, and frankly, if we were to gouge any other measure of efficiency than the Pareto-optimality, we would find such a situation not efficient at all.

However, to ultimately support your point, there are examples where the market definitely misallocated resources - to wit, the Irish Potato Famine. From what I've heard from profs, Ireland was a net exporter of food all throughout the Potato Famine; the landlords found it more profitable to send their food overseas than to sell it to their fellow-citizens. So they did.

That is not the only such example. Net grain exporting, net rice exporting during famines have happened in other nations as well, and often quite recently. Bangladesh 1974 comes to mind.

Hell, modern Russia exported grain at the same time as our population went malnourished. Did you know that my calorie diet for many years completely excluded milk, because it was unfeasible with my wage levels?

[TheKwas]

Most libertarians come from where in your university? Engineering programs? Law school?

Politics and Business. Although even in those two majors, libertarians in the american sense are pretty rare, and their understanding of economics is pretty limited.

How do you know? You don't appear to know much, not enough to make you a bit skeptic when some teacher tells you some model, with has dozens of refutations, to make you think twice before assuming that as truth.

Dickshit, I didn't say anything about truth or the accuracy of any model, I said I'm being taught mainstream economics as it is being taught today. Unless you consider everything to be in undergrad and in the masters program (since I've touched on numerous subjects there as well) to be 'dark age' economics, you assumed wrong and were objectively proven to be wrong.

The most delicious part is that while backpedalling, you have the gall to saying that I'm assuming too much when it was your assumption in the first place that ended up being as wrong as compass pointing south. Delicious, delicious irony.

A mixed economy where state intervention is designed to correct market failures.

And why doesn't a mixed economy really exist?

Mexico purposely intervened in the economy to correct market failures that were causing children to not to go to school (thus limiting the development process of Mexico). Therefore, Mexico must have a mixed economy.

The Austrian school doesn't exists anymore, It was a school of economic thought that existed between 1870 and WW1, in Vienna. Their contributions have been integrated into the neoclassical mainstream between 1870 and 1930. Their contributions are very important and much of modern economics comes from the research of these long death economists.

So in your crazy-ass re-interpretation of the history of economic thought, Ludwig von Mises and Murray Rothbard (born after WWI) aren't austrian economists?

You're thinking of the Marginal Revolution, not the austrian school of thought as it exists today. With this single paragraph, you have completely outted yourself as a complete imbecile on all things related to academic economics.

In this case I see no reason to go any further since I regard your definitions as wholly unworkable.
I'm not going to waste my time.

His definitions are just fine, it's his logic that makes no sense. By his own definition, basically every country in the world is a mixed economy, by the mere fact they have and maintain a public education system.

Samuel, I don't want to be rude, but your understanding of what I am talking about is apparently severely limited.

...

Of course, trying to talk about a subject without having some basic understanding of it is a waste of time.

Says the guy who can't even google "Austrian school of economics" or "Murray Rothbard's birthdate", but still calls himself an expert in economics.

You can explain economic phenomena with a variety of models. Some models conclude that markets are perfect, other models doesn't. If you like markets, you can use the perfect market model, if you don't, you can use the imperfect market model.

Both types of models have plenty of empirical evidence supporting them!

What empirical evidence can support the perfect market, which does not exist in reality with all the information, transaction, etc. costs and entry barriers? Are you really that dumb?

He's dumb as balls if you think that the perfect competition model and the imperfect competition models are competiting models and that you should use one or the other depending on your political views. You use either model depending on the industry/market you want to examine. If you're studying a single market that has some very obvious asymmetric information issues (like a car-auction, to use the famous example), you use a model that will capture that effect. Other markets, such as perhaps agriculture in some countries, can be closely modelled by accepting the perfect competition assumptions.

There's no "one-size-fits-all" model in microeconomics (or macroeconomics, really).

[K. A. Pital]

Ya know what? Iosef said that countries where people live longer and have a better education are good countries. I will center on my point about First World nations and their HDI disparities - they are small, because most First World nations are economically developed to a similar degree, but still they exist.

This is the lead HDI
1 Norway
2 Australia
3 Iceland
4 Canada
5 Ireland
6 Netherlands
7 Sweden
8 France
9 Switzerland
10 Japan
11 Luxembourg
12 Finland
13 United States

The United States (arguably, of course) has less state intervention than all nations above it, with some having vastly more intervention (even if we were to gouge by the very rough indicator such as the relation between yearly state budget and yearly GDP). How can Iosef explain this?

[Surlethe]

How much starvation in a Third World country is because the market is not allocating resources to it and how much is because some tinpot dictator is refusing foreign firms entry into that country's markets? It seems like it would be difficult to consistently make that determination.

I'm not sure about starvation, but undeniably given a set value of FDI, which cannot rise or fall swiftly, it will get allocated to the "best", i.e. most market-efficient use. It will not get allocated to alleviation of suffering, unless said alleviation provides profit (most desireably short-term high profit; long-term, small profit opportunities lose in the battle for investment, regardless of their usefulness to society).

This is true; markets do not directly alleviate suffering. However - not to try to refute, but to continue the conversation - as they encourage the exploitation of resources and the creation of capital without bureaucracy, they are useful to society. See more below.

Iosef Cross said it himself, actually, and in very good terms - unless there is a profit opportunity, the market is impotent - and vice versa. The situation is actually even worse - the market continously selects resource allocation between profit opportunities A and B, and if B's chances are worse than A's, well, tough luck for B. The market is a fundamentally Darwinian system of resource allocation.

This is a strength as well as a weakness. Earlier in the thread, when people were talking about the "indirect learning" of the markets, I think this is what they meant: as long as it works, the Darwinian resource allocation causes "inefficient" resource allocations to cease, and it does so ruthlessly, remorselessly, and without the costs associated with bureaucratic action. Insofar as what the market considers efficient is also morally laudable, then, it is useful in social engineering schemes. It may also be efficient to modify the market with less costly regulatory solutions (e.g., Pigovian taxes, subsidies) instead of more costly direct regulations (e.g., carbon auction, direct production). But that is not an a priori fact.

Also, when the question is allocation of oil superprofits, a significant share goes to luxury consumption in oil-producing nations. This does not indicate an efficient allocation.

The very problem of luxury consumption in general vs. widespread poverty in general indicates that a Pareto-optimal allocation can at the same time be horrendously flawed from a moral point, and frankly, if we were to gouge any other measure of efficiency than the Pareto-optimality, we would find such a situation not efficient at all.

I do not know that the example of oil superprofits going to luxury overconsumption in oil-producing nations is a good one. Such things bespeak horrible corruption, not the sort of markets that libertarians usually have in mind. But in general you are right - like Iosef said, as long as they have something to trade - and people in horribly poor places have practically nothing to trade given the inefficiencies of international investment. Since they have practically nothing compared to me, it doesn't even make sense to talk about comparative advantages; what could a starving African possibly have a comparative advantage in that would make me want to trade with him?

[ray245]

Ya know what? Iosef said that countries where people live longer and have a better education are good countries. I will center on my point about First World nations and their HDI disparities - they are small, because most First World nations are economically developed to a similar degree, but still they exist.

This is the lead HDI
1 Norway
2 Australia
3 Iceland
4 Canada
5 Ireland
6 Netherlands
7 Sweden
8 France
9 Switzerland
10 Japan
11 Luxembourg
12 Finland
13 United States

The United States (arguably, of course) has less state intervention than all nations above it, with some having vastly more intervention (even if we were to gouge by the very rough indicator such as the relation between yearly state budget and yearly GDP). How can Iosef explain this?

Although it seems to me that some countries that fall behind the US in terms of HDI have a greater level of state interventionism as well.

[K. A. Pital]

This is true; markets do not directly alleviate suffering. However - not to try to refute, but to continue the conversation - as they encourage the exploitation of resources and the creation of capital without bureaucracy, they are useful to society. See more below.

I cannot agree with such a wide generalization. A market chooses one among many opportunities for capital creation, and in fact because much of the direction of development is determined by the decisions of capitalists, one could say that the capitalist class chooses amogn the many opportunities. These opportunities can be vastly different and diverse. For example, in a sufficiently lax environment a person can invest in drug trade or in building a steel mill or a milk plant. Steel mill or milk plant, say, provides long-term social benefit. However, drug trade provides a higher and more immediate profit. Alternatively, the situation of capital demise - greater profits and personal wealth can be amassed by destroying capital (and faster, at that) than by creating it. Imported consumption goods destroy the prior-existing production industry and decrease the welfare of the people. It is a market-rational decision, because despite the fallen level of welfare of the people, the profits of the capitalist are increased, and received in a shorter term; his capital expenses (which are associated with running factories) are lowered, as are labour expenses (importing from a nation with cheaper labour offers an absolute advantage).

All these decisions are market-rational, and stem from the rational development of the market itself. Yet, they do not lead to outcomes that are useful to society.

This is a strength as well as a weakness. Earlier in the thread, when people were talking about the "indirect learning" of the markets, I think this is what they meant: as long as it works, the Darwinian resource allocation causes "inefficient" resource allocations to cease, and it does so ruthlessly, remorselessly, and without the costs associated with bureaucratic action.

That is a strength only if you consider all Pareto-optimal outcomes to be efficient resource allocations. But they are not - when the pie is divided in two parts among three people, one goes dead. This allocation is Pareto-optimal, market-efficient, and yet, it's not acceptable from any point of view which makes a complex measure of social utility.

The problem here is that negative utility of the dead person is much greater than the positive utility received by the 0,15 percent of the pie that each other person got as a bonus thanks to the third person dying. A Pareto-optimal allocation thus resulted in a huge negative utility.

I do not know that the example of oil superprofits going to luxury overconsumption in oil-producing nations is a good one.

Why? They do not bespeak any corruption; all libertarians are in favour of privatization of all natural resources and land, as far as I know. If the oil is yours, and it's private, as are all the extraction complexes, and such, why is it wrong or "not the sort of market" for the oil owner to buy himself a Bentley? I do not see here any corruption. I see allocation of resource according to the oil's owner. A free market voluntary buy. No one forced him to buy the Bentley.

Since they have practically nothing compared to me, it doesn't even make sense to talk about comparative advantages; what could a starving African possibly have a comparative advantage in that would make me want to trade with him?

Yeah, exactly. The Ricardian idea which assumes that comparative advantage always would lead to a favourable outcome for both parties engaged in trade only works when factors of production are immobilized and the economic situation is static (technology is exogenous). This is one of the most bullshit parts of economics, which always irritated me - technology is most certainly not exogenous to economics, neither is time and development static, and models should at least try to account for that. Not to say many economists have not, but their elaborate multi-factor systems are about the farthest thing you could find from libertarian screeds and dogmas.

Although it seems to me that some countries that fall behind the US in terms of HDI have a greater level of state interventionism as well.

Quite certainly so. But if less regulation produces the superior result as a matter of fact, i.e. as an inviolable economic law (which is what Iosef seemed to imply), and not as a result of other (let's call them exogenous) factors, then such a paradox should not exist. The distribution should be uniform and correspond to the degree of economic intervention.

The fact that he simplified a multi-factor growth of the USA in the "last 150 years" to a single factor (the amount of state intervention) is just a display of horrible reductionism. I tried to center on First World comparisons and the HDI precisely to show that each outcome is a result of several factors at work; not one as Iosef brazenly implies.

P.S. Man, good old days! Economy debates rise anew.

[Surlethe]

Hey, Stas, I just graphed that list of countries with budget revenues as a proxy for government size, and with the exception of the US and Norway, it looks like budget revenue as a proportion of GDP is inversely correlated to HDI. At least, when you take Norway and the US out, you get a 1% drop in revenue (as prop. of GDP) leads to a 0.02 increase in HDI with R2 = 44%. If Norway and the US are in, a 1% rise in revenue leads to a 0.01 increase in HDI with R2 = 6%. Very back of the envelope, I'll admit, but slightly counterintuitive.

[K. A. Pital]

R2 = 44%? Doesn't it imply you can't be confident in the model and the correlation is weak? I thought that everything up to 0.5 is not even considered as possible explanation in statistical analysis, and a much stronger one is required for such considerations?

The problem is, like I said, reductionism. If the system is strictly single-factor like Iosef implies with his ridiculous "USA development" comparisons, then quite certainly there would not be violations, and the correlation would be strong.

This is interesting though - would the correlation be stronger or weaker if we were to include First and Second World states together? Would it be different for the year 1990 (when most second world nations had planned economies)? Would the correlation be stronger or weaker if we were to include all nations, including the Third World?

Hmm... someone did it for the 1992 HDI - my rough guess seem to have been corroborated.
http://www.emeraldinsight.com/Insight/V ... 40403.html
Despite the - quite worthy! - note that too much intervention can be harmful, the overall trend displays that more government intervention corresponds to a higher HDI. It also makes some veiled guesses towards as what the optimal amount of CR might be (they peg it around 50%), whereas I'd peg it around 60-75% percent (for my own reasons that go into a lot of historical economic research).

[Surlethe]

This is true; markets do not directly alleviate suffering. However - not to try to refute, but to continue the conversation - as they encourage the exploitation of resources and the creation of capital without bureaucracy, they are useful to society. See more below.

I cannot agree with such a wide generalization. A market chooses one among many opportunities for capital creation, and in fact because much of the direction of development is determined by the decisions of capitalists, one could say that the capitalist class chooses amogn the many opportunities. These opportunities can be vastly different and diverse. For example, in a sufficiently lax environment a person can invest in drug trade or in building a steel mill or a milk plant. Steel mill or milk plant, say, provides long-term social benefit. However, drug trade provides a higher and more immediate profit. Alternatively, the situation of capital demise - greater profits and personal wealth can be amassed by destroying capital (and faster, at that) than by creating it. Imported consumption goods destroy the prior-existing production industry and decrease the welfare of the people. It is a market-rational decision, because despite the fallen level of welfare of the people, the profits of the capitalist are increased, and received in a shorter term; his capital expenses (which are associated with running factories) are lowered, as are labour expenses (importing from a nation with cheaper labour offers an absolute advantage).

All these decisions are market-rational, and stem from the rational development of the market itself. Yet, they do not lead to outcomes that are useful to society.

Regarding the example of the drug trade versus steel mill or milk plant, sure. If one accepts Pareto efficiency as utilitarian, then if the drug trade is a greater source of revenue than the steel mill, society derives greater value from drugs than steel. Of course, one can always use incentives to direct the forces of the market - taxing drugs, for example. In that case, by increasing the cost of drugs, one 'costlessly' directs resources toward the steel mills and milk plants.

I don't understand why imported consumption goods make people worse off. The industry, in general, has left for places which were far worse off before than after, and after adjustment the people in the home country now have consumer goods which cost less. This seems to be a classic non-zero-sum game. If an electronics plant in Kokomo moves to Chongqing, say, the US workers move from $60,000 jobs to $30,000 jobs and the Chinese workers move from $6,000 jobs to $10,000 jobs. Moreover, US consumers now benefit from cheaper cars as well; that must be weighed as well.

This is a strength as well as a weakness. Earlier in the thread, when people were talking about the "indirect learning" of the markets, I think this is what they meant: as long as it works, the Darwinian resource allocation causes "inefficient" resource allocations to cease, and it does so ruthlessly, remorselessly, and without the costs associated with bureaucratic action.

That is a strength only if you consider all Pareto-optimal outcomes to be efficient resource allocations. But they are not - when the pie is divided in two parts among three people, one goes dead. This allocation is Pareto-optimal, market-efficient, and yet, it's not acceptable from any point of view which makes a complex measure of social utility.

The problem here is that negative utility of the dead person is much greater than the positive utility received by the 0,15 percent of the pie that each other person got as a bonus thanks to the third person dying. A Pareto-optimal allocation thus resulted in a huge negative utility.

You cut the quote at precisely the point where I qualified the statement. Insofar as the Pareto-optimal distribution of resources aligns with the optimal utilitarian distribution, markets are useful.

I do not know that the example of oil superprofits going to luxury overconsumption in oil-producing nations is a good one.

Why? They do not bespeak any corruption; all libertarians are in favour of privatization of all natural resources and land, as far as I know. If the oil is yours, and it's private, as are all the extraction complexes, and such, why is it wrong or "not the sort of market" for the oil owner to buy himself a Bentley? I do not see here any corruption. I see allocation of resource according to the oil's owner. A free market voluntary buy. No one forced him to buy the Bentley.

I thought you were talking about countries like Saudi Arabia or Kuwait? Where state-run oil companies take oil out of the ground?

Since they have practically nothing compared to me, it doesn't even make sense to talk about comparative advantages; what could a starving African possibly have a comparative advantage in that would make me want to trade with him?

Yeah, exactly. The Ricardian idea which assumes that comparative advantage always would lead to a favourable outcome for both parties engaged in trade only works when factors of production are immobilized and the economic situation is static (technology is exogenous). This is one of the most bullshit parts of economics, which always irritated me - technology is most certainly not exogenous to economics, neither is time and development static, and models should at least try to account for that. Not to say many economists have not, but their elaborate multi-factor systems are about the farthest thing you could find from libertarian screeds and dogmas.

It's not hard to permute the models to allow for capital flows and technological differences, as you say. In fact, factor flow occurs when trade is frozen - one of the reasons for the massive immigration to the US in the 1800s and early 1900s was a response to the huge trade barriers of the time. I don't disagree with your final point, though it is interesting that the overwhelming majority of economists are in favor of free trade - more than any other proposition. 91%, IIRC.

P.S. Man, good old days! Economy debates rise anew.

Word

EDIT:

R2 = 44%? Doesn't it imply you can't be confident in the model and the correlation is weak? I thought that everything up to 0.5 is not even considered as possible explanation in statistical analysis, and a much stronger one is required for such considerations?

Honestly, I don't remember the statistical practices well enough. This was a very fast regression because I noticed the correlation and wanted to investigate.

The problem is, like I said, reductionism. If the system is strictly single-factor like Iosef implies with his ridiculous "USA development" comparisons, then quite certainly there would not be violations, and the correlation would be strong.

Oh, no disagreement here. I can't believe someone who is acting high and mighty and edumacated would be stupid enough to make such a blowhard oversimplification. One more tick mark in the "Iosef Cross is a bullshitter" column.

This is interesting though - would the correlation be stronger or weaker if we were to include First and Second World states together? Would it be different for the year 1990 (when most second world nations had planned economies)? Would the correlation be stronger or weaker if we were to include all nations, including the Third World?

My suspicion is that the inverse correlation I noticed is a fluke of the very top of the HDI spread. To your questions, here are my intuitive answers - The correlation would entirely disappear when the First, Second, and Third World countries of 2010 are included because many diverse kinds of governments -- among the Third World nations, I'm sure there are small or no governments (Somalia) and entirely command governments (?). In 1990, I think that the correlation would weakly appear if one included only First and Second World nations, because of what I understand to be the relative prosperity of First World nations. The countries with good social safety nets had them in 1990, and so the decreased economic performance of the Second World nations would hurt them relatively in HDI rankings. But I have not made a study of these things, so only take my intuition with a grain of salt.

However, I don't want to actually crunch the data tonight to test my predictions (I entered the GDP info by hand from the CIA world factbook and the HDI info by hand from Wiki; that was a pain enough in the ass for 15 countries).

[K. A. Pital]

In that case, by increasing the cost of drugs, one 'costlessly' directs resources toward the steel mills and milk plants.

That works only so until the government is not subservient to the interests of the drug barons. Which brings to my next point - the majority of such resource-directing economic decisions are made by the capitalists, who are also having a large (in the worst case, absolute) sway over government decisions. A system of checks and balances can alleviate it to a point, as can democracy as a system.

I don't understand why imported consumption goods make people worse off.

It does not make so in general, but there are instances where it could. Your assumption is that the people in Kokomo move to $30 000 jobs. But what if they do not move to such jobs, what if the Kokomo plant was their only source of income? They can get rapidly pauperized. In a poor economy, they also have huge constraints on being able to move (for example, city-to-city movement in Russia is extremely hard; housing is VERY expensive relative to wage levels). Therefore, Kokomo people can become poorer and even malnourished; meanwhile, the Chinese workers may not have been malnourished beforehand. Although I agree that in many situations, the movement of capital is beneficial.

The problem is compounded in several years, however - now the high-tech plant is in Chongqing; Kokomo's people who previously made a living by selling their electronics to the domestic industry, can no longer do it and go poor. On a national level, that means complete import substitition of all higher-tech goods and eventually it leaves the inhabitants of this country with little to give in exchange for these goods - their source of income is destroyed.

You presumed they have an alternative one; but if they previously had an oil well (say, for export) and a plant (which worked for the domestic and export market), and are left with only the oil well, their income not only falls in the immediate, short run - their bying capabilities decrease over time as their industry primitivizes, being unable to produce complex goods.

Worse yet, if we talk about the plant being relocated from Bantustan where people are close to starvation, to a relatively stable nation like China, quite certainly the starving Bantustanis can't do shit. It is even worse if the Bantustani labour cost is compounted by objective factors, such as the need for extremely warm clothes, central heating or such to even live. In that case, the capitalist can remorselessly destroy the only factory in Bantustan whilst bying one in China.

If Bantustan then becomes a post-apocalyptic hellhole, teh capitalist as a rich and resourceful person, now having a plant in China, can also emigrate from Bantustan to Hawaii or Dubai or any other place like that. Bantustan is a complete starving wreck, the Chinese got some income increase - though the greatest beneficiary is of course the former Bantustani capitalist, who now resides in Dubai on his personal villa and watches TV about how Bantustanis die.

In short, the rule only holds if the capital moved improves the situation of people elsewhere to a greater extent than the suffering it causes at the point-of-removal.

It's also a matter of alternative investment. The great majority of investment gets re-invested in the First World nations, foregoing opportunities to invest in poor, volatile nations whose increase of life level would drastically outweigh the losses dealt to the First World economies by such a re-distribution. What if the domestic industries of a Third World nation are, in fact, crushed by imports from a First World nation? Such a situation is decreasing the well-being of humans overall.

P.S. Imported consumption not necessarily means a new industry is created elsewhere or relocated. It can also mean that foreign industrial enterprise X simply increases output to cover your national market, while your enterprise Y which did the same is destroyed. This also does not automatically translate into higher wages for the worker of the foreign enterprise X; although it quite certainly does translate into a higher profit for the owner of the same.

Insofar as the Pareto-optimal distribution of resources aligns with the optimal utilitarian distribution, markets are useful.

Quite correct. The question is only whether it would align with such without exogenous pressure.

I thought you were talking about countries like Saudi Arabia or Kuwait? Where state-run oil companies take oil out of the ground?

No, I was talking about Russia. Private oil companies extract oil, have profits, and their owners commit to great and quite certainly legal luxury consumption. At the same time, Russia experienced a degree of malnourishment uncommon for an economy with it's development level.

P.S. The trend from the paper I liked to above, that high-HDI nations have greater government intervention than medium-HDI nations and yet greater than low-HDI nations, on the average, seemed counter-intuitive to me - I presumed high-HDI nations to have lower CR versus medium-HDI nations, but both groups having a higher CR versus low-HDI nations. I was wrong, it seems - CR rises along all three groups on the average.

That's ... surprising, although it does further my point. Oh, and just one little note:

In fact, factor flow occurs when trade is frozen - one of the reasons for the massive immigration to the US in the 1800s and early 1900s was a response to the huge trade barriers of the time

That is a good example. However, the market can itself naturally limit factor flow, most notably labour flow. One such limitation can be the price of tickets - even if we remove all visa and administrative barriers, and language itself, that exist for manpower to move. The other can be price of housing - the domestic market system which can be based on high-stable wages and extremely high housing prices allowing a person to buy a house when he engages in a credit agreement for 10-15 years since his late youth (25-30 years). This precludes movement by any specialists which do not have a higher-than-average wage level in the presumed country of arrival, and largely precludes the emigration of old men. Finally, the inability of the worker to make any savings in his home nation, needed for the "leap" into the desired nation (which we presume is the location of capital). All these constraints arise naturally from the market, as do many others.

All this leads to my first point once again, the capitalist as a single person and all capitalists as a class exert more influence in a market system, which them forms Pareto-optimal states which are best fit to their desires (i.e. maximal utility for a subset of society), not necessary the maximal utility for a given society.

[Surlethe]

That works only so until the government is not subservient to the interests of the drug barons. Which brings to my next point - the majority of such resource-directing economic decisions are made by the capitalists, who are also having a large (in the worst case, absolute) sway over government decisions. A system of checks and balances can alleviate it to a point, as can democracy as a system.

Absolutely - one of the biggest problems with a freer market system is that power concentrates with wealth. I would submit, however, that this diluting power from the ruling classes is a problem with all forms of social organization; in the context of a largely control economy, checks and balances are also necessary to prevent inefficient allocation because of corruption in the higher ranks of the bureaucracy.

In short, the rule only holds if the capital moved improves the situation of people elsewhere to a greater extent than the suffering it causes at the point-of-removal.

This is certainly true. The scenario you outlined relies upon high transaction costs to make its point. In my view, there are two ways in which the free market fails. The first is through the skewed distribution of resources brought about by unequal wealth. The second is through ways in which the basic economic models fail to approximate the world - transaction costs, rent-seeking, externalities, etc. These frictions all present opportunities for government direction and intervention to improve outcomes.

Quite correct. The question is only whether it would align with such without exogenous pressure.

I think our disagreement is largely the extent to which it aligns without exogenous pressure. (Seaking of "exogenous", one must also take into account the political economy of the government; in such social engineering schemes as we are discussing, government action cannot be ultimately presumed exogenous.)

No, I was talking about Russia. Private oil companies extract oil, have profits, and their owners commit to great and quite certainly legal luxury consumption. At the same time, Russia experienced a degree of malnourishment uncommon for an economy with it's development level.

Ah. Such extravagant consumption is why progressive taxes were invented.

All this leads to my first point once again, the capitalist as a single person and all capitalists as a class exert more influence in a market system, which them forms Pareto-optimal states which are best fit to their desires (i.e. maximal utility for a subset of society), not necessary the maximal utility for a given society.

We do not disagree on these points. However, one must balance the costs of greater capitalist power and friction-induced suffering with the costs of bureaucracy, concentrated power, and less efficient capital distribution.

[Rye]

An interesting counterexample for libertarian economic policies is the story of Detroit's historical boom and bust cycles and evolution into a total ghost town. I would attempt to go into this more to how it applies, but unfortunately I've run out of time.

There was a fascinating documentary on the history of the city on the Beeb recently (iPlayer link), but it's easily one of the best example of how the American Dream can work for and then fail millions of people and in spectacular fashion as a result of relying too much on consumerism and the market. The opening six minutes or so of the documentary are on youtube and unfortunately don't go into the market so much as setting the scene:

[K. A. Pital]

Heh, I see your point, Surlethe, but libertarians are usually opposed to stuff like progressive taxation, for example.

Moreover, progressive taxation curbs the problem of luxury consumption, but only to a certain degree. It doesn't change the fundamental disparity in resource distribution.

[Surlethe]

Heh, I see your point, Surlethe, but libertarians are usually opposed to stuff like progressive taxation, for example.

Oh, no doubt! But I myself am not a libertarian, even if I might sometimes sound like it

Moreover, progressive taxation curbs the problem of luxury consumption, but only to a certain degree. It doesn't change the fundamental disparity in resource distribution.

No, it doesn't. But the costs of entirely eliminating disparities in resource distribution are, in my opinion, far too high; I'd prefer an approach that rewards people of value to society and makes use of the market mechanisms in achieving progress.

[starslayer]

R2 = 44%? Doesn't it imply you can't be confident in the model and the correlation is weak? I thought that everything up to 0.5 is not even considered as possible explanation in statistical analysis, and a much stronger one is required for such considerations?

Usually, yes. The problem with R^2 is that it does not take into account the uncertainties inherent in the data. If the data is uncertain enough (IIRC, the error must be a good fraction of each datum's first significant figure), R^2=.44 might well be a reasonable correlation, but if the data's that uncertain, then a lot of different models can probably describe the data. If that happened in physics, the experiment would be regarded as not accurate enough to come to any real conclusion, save that there is some relation between the variables being examined.

With Surlethe's example, the budget figures should be exact (I mean, a government knows how much it spends... right? ), but the GDPs will probably have some uncertainty on them. If they don't, or if they're reasonably small, then yeah, R^2=.44 is pretty bad, and a linear model is not warranted.