Failures in Romney's Economic Proposals - Legitimate Market Transactions

Sorry, I took some time off to suffer from an illness, but I am better now.

I was discussing how Romney's economic plans would fail in the real world - and doing so from a capitalist free-market perspective.

In earlier posts I mentioned how his plan fails to harvest positive externalities (e.g., from education and public health measures). Furthermore, it allows for rampant negative externalities - costs that are forced on others against their will and without compensation such as the costs of pollution and climate change.

In this post, I wish to discuss the fact that the plan Romney is defending is one that requires that all agents be perfectly informed and rational - regardless of any action that other agents may take. In the real world where this is not the case it allows for exploitive business practices that violate fundamental principles of a free-market system.

Free market economics say that a market transaction between two rational and well-informed agents, free from force or fraud, benefit both parties. This is what makes it possible for agents pursuing their own interests in a market free - one in which force and fraud are eliminated to employ Adam Smith's "invisible hand" to benefit all of society. Billions of these individual transactions every day, each benefitting both parties, adds up to a sizable overall benefit across whole societies.

That's the theory.

Please note that the theory only applies to transactions among informed and irrational agents that are free of force and fraud. If these criteria are not met, one party ends up obtaining a benefit at the expense of others. More often than not, the benefit acquired by those using force or fraud or taking advantage of the ignorance and irrationality of others obtain less of a benefit than their victims suffer in terms of cost. This produces a net loss in overall social well-being.

To see this in practice, ask a free-market economists what free market principles have to say about an adult enticing a child into engaging in dangerous sex acts. This will give you an idea of the importance that free market principles place on informed consent in defining a legitimate market transactions.

I want to put some emphasis here on the concept of a legitimate market transaction. This is what Romney's economic plans are ignoring, to a large degree.

Free market economics draws a line between legitimate and illegitimate transactions based on the use of force or fraud or on parties being ill-informed or irrational.

These terms are not clear-cut (as some might imagine).

A boss finds an employee with a sick child to be attractive. "Have sex with me or you will lose your job and your medical coverage." Is this a legitimate transaction? Or is it a form of rape comparable to, "Have sex with me or I will shatter your child's skull against the concrete?"

Is it the case that failure to reveal certain information the another party counts as "fraud"? If I do not tell you that the car I am selling you requires a special type of motor oil that costs $100 per quart, have I lied to you in order to manipulate you into a transaction you would not have agreed to as an informed customer?

What counts as "informed consent?"

Who gets to answer these questions? How do they get decided? What are the correct decisions? What criteria determine which answer is correct or incorrect? How do we resolve disputes?

Romney and his kind like to protest "regulation".

What they bypass is the fact that free markets are a regulatory system. They are a set of rules for distinguishing between legitimate and illegitimate market transactions.

What many of Romney's backers are demanding in their call to repeal regulation is actually a call to repeal free-market capitalism. They are seeking a liberty to use force where the free market would prohibit it (such as in generating negative externalities as discussed in the previous post) that free markets would not permit. They are also seeking a liberty to engage in manipulative and exploitive marketing practices that would violate the principles of informed consent that Adam Smith's invisible hand would require.

Not surprisingly, they have an incentive to weaken these restrictions. They restrict the amount of wealth that the super rich can extract from the poor and middle class. Why trade with the poor and middle class when you can take from them? To take from them in a democracy you convince them that free market principles that protect them are "regulations" that are "bad for the economy". You use this to persuade them to vote away the rights that free market principles would insist on protecting. Once they vote away these rights, they are open to plunder in ways that force wealth transfers from the poor and middle class to the rich.

The recent banking practices that resulted in the economic crash of 2008 provide an example. The lending practices that these business engaged in to make their profits were not "free market" transactions. They were exploitive and manipulative offers that depended on customers being ill-informed and irrational about the true potential costs of the agreements they were getting into. And the banks continued to demand the "right" to engage in these exploitive and manipulative practices, even though free-market economics would condemn them as illegitimate.

Without these safeguards, what free market principles say have to be purchased from the middle class and the poor in legitimate market transactions can be taken through force and manipulation instead. And taking is much better than buying - at least from the point of view of the taker. Or, in this case, from the point of the view of those whose lobbyists can persuade the government to grant them a liberty to manipulate others.

The question I continue to ask is: How much wealth redistribution from the rich to the poor would we need if we simply stopped the forced transfer of wealth from the poor and middle class to the rich?

How many lobbyists are on your payroll? And do you really think the lobbyists working for those who can afford to pay them are not ultimately getting paid to use the government transfer wealth - or to obtain a liberty to transfer wealth - from your pocket to those who can afford to pay them? They are earning a profit for their employers, or they would not be there.

Romney's economic plan might work in a world of perfectly informed and rational agents who cannot be exploited or manipulated. In the real world, they provide a recipe for the forced transfer of wealth from the poor and middle class to the rich. In ways that violate the fundamental principles of free market economics.

But, then, maybe that's the point.