Thursday, October 25, 2012

Failures in Romney's Economic Proposals - Wealth Inequality

Adam Smith's "invisible hand", whereby a free market economy benefits society as a whole, requires an assumption of near-equal economic power.

Some are going to read this and think that nothing more absurd has ever been written. Clearly, free markets care nothing about differences in income.

While it is true that the free market has nothing to say about differences in income as a result or output of the system, its "invisible hand" component still requires economic equality as an input or Adam Smith's "invisible hand" will not work as advertised.

The way free markets are supposed to work, they direct goods and services to those who value them more. It's a simple process. If you want something more than somebody else, you are willing to pay more to get it. As prices rise, some people quit buying - they are just not willing to pay as much. The people who keep buying as the prices rise are the people who really want or need what is being sold. The free market guarantees that things go to their most highly values use, while trivial and less important uses fall are given up.


Well, yes . . . IF we add the hidden premise that all bidders have the same economic power. However, it becomes false the instant we abandon this assumption of economic equality. Furthermore, as economic inequality increases, Adam Smith's invisible hand becomes less and less effective.

Imagine that a hurricane has hit a major city. There is little fresh water. One person with a few bottles of water offers to sell a bottle. There are two bidders. A mother who wants the water to give to her sick and dehydrated child, and another who wants it so she can shampoo her pet poodle. Let us imagine, just for the sake of argument, that the mother desperately wants to save her child - she fears for her child's life. While the other thinks that her poodle would like to be clean, but it is not a priority concern.

The water would go to the mother. The woman with the poodle would be the first to give up in a bidding war.

The free market works - Adam Smith's invisible hand sees the water going to the person who values it more.

But now we will add the assumption that the poodle owner has $20 million dollars, while the mother of the sick child has $20.

Now, is it still true that the free market will assign the water bottle to the person who values it more?

No, it is not.

$20 to the person with $20 million is like 0.0001 cents to the person with $20. The poodle owner can raise the price to $200 without a care. However, she is not stupid. There's no need to. She can get the bottle of water for $20 - and it may well be worth it for her to do so.

The important fact is that $20 is not the price at which the poodle owner proves to the market that she values shampooing her dog more than the mother values the well-being of her sick child. It's the price at which she proves that she has more money than the mother of the sick child can spend.

Give the two mothers equal economic power - donate $20 million to the mother of the sick child - and we will see who values the water more. If the assumption of economic equality is true, the market will give the water to the woman who values it more. Where that assumption is not true, the free market will, at times, give the water to the person with the most money to spend even where that person values it less.

The more economic inequality we have, the more this happens.

It is a well-known economic phenomenon. As incomes rise in a region, those with money begin to buy more meat. In doing this, they bid up the price of grain. They purchase better tasting food for themselves, and those with less money starve as a result. Yet, certainly, those with money do not value the taste of a steak more than those without value the calories and nutrients in seven loaves of bread.

We see it today where those with money want energy, some of which they make out of corn - bidding up the price of corn and, in doing so, bidding food off of the table of people who are literally starving to death. A number of children will die to provide this energy to those who can afford to pay for it. Yet, there is no sense to the claim that the rich like their "clean energy" more than the poor mother hates to see her child starve to death.

The rich also bid food away from the poor by bidding away the land on which food can be grown, using food-land for their estates.

The things that the wealthy are able to bid away from poor people (who have a higher-value use for those goods and services but no money to spend on them) is not limited to food. It includes quality medical care, quality education, and energy itself. The wealthy can spend thousands of dollars on energy for pleasure cruises and airplane trips while the elderly couple freeze to death in their homes.

Other things included in this list is access to the media - and, with this the ability to determine what people believe by determining what they see and hear. They create Fox News and fill it with market-tested propaganda to get people to believe what it is profitable to them to have people believe.

This also includes access to political power.

How many millions of dollars have you contributed to super-packs recently? How many television spots can you afford? How many times have you heard an advertisement that you judged false or misleading where - with enough money and the right connections that money buys - you could have gotten that message out to the public? Instead, the only people who see it are a few people on your friend's list or who read your blog - tweets and blog postings that have to compete with the slick market-tested products of those with money.

These are not areas where the free market are directing the resources to the users who value them the most - where Adam Smith's invisible hand provides a benefit to all of society. These are areas where those with money but who value something less are bidding them away from those without so much money but who actually value them more.

Of course, we are not told about this hidden assumption of economic equality built into these arguments of how the free market benefits all. Where this assumption is true, Romney's economic plan will benefit all. Where it is false - where there are vast differences in the amount of money people have to spend - it creates a system where economic goods are accumulated - not by those who value them more, but by those with more money to spend.

No comments: