Monday, October 15, 2012

Four Problems with Romney's Economic Proposals: Introduction

Over the course of the next four days, I am going to discuss four reasons why Romney's economic intentions will fail.

Furthermore, I will make this criticism from within the context of free-market economics. Effectively, I will make it from a context which Romney's running mate Paul Ryan would have to agree with - if he is at all consistent with the free-market principles he claims to uphold.

Free market economics actually tries to be about the real world. It tries to incorporate facts about the real world into its system. What Romney and company is peddling, on the other hand, is a cheap knock-off of capitalism that profits the seller and poisons the buyer. They steam the label off of capitalism and put it on their snake-oil as a way of increasing sales - a way of getting more voters to buy it. It will kill some of those buyers, maim others, and otherwise impoverish still more. It will, however, profit the sellers.

In order for Romney's snake-oil to be effective, the following four things will have to be true:

(1) There are no positive externalities.

(2) There are no negative externalities

(3) All agents are perfectly rational and fully informed.

(4) All agents have the same economic power.

In the real world, none of these are true. Consequently, in the real world, Romney's snake oil will not work. The sellers will pocket the money, but the buyers will end up no better off as a result of the snake-oil. Some will end up significantly worse off.

Positive externalities are the side-benefits that people get from living in a community where the population is well-educated and its people understand the real world in which real-world decisions are made. They are the benefits that come from being secure from internal and external threats. It comes from a good infrastructure - a good foundation for the exchange of goods, services, and information. It comes from a population that is healthy and it comes from good sanitation. Any population that does not have these things suffers, and Romney's plans will diminish these things. They will do so, not because Romney is evil (though if I had the moral failings of a typical Fox News commentator I would be claiming that Romney must hate America and is seeking its destruction). It will happen because Romney's plan is blind to positive externalities and makes no room for harvesting their benefits.

Negative externalities are harms inflicted on others in the course of economic activity. Imagine a society in which corporate leaders are free to kill, poison, and maim others - and destroy their property - whenever it profits them to do so. That is what Romney's system provides. The killing, poisoning, maiming, and destroying comes from polluting the air we breathe and the water we drink. It comes from creating dangerous working conditions where the owner of the factory pockets the profits and the injured worker or dead worker's family pockets the bills. It takes the form of destroying cities and whole nations with climate change - destruction that the rich can afford to walk away from, but the vast majority of the residents of areas harmed cannot economically leave.

Perfectly rational and informed agents can efficiently pursue their own interests. Irrational and uninformed agents make mistakes. None of us are perfectly rational and informed. We can't be - we do not have enough time. Therefore, we have reason to support institutions that help us to avoid at least the most serious harms that uninformed and sometimes irrational agents make. Taking away these safeguards leaves us vulnerable not only to our own follies, but to parasites who feed us false information and rhetoric in order to suck out of us our economic life blood. Nobody is in a better position to drain our economic life blood with rhetoric and misinformation than those with enough money to control hire experts in public manipulation - the public relations consultants.

Certainly, Romney's system is not one where he expects everybody to have the same economic power. However, his system is one that will not work as he says it will unless everybody actually has equal economic power. Ideally, in a free market, goods and services go to those who value them more. They go to the person who is willing to pay a little bit more to get them. The person who pays less, it is assumed, did not want it as badly. In reality, where economic power is not equal, people with a trivial interest in certain goods and services can bid them away from others who value them greatly - who even need them for survival. Imagine somebody following you around and each time you go to buy something - food, medical care for your children, gasoline to go to and from work - he offers more than you can afford to pay. There is nothing you can do about it. You have $50,000. He has $50 million. As you die of thirst, you can bid $50,000 for a bottle of water. He can bid $50,001 and pour its contents out at your feet and still have $49,949,999 left over. As he watches you die, he did nothing wrong according to the system Romney advances. You did not want the water as badly as he wanted to watch you die.

Briefly, these are the four real-world facts ignored in Romney's economic plan.

These facts require including in your economic package some method for harvesting positive externalities as well as avoiding negative externalities. It calls for promoting institutions that help less-than-fully-informed and sometimes irrational agents avoid the worst mistakes that such agents can make. It also defends them from those who would manipulate them with rhetoric and misinformation. It is a system that recognizes and respects the fact that $50,000 in the hands of somebody with $50 million is worth a lot less than a bottle of water in the hands of somebody dying of thirst.

These are facts.

Nobody's score in a political debate can change these facts. No amount of entertaining rhetoric will erase these facts or protect people from the harms that will come from ignoring these facts. The person handing you cyanide-laced fruit drink may be quite convincing as he asks you to drink it - but that will not negate the effects of the cyanide.

It is also doubtful that a person can adequately explain these problems with Romney's plans in the two minutes one is allowed in a debate. Fortunately, I do not suffer from having such a limit.

Tomorrow, I discuss positive externalities.


mojo.rhythm said...

Isn't a free market technically indifferent to vast inequalities in wealth and economic power? After all, if it was arrived at by a "voluntary" process, then isn't that a morally acceptable outcome according to the neoclassical economic priesthood?

Alonzo Fyfe said...

As I will argue on Friday, free market economics seeks economic efficiency. It seeks to transfer economic goods from those who value them less to those who alue them more through voluntary trade on an open market. Differences in income create situations where economic goods go from those who value them more to those who value them less - simply because those with less power cannot fully participate in the open market. Ths creates economic inefficiency.

It s true that the free arket does not care about the effects of differences in wealth in itself. However, it alse hates inefficiency.