The Words We Use…

Last night, I spoke to the student Economic Club at Ball State. Since numbers aren’t my thing, I focused on theory….Here (slightly condensed)are my remarks.

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Terms like conservative, liberal, socialist, progressive get used these days as accusations and insults rather than ways of defining a political or economic philosophy.

On today’s political spectrum, I consider myself liberal, but given the state of current discourse,  it might be worth explaining what I mean by that term—and why my kind of liberalism is compatible with genuine market capitalism, although not necessarily with what passes for capitalism in today’s America.

I am basically an 18th Century liberal, by which I mean a product of Enlightenment values like empirical inquiry, science, and the importance of facts—including facts I may find inconvenient.

It also means I place a high value on both individual autonomy and the common good. And that means I tend to analyze government’s activities through the hypothetical of Locke’s Social Contract.

The United States’ Constitution was crafted by men heavily influenced by Enlightenment ideas. Their belief in protecting a marketplace of ideas owed a debt to Adam Smith’s description of economic markets, a description supported by the experience of the colonists, many of whom were small merchants. Good ideas would win out over bad, in much the same way as that better mousetrap would win market share.

I believe market principles remain sound, but they have to be applied to “facts on the ground” that the Founders could never have anticipated.

There were around 4 million people scattered along the east coast when America won independence; there are now over 300 million. Technology, diversity, and globalization have changed the national landscape. Our job is to craft policies that protect the essential values of the Constitution and Bill Of Rights in new and very different environments. People of good will can disagree about how to do that –but I would argue that in order to disagree productively and civilly, we have to begin with a common basis in fact and history, and we have to agree on the definitions of the words we use.

For example, I consider myself a capitalist; I believe in markets—in those areas where markets can work properly.

Economists often define a free trade as a transaction between a willing buyer and a willing seller, both of whom are in possession of all information relevant to that transaction.

Understanding how markets work is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.

Teddy Roosevelt reminded us that monopolies distort markets; if one company can dominate a market, that company can dictate prices and other terms with the result that  transactions will no longer be truly voluntary. There are other behaviors that undermine markets: If Manufacturer A can avoid the cost of disposing of the waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal. If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.

Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field.

Government also responds to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” simply doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. (Health care is an example.)

Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.

Economists and policymakers can and do disagree about the need for particular regulations, but they agree that the absence of appropriate regulatory activity undermines capitalism. Unregulated markets lead to corporatism, where special interests can “buy” government regulations favoring them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

Socialism refers to the collective provision of goods and services, usually through government. There are some goods that free markets cannot or will not produce. Economists call them public goods, and define them as both “non-excludable” –meaning that individuals who haven’t paid for them cannot be effectively kept from using them—and “non-rivalrous,” meaning that use by one person does not reduce the availability of that good to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are to have these things, they must be supplied or protected by the whole society, usually through government.

Obviously, not all goods and services that we socialize meet the definition of public goods.  We socialize police and fire protection because doing so is generally more efficient and cost-effective, and because most of us believe that limiting such services to people who can afford to pay for them would be immoral. We socialize garbage collection in more densely populated urban areas in order to enhance the livability of our cities and to prevent disease transmission.

Getting the “mix” right between goods that we provide collectively and those we leave to the free market is important, because too much socialism hampers economic health. Just as unrestrained capitalism can turn into corporatism, socializing the provision of goods that the market can supply can reduce innovation and incentives to produce. During the 20th Century, many countries experimented with efforts to socialize major areas of their economies, and even implement  socialism’s extreme, communism, with uniformly poor results. Not only did economic productivity suffer, so did political freedom. (When governments have too much control over the means of production and distribution, they tend to become authoritarian.)

Virtually all countries today have mixed economies. The challenge is getting the right balance between socialized and free market provision of goods and services.

There’s lots of room for disagreement about things like how much regulation is too much, what level of national debt slows economic growth, what the tax burden should be and who should pay what. But in today’s America, these discussions tend to be all ideology and no understanding—all heat, no light. I wish I had a dollar for every TV pundit who clearly did not understand the difference between the deficit and the debt, or the difference between marginal and effective tax rates. We have people in Congress who quite obviously don’t understand what the debt ceiling is and isn’t.

It’s actually a good thing that Americans disagree—thoughtful disagreements often lead to better results. But it is really, really important that parties to a debate know what they are talking about. That is a lot harder today, thanks to the Internet and the collapse of that quaint exercise we used to call journalism. We live in an era of cherry-picking and confirmation bias—and our preferred realities are only a click away.

At the end of the day, policies based on ideology or wishful thinking just make things worse. And arguing about economics without agreeing on the meanings of the words we use is worse than useless.

 

 

21 thoughts on “The Words We Use…

  1. Excellent,
    ‘It’s actually a good thing that Americans disagree—thoughtful disagreements often lead to better results. But it is really, really important that parties to a debate know what they are talking about.’
    Thanks

  2. I wonder if the Founders were influenced by Adam Smith’s book. It was published in 1775, I believe, so there wasn’t a lot of time for its ideas to be assimilated “across the pond” by the time the nation’s economy was starting to develop outside of England’s.

  3. Excellent. I am going to bookmark this entry in your blog to use as a reference for someone that obviously doesn’t understand the economy, the debt and the deficit, etc. Does anyone have a civics book to recommend that would cover these things in full? Or has the Professor written one?

  4. This is your best ever! I’ll be keeping and using it for some time. Really, this is terrific!

  5. Just wonderful Sheila!!! This is the best summation of the economic realities of this country that I’ve seen in a long, long time. Thank you so much and bravo once again!!! I just wish I could have been up there at Ball State to sit in on your talk and applaud all of what you said in person. You are one heck of a TRUTH teller!!!!

  6. Interestingly, these are all things we should have learned before we left high school. This is the case laid out for the re-introduction of Civics classes. Thank you.

  7. Aging Girl–I have. It’s “Talking Politics? What you need to know before opening your mouth.”
    Georgetown university press. It’s a “mini book”–barely 40 pages.

  8. Sheila – That was a great speech and thank you for sharing it with us. I imagine you made quite an impression on their minds. My hope is that they will remember your words as they witness corporatism and will take action to right the wrongs in the U.S. markets and possibly worldwide.

  9. Side note to Sheila and Gerald Stinson –

    Thank you Sheila for giving Gerald permission to share the name of his blog.

    Thank you Gerald for sharing it and I plan to read your posts in the future. Of course, only after reading Sheila’s first.

  10. Bravo at your macro look at the sound and fury of where economics intersect with government! You nailed it! This noisy intersection was a pre-Enlightenment mess and continues to be one today what with new opportunities to do mischief for profit by getting a leg up on the competition by hook or crook, patent manipulation, monopoly pricing, bribes (aka “campaign contributions”), trashing the environment etc.
    The cognitive brain scientist Lakoff in his book, The Political Mind, deals with one aspect of this continuing understanding or misunderstanding of free market philosophy at its intersection with the public interest.
    As summarized, he notes that government is involved in protection and empowerment of its citizens and then gives us an example. He writes: “Corporations make use of government empowerment more than ordinary citizens. I drive my car on freeways; corporations send out fleets of trucks. I get a bank loan for my house; corporations get loans to buy other corporations. Corporations thus make compound use of government empowerment, and that is why they – and their investors – should be paying more, not less, than ordinary citizens of this country.” (Try telling that to Wall Street or the libertarian Brothers in Wichita!) Lakoff is talking about taxes, of course, but there are many other areas wherein government (via political shenanigans) offers more protection and empowerment to corporations than to ordinary citizens, the latest atrocity being that of redefining corporations as “persons” by the Supreme Court, as in “Mr. Goodyear, meet Ms. General Electric, let’s talk merger. . . .” I understand that as we go along we must redefine the terms and conditions of sustaining a market-based economy in some sort of balance with the public interest and still enjoy some of the blessings of democracy, but I hope that humanizing corporations is as far as we go since at the present and accelerated rate of innovation the next stop of creation could at least theoretically involve only corporations and robots in which humans are mere onlookers and where democratic values, free markets and other such former points of contention become quaint if not obsolete as the tidal wave of innovation takes us into new territory never contemplated by the Founders – or even us. Can’t happen? That’s what we were told about Dick Tracy’s two-way radio.

  11. As you say – >> Terms like conservative, liberal, socialist, progressive get used these days as accusations and insults rather than ways of defining a political or economic philosophy.

    The Socialist Movement was tarred and feathered early on. The formula for the simple minds was Liberal = Socialist = Communist = Lenin = Stalin = Castro, etc. The Socialist were also accused of not being sufficiently patriotic, especially during the era of Eugene Debs. This morphed into the Joe McCarthy song and dance – the Democrats are soft on Communism.

    Growing up as a Boomer the voice of the Conservatives was William Buckley. The Conservative Brand was taken over by louts such as Rush, and the Bible Thumpers. The Federal Government was castigated as a power hungry octopus usurping states rights, that must be starved to death. The one exception was the War Machine.

    Our so called Media of CNN, MSNBC and FOX spend their time bending, spindling and mutilating any semblance of honest journalism to a particular audience.

  12. Louie – Your piece is excellent. Thanks. Try telling a Social Democrat in Europe that communists are nice guys and see how far you get.

  13. No where does your anaysis apply more accurately than in health care. Clearly a social good, our accidental system has yielded the most expensive, inefficient, exclusionary system in the industrialized world. It is a system which results in poor public health care, exhorbitant profits for private insurers, huge bureaucratic waste, convoluted public policy outcomes ( Obamacare), and subordination of real medical needs to artificial financial restraints.

  14. I think that it’s very hard for rational and informed people to disagree with these thoughts but today those people seem sometimes to be outnumbered.

    How did that happen? Exactly as George Orwell predicted it would except for the source.

    We worry about nuclear bombs but our experience is that they are second in power to advetising, brand marketing. Minds can be and are regularly reprogrammed. There are viral properties to the lifeform, computer malware, and memes. They all take on lives of their own.

    What was once thought to be effective campaign practice has escaped quarantine and is consuming the country destroying informed and rational thought.

    We have no vaccine nor immunity. Will it spell our extinction? That’s certainly one possibility.

  15. Thank you for explaining something complex to most of us. I will pass this on, and yes, we should learn things like this in school as a required subject.

  16. Oh my Sheila, are you in trouble! How dare you travel into Michael Hicks territory and preach such heresy to his students. I hope you had protection. I’m sure that you and most of your readers know that Mr. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics at Ball State…and a meme for the state Republican machine. His opinions appear in many newspapers and is an excellent example of what you label as journalistic “confirmation bias.”

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