Zonkerbl wrote:popper wrote:Interesting reading on this site regarding austerity, Krugman, etc. Different perspectives all with some degree of merit. My take for what it's worth;
Is it true that all income derived in our economy has its genesis in business activity and profit? Every federal, state, municipal and private sector employee derives every penny of their income from the private sector. If it weren't for profitable business', govt. could not exist. Therefore shouldn't we all cheer business profit as long as it is earned honestly and with as little harm to the environment as possible?
Shouldn't we extract for govt. purposes as little business profit as possible so it can instead be used to reward worthy employees, shareholders, and be used to expand business operations (thus creating more jobs and more govt. revenue)?
Isn't a big govt., dependent as it is on higher and higher claims on business profit and individual income a drag on the productive capacity of a nation? I could write ten pages of text detailing how govt. discourages business formation? Isn't this the opposite of what we should be aiming for?
When the economy slows or retrenches should we stimulate it by extracting more and more from business and individual income in the false hope that a mindless, faceless bureaucracy, devoid of risk/reward accountability, is better able to allocate finite resources? I shudder to think what will become of us if we believe such nonsense.
Wow, so much to answer to! The answer to this question is basically the entire field of microeconomics.
So this is the neocon philosophy in a nutshell: markets are good, we should always trust them no matter what because what are you, a commie?
It is based on one of the theorems that are only true in extremely restricted circumstances, namely, long run perfect competition. Perfect competition assumes all actors are small, all actors in the economy have instantaneous and costless access to all production technologies, all actions of all actors are instantly observable to all other actors, all transactions are costless, there is no such thing as private knowledge (because everything everyone knows is instantaneously available to everyone else), all property rights are clearly defined and enforcement of property rights is costless, and the consumption of all goods is excludable (you can prevent people from consuming them) and rival (one person's consumption of a good makes less available to others). In the long run, when entry and exit of firms has guaranteed that all firms are operating on the minimum of the average cost curve, then you can say that the resulting allocation of resources is Pareto optimal -- a Socialist central planner cannot reallocate resources in a way that would make anyone better off. In other words, when these conditions hold, you can trust markets.
These conditions NEVER hold. That opens up opportunities for government interventions that can improve on the allocative result of markets. Doesn't, however, necessarily mean that the government has the information necessary to know how to carry out the proper reallocation (that was Hayek's contribution). So the field of microeconomics is largely an exercise in studying what happens when you relax one or more of these assumptions, and whether there's a way for government intervention to improve on the market outcome.
If you relax the assumption of "small actors" you get monopolies.
If you relax the assumption of instantaneous and costless access to all production technologies, you get the lack of unconditional convergence (persistence of the income gap between rich and poor countries) and other things.
If you relax the assumption of costless transactions, you get situations where the original allocation of resources has inertia, which can result in suboptimal outcomes. This is related to the "costless enforcement of property rights" assumption. When it holds, you get the Coase theorem -- no matter what the original pattern of resource endowments, markets will ensure that all welfare improving transactions take place, so you don't have to worry about the original allocation of wealth. When transaction costs are high, or property rights are not well defined or costly to enforce, inheritors of wealth have lower costs of income enhancing investments. Poorly defined property rights are also the root cause of externalities, like pollution and traffic congestion.
If you relax the perfect information assumptions, you get moral hazard and adverse selection, adverse selection being the market failure extant in the health industry.
Goods that are non-exclusive and non-rival are public goods that the private sector has no incentive to produce. The biggest example is national defense. My consumption of national defense does not make national defense less available to you, and there is no way to defend some people but not others.
