Free exchange

Something I always reflect on as someone that studies politics when hearing economists talk is how bloodless it all sounds. It's easy to say that in the long run this or that thing will help the economy and that adjustment is necessary, let the free market do its thing. Politics however, is basically the study of what that adjustment looks like outside the economic realm, and it's rarely pretty. It may be most efficient to let the market run its course and have countries adjust to new economic realities, but for some reason the people directly effected as resources get reallocated don't always take their adjustment sitting down for the good of the country.

Luckily, it has been a very long time since adjustments in the US had real consequences. But these things are always sudden. It's peaceful one day and then all of a sudden there's barricades in the streets and rioters burning the town down around you.

This was inevitable. Austerity by the state always falls most heavily on those at the receiving end of state largesse. And of course they want the wealthy to pay more so they can continue receiving from the state. Covetousness is ugly.

So what's to be done? They could raise taxes and confiscate everything the wealthy have so that there are no wealthy people left, but that only puts off the day of reckoning. What then? Who will they take from then?

Bastiat wrote in the mid-19th century that there are two ways to make a living; you either earn it for yourself or you live from what others earn.

There seems to be an unspoken assumption among the receivers of state funds that the wealthy will always be there to pay any amount that the majority wants from them; the source of funds for the wealthy are like an eternal spring that never runs dry. But history has proven that foolishness wrong many times.

Tzimisces, please show me a free market. I have only read about them in history books.

fundamentalist,

Pure free markets are just another utopian ideology. People being what they are, they can never be reached.

The one thing that annoys me about arguments against taxing the wealthy after a bubble, is that the wealthy are those that likely scored pretty big on the over pricing of the economy... much more than the poor and middle class, so when the economy readjusts, surely those that did well of the over pricing should pay equaly well for the rebalancing.... I don't mean the welathy should take all of the hit, everyone lived large off the last bubble, but to think that the wealthy didn't benefit more is just blindness.

From what I understand, the British gov't is raising fee by a factor of 3!

How would you feel if gasoline were to rise to $9.00 on Jan 1, 2011?

Due to EPA my sewer rates will rise by a factor of 3 over the next 10-20 years. In other words, a 5%-7% rise each year over time.

Why the gov't couldn't raise fees by 20% each year for 6 years is beyond me.

But this is the sort of fun we as Americans don't have to worry about as long as Backroom Deals are made and shoved down the throats of our representatives.

Off to borrow and spend, and never pay back!

Regards

Tzimisces, free markets under the rule of law, as proposed by all capitalists throughout history) are not utopia and did exist in the 19th century and early 20th century in the US and UK.

As a political scientist, following these things for a living and observing Germans from afar (as a German), scanning those same sources (and then some) I can assure you that this accusation of non-existent discussion of European affairs is utter nonsense. I really epected better from The Economist. Don't just cite a fellow blogger. Do the actual scanning yourself and you will immediately see how wrong this statement is. Or, as millions of Germans do each night, just watch the "Tagesschau" - and you will know that the reporting actually does take place. Only of course that the popular reaction is similar to that in Thatcher's Britain when they were being asked to pay without much control over the spending on perceived reckless behavior of others. Maybe something about female leaders being more straightforward about telling it how it is? Just a thought.

Abject, I'm not sure I agree with "the wealthy are those that likely scored pretty big on the over pricing of the economy." It's just anecdotal, but 25 years ago, some neighbor would go out and get a tv and vcr and we all wondered how he could afford that on a cowboy's salary with a wife who worked as an LVN. Today I know similar people with two plasma tvs, plus maybe a boat and a brace of cars. I'm not sure that consumption relative to output was proportionately higher for the rich (of whom I admit I know hardly any) than for the working class. I also doubt that if it had been, the correction would have caused such a deep recession. There aren't very many rich folk to adjust their lifestyles and I'd be surprised if their consumption has changed all that much.

I know there was illegal activity and stupidity among those who allocate dozens of millions to billions, but I still think the story is more plausible that most of us caused most of the current troubles.

fundamentalist,

I see differences only of degree, not of kind. I know less about Britain, but what about US reliance on tariffs for much of its financing? The use of Civil War pensions as a form of old age insurance, extending to many dependents removed from the initial recipients? US support for the transcontinental railroad? Support for both canal building and railroads in general? Of course, since the US had a huge amount of land to sell off it had less need to consider trade offs than afterward. Land sales provided a strong source of revenue and a way to alleviate a great deal of poverty since there was always migration west.

I see more of a correlation between the size and scope of industry and government intervention in the economy. For most of the 19th century few businesses, except railroads and the great chartered companies whose business was mostly overseas, were of great size and the economy instead seemed to be dominated by relatively small businessmen which required little regulation. As the size and complexity of industry increased, starting with the railroads, demands for state intervention rose. But I see this as a constant, where industry reached a certain size government began to intervene. This certainly happened with the chartered companies, Britain got ever more involved in the operations of the East India company as its influence grew. I see the extent to the market as free as one being strongly correlated with the size and complexity of business but being ever present wherever there were businesses of enough size and power to attract the attention of the people.

Also, since the largest sector of the economy remained agriculture, my impression is that most government interference in the economy had to do with agricultural questions. In the US, because of the abundance of land, this was relatively easy and mostly involved the various homesteading acts. In Britain, I believe there was rather more diversity. But it seems natural that people's demands for the government to interfere in the economy will be proportional to the amount that individual sector influences them, so as the influence of corporations and industrial activity has increased so has calls for them to be regulated. I just don't see any sharp breaks in people's demands that the government intervene in the economy, I see more of a relationship between market exposure (since if you can fall back on subsistence activities the economy seems less relevant), complexity of the economy, and the influence of wealth in other areas of society and the demands that the market be regulated. I don't think that earlier centuries were different in this regard, the difference was that more people had access to subsistence activities, the economy was simpler, and the largest business activities had not yet gained their modern influence, especially since agricultural issues continued to dominate most people's concerns.

It is not good to my heath to burn with indignation on this nice and sunny Sunday here.

Well, Morningside could soon be as threatening while Wall Street will be full of big smiles at the same time as their respective counterparts in London have been, as a macroeconomic result of the QEs. This kind of segregation of happiness will be soon ubiquitous in the world now that the Fed is still being haunted by Monetarist dogma, which has driven both Classicists and Bastard Keynesians overconfident for the last couple of decades, to finally recklessly expand credits to redress the imbalance or fill the demand-supply gap, both of which are expected to be further created due to austerity and low-key animal spirits.

By the way, Prince Charles is rather unpopular exclusively because he is not as good-looking as his mother and elder son. Although he may have been cold to his ex-wife, he would be regarded by the public as a sufficiently moderate and qualified royal member if the society had developed as conservative as when his mother was crowned. Only is he a victim of the zeitgeist of this material world in which the royal family has lost the mysterious veil necessary to maintain a monarchy (probably for ever). That’s why Brits have increasingly been talking about dethronement these years. This poor phenomenon is not irrelevant to the decades of socioeconomic development explained in the first paragraph.

The expected mayhem in Britain and other states in Europe and North America in the coming months or years is a natural consequence of New Classicist-style order of austerity which largely neglects praxeology. Facing public anger soon, the policymakers will shift their choice from the Classicist policy to an American Keynesian one. Their tentative solution will be a 'synthetic' policy of fiscal austerity plus monetary expansion at the same time, often added by a tax reduction on the incomes of what they wrongly regard the middle class. (The beneficiaries are actually upper-middle like employees at a bank, a much smaller chunk than the lower-middle people like owner-manager of a small factory). By this macroeconomic policy-mix is how a regime ceases, and history tells us that there has been no single exception. This time I would predict the end of the post-Bretton Woods regime.

It is easy just to call a natural human reaction such as a student riot or diplomatic hubbub among the euro-area states part of ugly politics while a calm dialogue would be still favourable. To me, it is not these reactions but the recent development of macroeconomic policy that is absolutely ugly. It is no different from bread and circus.

I think it is high time that economic journalists like Author R.A. realised that it is their Monetarist bias that aggravates the unfavourable socioeconomic development unless they are, realising in mind by themselves or not, hidden ‘market communists’.

Now I will be going to the gym in my neighbourhood to smack and kick the sandbag.

(By the way, the reason why Germans are victims of policies to keep them ignorant of macroeconomics and finance and easy to rule is that they have not a newspaper that could rival in quality to Gazeta Wyborcza. We are so lucky living today that we can read the web version of the Polish newspaper and its past articles by using the Google translator, by which you would understand the secret of reason why the Polish economy was able to avoid a serious recession this time).

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@Tzimisces

Public consensus, man. Public consensus. More serious efforts to build a public consensus for putting right the public finance that is inevitably attached more or less with pain. Yeah, wheat and beef become vigorous at monetary expansions: As Paul Krugman declares, Americans are all Polish. (The world's top expart in trade and economic development [but not necessarily in macroeconomics] has finally come to notice the stunning similarity between the United States and the perished Polish-Lithuanian Commonwealth, at first in policymaking and seemingly gradually in economic structure). I'm on your side, bro. You'd know it if you could click my pseudonym and read my past posts. Big wetty kisses.

Tzimisces, I think the differeces in degrees added up to a difference in kind between the US economies of the 19th and 20th centuries. Free markets require a government that enforces the rule of law and punishes theft and fraud. And that requires taxation. Only the Rothbardian branch of liberarians want no state at all. Mises called the state a necessary good for free markets. But the state should be limited to taxing for its legit purpose, which is the protection of life, liberty and property. Was the 19th and early 20th century absolutely perfect in that respect? No, because humans aren't perfect. Compared to the later 20th century, did 19th and early 20th century markets approach perfection? I think they did. In the 19th century government support of business such as railroads was the exception; today it is the norm.

@fundamentalist

It is because since marginal utility took the place of surplus value as the crux in interpretation, the modern classicist schools, whose macroeconomic policy aims to achieve and maintain the general equilibrium, have been developing virtually as forms of socialism. (The government support of laying railways seen in the 19th century America was nothing to do with Keynesianism). Moral aspect aside, the studies by Lange and Kornai, theoretically supported by Arrow and Debreu who proved the existence of general equilibrium, showed that the form of socialism – market socialism – was theoretically feasible but methodologically unfeasible, because the equilibrium was impossible to observe by statistics, like Schrodinger’s cat. The classicists in the capitalist bloc have still been trying to find a way to attain the equilibrium by statistical methods. Recently they presented the New Classical and DSGE methods, applied their policies and found they had failed to attain the equilibrium when the financial crisis took place a couple of years ago. The 19th century markets approach, when each bank used to issue bank notes at its own discretion until the panic happened in London, was an old style of classicist market approach. It is to deny Keynes, who insisted that the situation where unemployment exists at some level is the norm.

On the other hand American Keynesianism has been developing based on Hicks’ interpretation of the General Theory, largely ignoring the uncertainty that is neither apt for calculation nor statistics and misinterpreting ‘animal spirits’. The bastard Keynesianism has sometimes been regarded as a form of socialism. Without considering that kind of uncertainty or animal spirits as drives for economic evolution, its econometrics would naturally look like socialism, because in that case it would only be about market intervention.

The natural consequence is that, looking around the real economy run by human being, the discretional role of the government is as crucial as what you call the rule of law in your comments. The current economic policy seems to have been either pendulumming between classicism and bastard Keynesianism or opportunistically compromising between the two different notions of general equilibrium and effective demand. When people regard the economy as stagnating, the plausible result is always the policy-mix of small government and monetary expansion. But the problem is that the small government policy means fiscal austerity when technocrats and investors see it and tax cuts when taxpayers see it. Naturally, the policy-mix contains a contradiction – on balance sheets – in any case. When the policymakers aim at either attaining the equilibrium or raising effective demand by their market-interventionist policy:
1. With fiscal austerity plus monetary expansion, the central bank needs to fill its balance sheet with more debts as one offsets the other.
2. With tax cuts plus monetary expansion, the government has more debts while the central bank needs to fill its balance sheet with debts (but less than the former case – for the time being).
In both cases, either the government’s balance sheet or the central bank’s balance sheet is filled with debts correspondingly.

fundamentalist:
So you want to go back to the times when the Army broke up strikes for big business? And when Pinkerton goons murdered people(who wanted better wages and work conditions) and could get away with it?

Phil, wanting to return to the economic freedom of the 19th century does not require that I embrace all of the evils of that period, such as slavery, as well. It's a false dichotomy to say that everything in the 19th century was either good or evil. Some of it was good and some wasn't. As for the Pinkertons, every owner has the right to protect his property, even from union thugs.

@Doug,

It is less about who is at fault (everyone, with a few standouts at each extreme), more about, when looking at how to pay for the resulting mess, how to aportion the blame (and pain) fairly.

To my thinking, Wealth is a very good indicator as to how well a person has benefited from being the member of society (you cannot generate wealth in a vacuum) those that do well, gain wealth, those that do poorly lose wealth. Those that gained in the bubble and got screwed in the crash are no longer (as) wealthy, those that did well in the bubble and missed the crash are still wealthy. The bubble was an aberation that corrected and is now being paid for and those that are wealthy benefitted for the aberation more than from the crash (yes I know there are those that had wealth independent of both but unless they kept their money in a mattress, they were still part of the game)... I therefore see no problem with placing a little more on the wealthy... certainly not all of it, but they definitely have their fair shar to pay.