Monday, August 31, 2009

Interesting Economic Thoughts...

The title was a subtle hint, but this is an econ babbling post, so be warned, and if this stuff bores you, be skipping on to a different post :o)

I'm still working my way, slowly, through "The Naked Economist." I'm going slowly not because it's a bad book but because 1) I've been busy and 2) I've got other timewasters on board (HOMM2, anyone?). But I finished the chapter on government and economics and found it very interesting. I'm still pretty new at this stuff but I'm going to try to get some of the ideas down here.

The central idea of economics is that in a free market, on the whole any interaction between a customer and a seller will benefit both regarding that transaction. The market will operate in such a way that the consumer gets a good deal and the producer gets a good profit. If the price is too high, someone else will come along and sell it cheaper, and then the consumers will get good prices. If the price is too low, the producer will either go out of business or have to raise the prices to a better price. Sellers are incentivized to find ways to provide better services for less, which then gives the sellers more for less cost. Everyone wins. But when I say "everyone" I mean the buyer and the seller. That everyone.

The devil is in the details though. While the buyer and the seller will win in a free market economy, there are others who are affected by this process, neither borrowers nor sellers, who may not benefit at all. These "other people," neither buyers nor sellers, are called "externalities." To give you an example, if I buy the cheapest battery, and the cheapest battery is produced by destroying the environment, I may like the battery, the seller gets the money, and for that transaction we're both happy. But the environment around the factory is damaged, and living near the plant is now a bad thing, complete with birth defects and cancer. Those who live near the plant, and do not benefit at all, are externalities. Poor them. The environment is probably a good example because you can broaden it - if the environmental cost is such that it is global, than the externality can affect me, the seller, as well. Poor me. The market has no way to control these externalities. There are no controls built into it.

So here is where the government comes in. One of the roles of the government is to watch for and control externalities. In other words, to watch for costs of the free market that are fine for the buyer, and the seller, but bad for someone else. The market works entirely on incentives, and "don't screw the people in the other city/state/country" is not a very powerful incentive. So the government has to impose negative incentives (controls) such as fines, prison sentences, and so forth for otherwise negative behaviors or, conversely, positive incentives such as tax breaks, etc. for positive behaviors. Off the top of my head, affirmative action would be an example of this. Presumably at the time AA was put in place, there was no incentive for employers, educators, etc. to take on minority individuals. If a company started hiring a bunch of minority workers it wouldn't suddenly find itself more profitable. AA was thus intended to incentivize prosocial behavior by requiring it.

As I understand it, economists to not argue over whether the government should ever interfere in the market economy. They argue over where and how much the government should intervene.

So why do I care? I find it interesting because I had always had this thought that economists would be like "free market all the way - rah rah rah" and oppose any government involvement. From my read of this book, the author is not at all what you'd call a leftist, and yet he's there talking about how government does have a role in an economy. Granted, he's also pointing out some ways government involvement, especially poorly designed involvement, can be disastrous but it's a more balanced view of "the dismal science" than I had before.

More to come, I imagine, as I keep reading this crap.

No comments: