2010-02-10

Where we are now in terms of economic philosophy

I just posted this over at a comments thread at Reddit. It is part of a discussion on why socialism was abandoned so quickly by Western nations after the collapse of communism:

Socialism in Western nations began dying off at least ten years before the Soviet Union collapsed. Socialist policies in the US, Britain and Australia (to name just three) were progressively reversed via market-friendly governments.

Part of the reason was ideological. In Britain and the US especially, dogmatic socialism had promised much but failed to deliver. At the same time, economic ideas favouring the market began to prosper.

Meanwhile, In China, the Communists under Deng Xiopeng began Socialism with Chinese Characteristics, which was pretty much a code word for abandoning communism by allowing private businesses.

The problem with what I call "old socialism" is that it made the assumption that the government is better at producing the goods and services people need than the free market is. This got proved wrong when government supported industries - such as coal mines in Britain - ran at a loss for many years and acted to drag the economy down with it.

In its place came economic neoliberalism, which sought to reform "old socialist" policies. This was done by privatizing government industries, corporatizing certain government departments, removing subsidies, tariffs, quotas and other trade barriers, lowering taxation and deregulating certain industries such as finance. Reaganomics, Thatchernomics, Rogernomics - all these variant national economic policies were essentially different forms of economic neoliberalism.

What we're seeing now, though, is the failure of many neoliberal policies. Ironically this has come at a time when market dogmatism has reached its peak. In other words, the exact same conditions that killed off "old socialism" are now present killing off pro-market ideas.

And just as old socialism was dogmatic about the government being the only way to solve everything, so currently are market advocates arguing that the market is the only way to solve everything.

Yet the evidence against this is profound. A deregulated financial market has resulted in the "Great Financial Crisis", while market-based health care in the US has been shown empirically to be less efficient - both in terms of money and outcomes - than the government run universal health care systems of America's allies.

The lesson we must learn is this:

* The government can be very efficient in some areas, and not very efficient in others.
* The market can be very efficient in some areas, and not very efficient in others.
* So let's work out which ones are more efficient. This may mean both the privatization of government industries AND the nationalisation of private industries.

Check out Ordoliberalism.


3 comments:

BLBeamer said...

I dispute that US health care is market based. One of the - if not the most - important indicators of a market based system is that consumers, through their largely unregulated choices, make the decisions driving price and selection of goods.

That does not begin to describe the US health care system

I'm open to the possibility of market failure, but I do not believe that is what the US system demonstrates.

One Salient Oversight said...

One of the - if not the most - important indicators of a market based system is that consumers, through their largely unregulated choices, make the decisions driving price and selection of goods.

Another important indicator of a market based system - if not the most - is the proliferation of private businesses providing goods and/or services and who run at a profit.

THAT describes the US Health care system.

Can you please give more details?

BLBeamer said...

I don't believe that profits are the most important indicator of a market based system. In the theoretical market equilibirium state, the market for a good clears at the price where the marginal revenue = marginal cost.

But since we're on the subject, there are profits and there are profits. "Good" profits are those made by providing goods or services that consumers desire and are willing to pay for at prices in excess of the costs of production.

"Bad" profits are those acquired through non-economic activity. Activity such as manipulation or exploitation of a market through political connections and/or influencing regulation. A good example would be the large health insurance firms in the US. This type of activity is called "rent seeking".

No less profitable, but hardly indicative of a free market.

Consumers have little influence in the setting of prices in the US health care market. In fact, neither do doctors. Commonly, doctors' fees are largely influenced by the Medicare reimbursement schedule. Once it is set, private insurers will base their fee formulas on the Medicare price - either higher or lower but never too far away.

Doctors can and do lose patients by not signing up with a certain company and their "network" because many insurers will not cover costs incurred "out of network."

Interestingly, I read in the Wall Street Journal last year that the segment of the US health industry where consumers consistently express the most satisfaction is the least covered by health insurers: discretionary cosmetic surgery.