Price discrimination, price gauging, predatory trade practices etc. are wrong. Always wrong.Actually all these practices are hailed as progressive steps when undertaken by various Government agencies. They are denigrated only when corporations engage in them. Even then, there are very strong evidence that markets tend to correct themselves beautifully even when corporations indulge in such activities.
Opinion poll after opinion poll reveals that politicians are ranked lower in terms of trustworthiness than CEOs and entrepreneurs. Yet people tend to believe that the very same politicians can become beneficent and altruistic saviors of the oppressed when they form a mysterious entity called the Government.
Move over Freakonomics, Freedomnomics is here. In a lucidly written text, economist John Lott explains why free market works so well. A section of the book does deal with rebutting some of the ideas put forward in the famous book Freakonomics, but this book is much more than an empty exercise in polemics. John Lott provides interesting examples, lots of them.
Among other things he explains why the academia is predominantly leftist and always roots for a big Government. Freedomnomics explains why there is a perverse cycle of justifications given to over zealous Governments attempting to correct real or imaginary market failures, which they end up making even worse.
A must read for free market believers.
15 comments:
I'll admit that in general, I have a cautious approach to free-trade (different from blindly opposed to it), but I'm curious to know how disasters and injustices like Bhopal-Dow-Union Carbide, Enron scandal etc. (or any other corporate scandal to fleece the public and pollute the environment) will be handled under John Lott Jr.'s theory? What does he say about corporate responsibility and accountability? In neither of these instances (UC, Enron), was the government stopping these corporations from righting their wrongs. And, I'm not excusing the Indian government (or governments in general) here.
My point is that even with (corrupt) government oversight, the corporations run rough-shod over people's rights, so how in the absence of a government policies (free trade) will they act responsibly? What's their incentive? As far as I know, the theory of economics doesn't really attach any value to justice and human rights, or pollution (as long as it is not in my system) when considering the bottom-line. Or does it?
-Amit
Among other things John Lott talks about the economic value of reputation which is completely ignored by socialists. The capitalistic economies gave birth to the current avatar of financial systems of share capital etc. Because of this corporations have become almost like individuals (and indeed law treats them as such), albeit ones that never die, in theory, owned by many individuals. The CEO is selected from a pool of skilled people.
Because of this the owners of the corporations can make sure that the CEO is given the correct incentives so that he looks for long term profitability rather than short term gains. Losing ones reputation or doing corporate harakiri is certainly not in the minds of the owners.
You will notice that American corporations are far more "socially responsible" than companies elsewhere in the world.
Dow persists in their opinion that the accident happened because of sheer bureaucratic delays which prevented them from operating the plant the way they wanted to. Enron executives continued to claim that what they did was perfectly legal. Indeed there is no law against high leverage as such. Much of the losses to individual emloyees was highly exaggerated - reported in newspapers in terms of drop from peak value to post collapse value rather than actual money put in vs. market value. Very few people put a lot of money in 401k anyway, there is a ceiling.
We should also look at the aggregate effect rather than looking at individual examples. Look at all the socialistic economies in the world as opposed to those based on free trade. Roughly one third of folks in India live a life below human dignity, facing all kinds of abuse every moment of their lives.
Ah, but you can't really place a monetary value on "reputation" when calculating profits & losses at the end of fiscal year, can you? A corporation could have a solid reputation, but if it shows loss, the reputation is not going to make a difference to the share-holders. :)
In many ways, the reputation is a function/result of profit-loss, not independent of it.
And, I'm not so sure that I agree with your statement that American corporations are far more "socially responsible." The facts are not on their side and I can give you many examples of CEOs who have not acted in the best interests of the company. I'm basing my opinion after watching documentaries like "Corporation", "An Unreasonable Man" and "Enron: Smartest Guys in the Room." I'd also like to point out that many of the corporations today are trans-national rather than American.
I've checked out websites from both Dow and Bhopal.net. Who knows what the truth is, but it seems to me that the way UC acted is not how an innocent party behaves - any reasonable person would agree to that. Of course, Indian government is complicit too and totally ignored the victims. Jab apne hi chura bhonkte hain to parayon ko kya dosh dein. Imagine something like that happening in, say, Italy (another country w/ corruption *similar* to India) and I can guarantee that the results would have been dramatically different. But, we're getting OT here.
I'm not sure what you mean by looking at aggregate effects. If you mean that for the long-term benefit of a country, it is fine to ignore injustices, then I disagree and am of the opinion that justice & human rights are inviolable (that's the ideal we have to aim for - I'm aware that in practice, we fall short), and not something to be sacrificed at the altar of free trade. And many of those abuses that you mention come from the government pandering to corporations.
Don't know if you've read a book called "The Ecology of Commerce" (by Paul Hawken) but it's a good one and would be right up your alley as it deals with trade and economics. I'll check out the book you mention - I'm sure he has some good points/ideas.
-Amit
Could you place a monetary value on "brand"? Under limited circumstances yes, it does show up on balance sheets as goodwill etc. There are also ways to assign values to brands by using benchmarks and comparables. However, you simply can not arrive at exact numbers given that hundreds of billions of dollars if not much more is spent annually in various brand building measures. Reputation, just like brands, has economic validity. If a corporation loses its reputation, it stands to lose big. Some examples: product recalls, lawsuits, allegations of human rights violation in China etc. The point is, corporations do value reputation. But socialists pretend that economic transactions are one off - caveat emptor. This is simply not true. As a matter of fact, the larger the corporation, the more concerned it is about loss of reputation.
I don't think we are on the same point of reference when I said look at the aggregate picture. Law of the land is inviolable and so is basic human rights. but using the Enron example to knock free market economies is akin to using life stories to justify reservation.
The larger question is should India move towards the right. I believe the answer is a resounding yes. The comfort level with the position of the sliding bar is contingent on individual value judgment. As far as we are concerned, it is all the way, towards the right of course.
I'm not a big fan of labels or ideologies like left, right, socialism, capitalism etc. (all have their pluses and minuses), but if free trade helps India lift its citizens out of poverty while:
1. not compromising human rights,
2. not creating new injustices,
3. not destroying ecology, and
4. using renewable and sustainable energy sources,
I'm all for it. :)
-Amit
If it was just one example of Enron, it would have been a non-issue. And, I never said I'm knocking free trade. If you read my messages, I mentioned "cautious approach." I simply gave you examples of relevant issues that raise a red flag based on my experience and what I know.
-Amit
Barbarindian,
John Lott is a crank. Check out scienceblogs.com/deltoid for more on this crackpot's stupidity. His regression modeling is severely flawed and his grasp on quantitative matters is superficial. American corporations are socially responsible because the law deters them from acting otherwise. Stiff jail terms and exorbitant fines await those who cheat investors. and the laws in turn are framed by legislator who are accountable to a vigilant public. I am one with you in your contempt for socialism. But you alone are embracing the wrong alternative, robber-baronism.
Paul Krugman thinks Milton Friedman was a phoney. So? You are being very unkind to John Lott based on highly one sided views.
Robber baronism is a better alternative than Robin Hoodlamism ala Eliott Spitzer.
In any case, we intend to stay away from politics of another country. We just take the economic principles and leave the politics behind.
In any case, we intend to stay away from politics of another country. We just take the economic principles and leave the politics behind.
So, tomorrow, if OBL starts singing the praises of free-market and comes up with a new theory on it, you'd be all for it, right? :)
-Amit
Barbar,
That's right. Milton Friedman is the Amartya Sen of the right. Paul Krugman did a great job taking the guy's sham assertions apart. Friedman's work was done by the '50s after which he spent all his time delivering tall talk - foreshadowing Amartya Sen who is in terms of rise, eminence and decline about a decade behind. The US provides us a model worth following where an accountable government, an aware citizenry, and a well-regulated but free market combine to produce beneficial outcomes. All those things that the likes of John Lott and Friedman enjoy have come from public investment, infrastructure, healthcare, food surpluses, education, law enforcement etc., In India we have its mirror image In fact in India I am all for shutting down entire branches of the government, say by abolishing entire ministries and departments. But that's a bigger story for another day.
Robber baronism is a better alternative than Robin Hoodlamism ala Eliott Spitzer.
And why is human mind only capable of presenting this as a choice between only two options? It's either-this or-that - aren't there many other choices in-between?
-Amit
Let's not get too emotional. As I understand, most top economists, both on the left and right consider Friedman a top notch contributor to the science of economics. Krugman is yet to prove himself.
Milton Friedman ushered in a new era in economics which was decidedly away from Keynes. Note that the man himself did not suggest Governments stop all welfare projects. He just liked different methods, for instance vouchers etc. Even today America spends about $12K per kid per year in education with what dismal results! A voucher would be better. At that cost you can send a kid to the top private schools.
Krugman's principal criticism about Friedman are two (per one of his latest article):
a) Friedman's main idea of monetary policy (as opposed to fiscal) is a failure
b) Friedman became more of a politician
Well, guess what, the US and indeed most of the modern economies use monetary policy these days. You don't see US governments change tax rates or issue bonds to do direct fiscal intervention ever few months. You do see them change the Fed funds rate.
About politics, well, I think Krugman is being hypocritical. He is far more politically involved that Friedman ever was.
Barbar,
Wrong again. Monetarism is dead. It never worked, and never can. Friedman did some good work on consumption, based on the rational expectations model. He spent a lot more time shilling for dubious causes. The pure sort of monetarism that he advocated is so silly and stupid that no one except a tinpot dictatorship will ever use it. Fiscl intervention is a fact that can't be wished away. Every government does it. There is no better example of fiscal intervention in recent times than the Japanese revival and the Chinese surge. Keynes rules. Friedman's entire corpus of scholarship is worth little more than a proofing error in Keynes's writings.
That's a bold statement pal. While Fiscal intervention can not be wished away for obvious reasons, most Anglo-Saxon economies use monetary policy as the major tool to control economic cycles. US and UK (most of Eurozone) have predominantly monetary policies. You can not wish away the fact that the Fed funds rate have been adjusted many more times than tax rates.
Yes, Asian economies are a different story. Most are in a hybrid model.
Can India immediately move to a pure monetary policy based model? Doubtful. The Reserve bank is playing all sorts of games as it must. Those economies where there is a stronger need for control by the Government require more fiscal intervention. Think of India. The FM is trying to have his cake (high growth, more FDI) and eat it (currency appreciation control, inflation control, Aam Aadmi related stuff) too.
So under free trade, incidents like these (http://news.bbc.co.uk/1/hi/business/6925397.stm) won't happen, right? Or maybe it was government intervention that actually forced BA to do this. ;) :)
-Amit
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