All,
I am trying my hand at refuting Krugmanite responses to the following article:
http://online.wsj.com/article/SB10000872396390444100404577641280041366306.html?mod=hp_opinion
The specific comment to which I am replying is as follows:
"I’m late to this party, but I think Kessler attempts to make his case with half-formed arguments and tired talking points. First, the example of Henry Ford: if taking a long term view of the economic impact of Ford’s strategy, the two events described essentially happened simultaneously. Productivity and wages are necessarily correlated; however, in this case you can’t infer causality. Moreover, using this one example to discredit the totality of the current administration’s economic policy is specious. Second, the extension of Hayek’s "overcoat" example to the purchase of Chevy Volts is a massive leap that ignores the positive externalities associated with the purchase of electric cars. The argument that only the wealthy know best as to how to allocate investments for the good of society is too often repeated. If we assume that the wealthy are naturally rational and self-interested actors then it follows that they will put their money where it benefits them the most – this is not always a net positive for the domestic economy."
My reply:
"The point that I think the author wants to make is that an economic boom resulted after Ford (and others) introduced the assembly line because the products that they introduced to the marketplace allowed many sectors to increase their efficiency. Whether increased productivity preceded wages increasing is irrelevant to this point. Even if wages had not increased, the plethora of things that were being produced is what led to an increased standard of living and helped spur economic growth. High wages without anything to buy leaves a person no better off. It is productivity that leads to economic growth in this way, and I believe this is what he is trying to say that the administration does not understand.
The overcoat argument is an example of the unintended consequences of meddling in the marketplace and is better illustrated with the ‘broken window fallacy,’ in my opinion. Regardless, the point is that subsidizing one sector will result in channeling of capital (ie. money) there at the expense of unidentifiable other sectors. To apply this to the Chevy Volt, if the Volt is so great and people need cars so badly, why is the government having to subsidize them? They’re not being purchased without subsidies, meaning that there is clearly a better option for the consumer (Nissan Leaf, perhaps?), which will now no longer get the consumer’s money. If the Leaf is more efficient and less expensive than the Volt (which I don’t know, but for the sake of argument), the consumer can spend less money on the Leaf and then do something else with his savings. If interest rates weren’t being manipulated by Chairman Ben, perhaps our consumer could save that money for later use in a bank account. Those funds could then be lent out to an entrepreneur, who could produce a product and create jobs. Instead, our consumer is failing to maximize the use of his money as a consequence of the subsidy. This is the misallocation of which the author speaks.
The only comment in this article that I saw pertaining to the wealthy being better decision makers about allocating capital is that they do it better than the government can. There is no mention that this is for the good of society. The point of having a business is to profit (your business may aim to benefit society in some way as you see fit, but profit is necessarily your primary goal...otherwise how will you grow your business? Going BK will certainly not help you achieve your goal of benefitting society). So long as this profit is acquired though mutual agreement of seller and buyer, I see no problem with this motive. Certainly, fraud, theft, extortion, etc should be prosecuted (which the current administration will not pursue...John Corzine, etc). The good to society comes from productivity (again, ‘stuff’) increasing standards of living. And those $100 million donations from Les Wexner types don’t hurt either."
(I'm a medical student; our med center was recently renamed after Mr. Wexner for the above-mentioned donation).
Any thoughts about the coherence/correctness of my reply would be greatly appreciated, if for no other reason than to further educate myself. However, I would like to make an emphatic refuting argument. Thanks in advance!
EDIT: it is clear to me that my opponent does not understand that the author is referring to REAL and NOT nominal wage rates. I have revised my response accordingly:
The point that I think the author wants to make is that an economic boom resulted after Ford (and others) introduced the assembly line because the products that they introduced to the marketplace allowed many sectors to increase their efficiency. High wages (real or nominal) without anything to buy leaves a person no better off. It is REAL wages to which he is referring, ie purchasing power. Even if nominal wages had not increased, the plethora of things that were being produced led to an increased standard of living and helped spur economic growth by increasing REAL wages. It is productivity, which reduces scarcity, and subsequent increased purchasing power (ie higher REAL wages), that leads to economic growth in this way, and I believe this is what he is trying to say that the administration does not understand. Furthermore, with all due respect, I’m not sure how this can be logically viewed in the reverse order, especially bearing Occam’s Razor in mind.
Again, critiques of my interpretation are welcome.
The problem of bureaucratic allocation of resources either directly by stealing the end products of producers or indirectly by stealing money and competing with consumers not only has unseen effects on what the loser in the transaction would have done but also the loss in the ability of actors in the economy to perform "Economic Calculation". The bureaucrat bypassed the pricing system by using a subsidy to pay for the coat. So scarce resources WITH ALTERNATIVE USES that could have performed a more demanded function went to supply the coat and were not available for use. Of course in the case of the coat the effects of poor "Economic Calculation" were not felt, but the Vold on the other hand has effects that are felt by consumers as those scarce resources to produce the Volt could have been used to make cars even cheaper or in some other way that some entrepreneur can only dream about.
The real problem with the opinion piece is what it does not say. It mentiones Obama and his economically ignorant cohort but does not mention anything about the economically ignorant Republicans. Voters of course having experienced the "Bush Free Market" for 8 years and have nothing but piles of new regulations on investments and corporate governance, huge deficits, two wars, an out of control security state and unhappy voters.
To be fair the author should have described the socialist orientation of Bush and his ilk as well.
Bogart,
Thanks for your reply. I appreciate the clarity with which you describe the problems of gov allocations. I did edit my response to my opponent quite a bit from my original post here, mostly because I myself had to reassess what I thought the author was trying to say. The article was not well written and did not make the intended points, in my opinion, and I wonder if Kessler himself does not fully understand the concepts behind what he proposes. There is so much to learn about the market!