Reinvigorating the most important battle in economics
palladiummag.com
palladiummag.com
Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.
In a free market, when a business contracts for services from another business, it is motivated by value received and price paid. When the government contracts for services, price and value are of much lesser concern. The bureaucrats negotiating the contracts have little care for what it costs, whereas political and social concerns are paramount.
It's not in the least surprising that privatizing who provides government services does not result in cost savings.
The problem is that nothing is the “same thing as a free market”. Free market don't exist in the real world, and the market forces are way less powerful than what we would like. They are almost always dwarfed by other forces (transaction cost, network effect, economies of scale, and information asymmetry for instance).
Remember, the free market model comes from an era when chemistry was modeled with the 4 elements !
Those are all free markets, too. Consider information asymmetry, for example. The less I know about something, the riskier it will be for me to buy it, hence the less I am willing to pay for it.
I.e. information asymmetry is called risk, and is accounted for in the pricing. Companies are incentivized to reduce risk for their customers, because then they can charge a higher price.
I fail to see how the age of the model has anything whatsoever to say to its validity. Not everything old is stupid; not everything new is right. If you want to disprove the free market model, you have to do a lot better than pointing out that it's old.
It is true that perfectly free markets don't exist in the world. That doesn't mean that the model isn't useful as an approximate ideal.
[1]: crisis for starter…
My prediction has never turned out to be false. It's a useful prediction.
The problem is some combination of corruption and regulatory requirements. If the bureaucrats write the contract in such a way that only one company can satisfy it, that company has no effective competition so they don't have to compete on price. Same thing if the contract requirements, or the paperwork required to enter into the bidding itself, are such that smaller entities need not apply and you again have insufficient competition to drive down prices.
But none of that goes away by bringing the project in house either, you just trade corruption and high costs by contractors for corruption and high costs by public sector unions, and in that case there is explicitly not even the possibility for competition.
So you still either have to solve the corruption and bureaucracy somehow (effective method unknown), or move the project entirely to the private sector, e.g. by using the money instead to make tax cuts for regular people or transfer payments so that instead of government housing projects you leave people with the money to buy market rate housing directly, or whatever else they need.
The fact that it's a natural monopoly makes it susceptible to a lot of the same problems as a government, but making it an independent entity actually mitigates them somewhat by reducing the size of the bureaucracy. One of the big problems with elected governments is that the Republican wants to install a corrupt transportation board and the Democrat wants to install a corrupt school board and you have to pick your poison. If you get to elect the directors responsible for local transportation separately from the directors responsible for local schools, that doesn't happen as much.
It also helps quite a lot to move as much of the spending as possible to as local a level as possible, because then you don't get wasteful pork motivated by a desire for inter-region wealth transfers.
If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument. Coming up with an alternative scheme is probably the easy part. Agreeing on a new standard would be much harder.
Consider also that those millions of prices are also changing, often rapidly.
The problem is that, even within mainstream economics, we know market prices aren't correct. Pricing externalities is something pretty much all economists can get behind, and that's just the beginning. Does anyone really believe health care prices are correct? How about all the other subsidies? Asset prices for things like startups are even worse.
In areas where there are no market prices or the market is obviously artificial, price and value become nebulous. Without any objective standards of value, what things are worth becomes a matter of opinion and politics. I am pessimistic on there being consensus on a better way of understanding value any time soon.
More likely we will muddle through with patches to the system we have. Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
Essentially if you knew that and that it was wrong then it would lead to massive arbitrage opportunities.
Personally I believe that treating value in terms of "should" is asking the wrong question. The actual questions are chains.
* What is the current production cost? Can we do better? * What does it cost to produce production if we can? How long does it take to get it producing? * Can anything substitute for it acceptably?
Also, focusing on cost ignores markets where the marginal cost is nearly zero and price is set in other ways.
Yes. Market clearing prices are set by the intersection of desire/need and scarcity.
Health care prices can be virtually as high as you like if you can make health care scarce enough, because pretty much everybody wants to live.
The greatest profits are usually found where scarcity meets desperation.
This is also why most large corporations spend half of their time trying to tweak the desire side (advertising) and the scarcity side (market manipulation/intellectual property/contractual exclusivity/lobbying) in a bid to secure margins. De beers is probably the clearest example of success in these endeavours.
Everybody needs food, too, but food is as cheap as dirt.
Like oxygen.
I can grow food in my back garden. I can't grow medical care.
Because it's illegal (an awful lot of drugs are plant based).
Chinese history records that the premodern government was often suspicious of market trade for a pretty interesting reason -- when a region experienced famine, the market directed food away from the afflicted region. [1]
The problem, of course, was that in the premodern context, what most people produced was... food. A famine meant that everyone needed food, but it simultaneously meant that everyone had just been impoverished, such that there wasn't much profit available to be had in selling them the food they needed.
[1] It goes without saying that they were also suspicious of market trade for the standard other reasons.
It's good to avoid environmental degradation but the prices we use to do that are going to be arbitrarily set by government.
It's a bit worse than that because cost, value and price are all different things.
The amortized cost of making water available from the tap is pennies per gallon. The value of water is nigh infinite because without it you die. The price is presumably somewhere between those two values, but it could be anywhere -- an efficient water company might charge close to the cost but a robber baron with a hard monopoly on water might charge close to the value. The market only tells you the price, not the cost or the value.
In a lot of cases it doesn't even tell you that. Consider what happens when a person spends time on a hobby. The cost is not zero, the value is not zero, and there is no price. Even more complicated, suppose the hobby is writing free software. Then there is no price (or it's zero, which isn't very informative) but you have value being derived by people all over the world, who may each value it in a different amount.
> Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
A carbon tax is definitely about pricing an externality. A UBI is kind of the opposite. It's basically admitting that we don't know how to value everything correctly so instead of that here's the money, go choose what you need for yourself.
https://www.amazon.com/Value-Everything-Making-Taking-Econom...
Likewise the public sector section is annoyingly simplistic in that it doesn't grasp the difference between neccessary and sufficent in creation. Research certainly does give major dividend when it is pulled off but it also requires utilization.
I am not sure if the actual book addresses it better but any refusal to acknowledge the complexity and tries for a simple one size fits all is frankly insane.
Ricardo's reply was that the precondition to a commodity having value is that it is firstly an object of demand. Smith's, Ricardo's and Marx's theories of value (the commonalities of which tend to be overstated, even by the likes of greats such as Samuelson) all describe the case in which if I decide to make a product and nobody (or not enough people) want it, this leads to my realization that what I've been doing is useless and subsequently moving my capital elsewhere.
I think Carchedi and Kliman defend Marx's version of the "labour theory of value" quite well, as do Shaikh and Tonak on empirical grounds, and from an opposing perspective Dumenil and Levy do as well. Others, such as Moseley and Patrick Murray, relax their conditions a litle and argue that it is a mistake to apply the theory to individual commodities, rather, it can only be applied to "aliquots representative of the lot".
I have a comment here with some (slightly outdated) information as to the status of the classical (mostly Ricardian and Marxian) theories of value among the people who still study it (usually heterodox economists): https://news.ycombinator.com/item?id=18490388
(Obviously I'm disregarding all the derivative concerns that inevitably would arise from introducing immortality. After all, it's simply one possible example of a vastly undervalued innovation.)
”It's time to retire metrics like GDP. They don't measure everything that matters time to retire metrics like GDP. They don't measure everything that matters”
I had to independently go read Hayek, Marx, Rothbard etc...and at the time there really wasnt any research that attempted quantifying value or mapping preferences to anything measurable.
So I'm glad to see this line of study come back into the discipline.
If I sell you something does that count as part of GDP? If I sell my labor to a company does my selling of it become part of the GDP? Then the company sells the product I produced for it, is that added to the GDP as well?
Or is it only when a company sells something that it is counted as part of the GDP?
E.g. in your example, see the Value-added approach: https://quickonomics.com/gross-domestic-product-gdp/
But so then if I produce nothing but just sell something at profit which I already have is that part of the GDP?
If the value of my stamps-collection increases and I sell it at considerable profit is that an increase in GDP?
The US is an extreme example of a system that optimizes totally for choice...and it achieves that aim. The UK is an extreme example of system that optimizes totally for access. They both achieve their aims but there is a necessary cost. The most successful systems are mixed ones (Mazzucato is prone to make extremely reductionist statements about this: the private sector has this disadvantage, the solution is all public...in the UK, we know this doesn't work...we have tried it).
I'm not sure this is true, or at least, I don't understand what pre-requisites for this to be true the U.S. posseses. Insurance is not allowed to trade across state lines, the private marketplace has a small selection of plans, most people get their insurance from their jobs meaning they only know the details of their medical plans AFTER a non-trivial time down payment (in other words, the transaction costs are high)
I think the criticism that the U.S. system doesn't really have that many positives is a fair enough assessment.
Have you been to a place that doesn't optimise for this? The US is one of the only places in the world where if you are sick, the medicine (if it exists) is 100% available.
I have a relative who lives in a place that doesn't have this aim...she is sick, medicine exists but "policy" is not to cure people who have that illness because the return on investment isn't high enough...in fact, she can't receive treatment at all for it outside of primary care. This happens quite frequently with cancer/epilepsy outside the US too...the medicine exists, you just can't get it...
...and you are complaining about only having a "small selection of plans"...must be nice. Try selecting from one plan that might not cover you when you get sick (and if you get very sick, there might be nothing beyond primary care i.e. your local doctor who isn't a specialist).
1. Modern economics doesn't try to define "value" objectively. Value is whatever price the market is willing to bear. This logic fuels speculation bubbles.
2. The finance industry is a huge part of a modern market economy. But what value does it provide?
3. Public spending is behind most fundamental scientific research: "research has shown that two-thirds of the most innovative drugs (new molecular entities with priority rating) trace their research back to funding by the US National Institutes of Health."
4. Public spending grows the economy. The effect multiplier is 1.5.
That's the big question. What gets measured?
Capitalism optimizes for - something. And what it optimizes for matters. Think of the "free market" as a system for evaluating an objective function. You get what you optimize for. That may not be what you want.
"Externalities" are not in the objective function, which is the cause of many problems.
Her conclusions also tend to be far too simplistic. The reason why the UK has moved to using the private sector more is because the other way was bankrupting us. She seems to believe that the public sector can innovate...okay, where is the evidence of this? The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
Well, she wrote a whole book about it, she's not just asserting it. The public sector played a huge part in the genesis of the Internet for one thing.
>The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
But another pretty critical point of that book was that our public conversation is inhibited by the extremely limited vocabulary we use to describe it. Is a defence contractor really part of the "private sector"? Is a NASA engineering team part of the "public sector" the way an employee of a mail sorting centre is? What about an academic working for an old school monopolist like Bell? Ok, fine it was privately owned so if you want to use a crude and almost useless private/public sector split it is very easy to say "private" but it's not private sector in quite the same way as a local shop is, is it?
And my exact point is that there is a distinction between saying:
1. The public sector played a huge part in the genesis of the Internet.
2. The public sector can make wise investments, and we can definitely control this.
Point 1 is true but point 2 does not follow logically from it. And, again, there is a lot of evidence that point 2 is definitely not true.
I am not particularly sure there is any need for quibbling over definitions. It is just about incentives. To take the UK as an example: stuff like ICFC/3i, which was publicly funded but run on a commercial basis (another example is NEB/BTG, this failed...until Thatcher), worked and pretty much all of the nationalised industries failed because there were no budget constraints (the purpose of the 1975 Industry Act was to ensure nationalised companies employed a lot of people who would then vote for the govt...it didn't matter if a private sector manager was employed i.e. British Leyland).
Again: the distinction between what works and what doesn't is fairly well understood. The issue is that Mazucutto looks at something like ICFC (btw, I know she looked at this because I have talked to people who she has advised) and says: look the public sector can get things right (i.e. confirmation bias). When the point is that how you design things matter massively (a point which is often made less explicitly). Ownership is basically irrelevant but for someone who wants to grow the state, i.e. most of the people she advises, that seems like the most relevant point.