Thursday, February 16, 2012

Knabeism for Dummies

This is a less flippant response to your "Take Me To School."
When two parties freely and without fraud, enter into a trade, both are better off. It's a very powerful concept. When I bought my iPhone I was very happy. I really didn't care it made Steve Jobs a gazillionaire. It didn't matter to me where it was made. It didn't matter that Apple's margins were higher than what might be set by a   Reasonable Profits Board. Apple was happy to sell that iPhone to me and I was happy to part with several hundred dollars. We were both better off.
Think about it. How can we make everyone happier? By letting them buy and sell goods and services freely amongst each other is the answer. If the trade isn't fraudulent, and if the trade is entered into freely, both are better off, society is better off. Isn't that what we are trying to do, make a better society? And when I look at the long arc of history I notice societies that are organized more towards this philosophy have the tendency to do much better than those societies that are organized less along this philosophy. Think Hong Kong versus Cuba. Think the US versus the Soviet Union. Think Houston versus Detroit. And when I say better, I say better for everyone, rich and poor alike.
One general objection is around asymmetric information. When I sell a house I have much better information than the buyer of a house. That gives me an advantage over the buyer. Because of that it's a pretty good idea to have a third party inspect the house. It's a pretty good idea to have the contract explicity guarantee the seller is not withholding material information. I wouldn't object to contracts without those items, but one would expect such a deal would be consumated at a lower price to compensate the buyer for the increased risk.
Another objection is one party is going to get a better deal, however that might be measured. Did Apple get a better deal when I bought the iPhone? I have no idea, nor do I care. I was happy. If I wasn't happy I wouldn't have purchased the iPhone. Does it matter that one party got the better deal?
A third objection is the transaction can impose costs on others not party to the transaction. I may own a coal-fired power plant that emits pollution into the air. I am imposing a cost on you when I freely engage in my trade. There is a robust literature on externalities but maybe the most powerful analysis comes from Ronald Coase who examines externalities within the context of transaction costs, and overall societal efficiency. I'll avoid an exegesis since I'm not up to the task, but in sum, externalities are costs that need to be addressed, and should be addressed so as to minimize the societal costs. Much of the smarter objections to carbon emissions and coal-fired power plants focuses on externalities.
Where does the government fit in? Protecting against fraud is one function. Helping adjudicate property rights particularly with respect to externalities is another. And I know this is inconsistent of me, but helping those who need help. Yes, it is contradictory of me to say I should force the well off in society to help those in need. Guilty. But I do think we should help those in need from a moral standpoint. However, the best way to help those is growth, not redistribution. And growth comes with free trade.
That's mainly the filter I use to look at life. So tell me you want a Reasonable Profits Board or a limit on MLR (medical loss ratio) I object since that is limiting the ability of us to enter into freely negotiated transactions. And then it leads to resource misallocation. If you say to an insurance company you can only earn a 10% profit insurance companies will potentially exit the market, reducing supply. Potentially you will encourage consumers to buy more, since you've capped prices, again, misdirecting resources and distorting efficiency. But it's not just about efficiency, it's about growth. 
Growth is what makes us better year-to-year. When we talk about our children having better lives than us we are talking about growth. That is, we can have more for less. Our lives are easier, more pleasant, longer-lived. Growth is electricity and cars and the telephone and microwave ovens and the jet plane. Growth is allowing one industry to fail and be supplanted by another. Schumpeter called this creative destrucution and it is something we see all the time. For instance, we are lucky enough to have witnessed the birth of the PC and we are now witnessing its death. And that's good. My life is better with my iPhone and iPad. My life is better because the iPhone and iPad increases my freedom of movement and my connection to my loved ones. I use the PC much less because of cell phones and tablets and I am much better off. One day, someone will come up with something that replaces cell phones and tablets and our kids will be better off than us. That is, if we let everyone freely enter into transcations that allow this to happen.
If Obama had been smart, and knew even a bit of economics, he would have let the market determine GM and Chrysler's fate. Resources would have been taken from organizations that were bad at satisfying the market's needs and given to those good at satisfying our needs. That's growth. That's improvement. That's people getting what they want. That's both parties walking away from a trade, happier than when they started.
Almost all of my objections to Republicans and Democrat are to actions that impinge on my abilty to enter into transactions that make me, and my counterparty, better off. How can you possible object to that?
Too long. Too boring. Too pedantic.

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