Sunday, July 10, 2011

anti-mankiw: dialogues

The idea that "society" allocates goods and services in a market economy is incorrect: the true agent responsible for economic outcomes in such an economy is the market and market mechanisms. But market mechanisms are far from universal, far from the "usual way of organizing economic activity." In the home, with friends, or at work, decisions are made based on responsibility, need, trust, and love (in the case of the home and friends), or authority (in the case of work).

Question: Economists often attribute the resulting allocation and distribution of goods and services in an economy to SOCIETY, e.g., "SOCIETY allocates resources across the individuals in an economy." But what precisely do economists mean by the term "society decides..."?

Answer: Economists use the term "society decides..." or "society allocates..." in order to rid markets of any blame for problems with the current distribution of income in a society. When economists attribute the current distribution of income to society, economists really have in their minds a process which is not social, but which does rely heavily on markets and market mechanisms:

1. Individuals interact with each other according to a set of assumptions placed on how they behave (they are rational, they respond to tradeoffs, opportunity costs, and incentives).

2. They interact in a marketplace by trading at various prices until ...

3. everyone is satisfied given their budget constraints.

4. The point of this process is to reach the "social optimum": the amount of goods each person has received after individuals have traded in the market.

In short, it is not really "society" that allocates goods and services; it is individuals who interact through a market mechanism. By placing the "blame" on society, or calling it a "socially" determined income, economists make it seem like the market process is impersonal. According to them, the market does not discriminate against the sick and poor, when the sick and poor need medical services or food and cannot pay for them.

Question: But no one is discriminating against the sick and poor when they need medical services. It's just that, when you place everyone who needs, say, medical services, into a room with everyone who wants to sell medical services, the price naturally gravitates to a point where some are just too poor to afford them at the equilibrium price. So, who is there to blame, if not poor people, for letting themselves fall into bad health or not working hard enough to afford medical services at the current price?

Answer: The answer lies in who is truly to blame for the fact that the most needy cannot find the services necessary to survive. Economists say that "society decides the optimal division of goods and services in an economy." That is, society, which is composed of individuals freely making decisions, gives rise to the unfortunate situation of some people being rationed out of healthcare, or food or what have you.

But what we have found in the previous answer is that it's really about the market mechanism -- that is the agent responsible for some of the social problems you mentioned.

Question: So what you are saying is, we ought to blame the market for social problems? But Principle 6 of Mankiw's Principles textbook says that "markets are usually a good way to organize economic activity." Ought we try to enforce efficiency-enhancing solutions to our problems wherever possible, including organs, health care, and housing?

Answer: But markets are not a "usual" encounter in our society. When you go to work, markets are not how that economic activity is organized. Activity at work is organized by a boss or superintendent, who tells you what to do, and then you do it. Sure, you have the right to quit and look elsewhere for a job if you do not like your boss or think you're qualified for a better position, but that does not diminish the fact that for 8 to 9 hours a day you are working not according to a market mechanism, but rather according to the decisions of a central controller and his or her staff.

And when you go home, your mother or father will make dinner for you, not according to market prices or rationality, but because they love and care for you. They also recognize that you have certain needs in life, and try to provide a good life for you based on those needs.

In short, the majority of your day-to-day life, is decidedly not market-based.
-8 to 9 hours are spent at work or at school, under a boss or listening to a teacher
-7 to 8 hours are spent sleeping at home, under a roof provided for you by your parents
-1 to 2 hours are spent enjoying meals prepared for and provided to you by your family
-That leaves 4 or 5 hours left, which you might spend at a school, with your friends, or some other environment which is certainly not guided purely by market incentives
Furthermore, these traditions -- receiving orders in the workplace, or having your parents provide for you as a child -- have worked for thousands of years. So, is it so obvious that we should use the market to allocate healthcare, if there might be some other ways of doing it based on much more trusted and common ideas of responsibility, or need?

In conclusion, when economists say that society has allocated goods and services, it is really a market mechanism at work. Thus, the market is responsible for many existing social problems of the poor and sick. Since a large part of our time is spent outside of the market, either at home or at work, perhaps there are other ways of allocating the things we need. We should look into these before accepting as fundamental the ideas that "trade can make everyone better off", as Mankiw argues in Principle 5 of his textbook.

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