As we mentioned a few weeks ago, politicians are talking about raising the CAFE standards and now since Katrina, people are telling their political representatives to DO SOMETHING! May I say, please don’t?
Toyota’s Prius has had a sales increase of 132% this year over last year. Does anyone really think the car companies aren’t acutely aware of a building demand for high mileage vehicles? Does any political windbag bloviating on Capitol Hill really think his remarks will send that message to vehicle manufacturers any more clearly than thousands of customers with money in their hands? Hybrid vehicles are appearing everywhere and SUV sales are falling, what more can politicians accomplish other than giving themselves the chance to grandstand on TV? Oh, … wait, never mind.
Kipio says
Well, I think that this shows a simplified views of what markets do and do not accomplish.
You are absolutely right that the market will be best at reacting to immediate price changes and therefore dealing with short-term events like interrupted oil supplies. It should need no help in doing so. But things like long term national security risk due to oil price fluctuations and environmental risks due to global warming are both negative externalities, which mean that the market itself won’t deal with these problems (if they are problems.) Most economists would say that government incentive programs are needed to implement the social policies necessary to deal with various externalities. Obviously whether or not this is a good idea is a policy question, not a question of markets.
I have noticed that many people who feel strongly about politics have a strong misunderstanding of markets. Liberals often tend to hate markets, to think that they only do social damage and must be strictly controlled by government. Conservatives often feel that markets tend to solve all of life’s problems and that government involvement always tampers with the good results of a market.
Almost any economist would tell you that a market is a like a force of nature, doing good and bad. And she would tell you that like a force of nature, it cannot be stopped, but can be harnessed. So, most economists would say, “tell me what your social goal is, and I will tell you the best way within the market to accomplish that goal.”
As an example from an earlier post, price caps are a horrible way to try to control a market. They lead to black markets and shortages. Taxes are seen as fairly effective; they give incentive to people to spend their money in a certain way, but they don’t force the market to accomplish the goal in a specific way. This way, the market “finds” the best solution for accomplishing the goal. Finally, direct regulation is so/so. It works better than things like price controls, but it has problems like bureacracy.
So, from a economic standpoint, what we want government to do is:
1. Decide on a reasonable social policy (and my guess is that this is where your TRUE disagreements are.)
2. Implement that policy in a way that works with markets, not against them.
And politicians have a variety of problems with both number 1 and number 2. But I’m not sure if thats a compelling reason to abandon all social policy.
kneeslider says
That’s a long way of saying, “Markets work, …except when they don’t. Markets don’t deal with ‘externalities,’ problems the market doesn’t recognize, especially long term problems. Social policy provides incentives to encourage behavior that solves those problems.â€
My first question is: “Who decides what those externalities are?†Isn’t that the crux of the issue? That’s the whole political process in a nutshell.
Let me slightly redefine your liberal and conservative views of the market: Liberals tend to dislike markets because their goals or preferred outcomes do not win in free markets so they need the government to force the result they want. Economic conservatives (Libertarians) prefer the market for the reasons you cite. Social Conservatives have views similar to Liberals, viewing the market as a freewheeling, possibly immoral and unrestrained danger.
Ask various groups of liberals or conservatives and they’ll each give you a laundry list of externalities, problem is the lists won’t overlap. That’s when the fun begins. Many individuals will list problems that, to them, are a forgone conclusion that “everybody knows†when of course everyone knows no such thing.
So my problem isn’t social policy, it’s who decides. Markets keep the decision in the hands of those most directly affected in any given situation and larger questions are dealt with by market votes, the cumulative demand of dollars buying products or services of a certain type. Let the market work in those case where a market solution, incentivized or not, can affect the outcome. Limit social policy, i.e. government intervention, to those areas where no market solution is possible.
My original comment about letting the market take care of fuel economy issues is an example of the first type, markets can fix it, so let them do it. An example of the second type of problem or externality is the huge influx of illegal aliens. It’s a long term issue that affects the markets and the economy but where no market supply and demand force can fix it. It’s interesting, too, that both liberals and conservatives seem to agree on this problem and yet nothing much is being done. Go figure.