Monday, October 17, 2011

The Dialectic of Unintended Consequences

Here's an article that the author over at the EconoSpeak blog wrote on how the discussion of power is missing from economic discourse....The Power of Economics vs. The Economics of Power.  It's for sure that power and control is a fascinating topic...so fascinating that my comment on his entry transformed into this blog entry...

Eh, it would have been more interesting if you had considered both sides of the equation.  So here's the other side...

Unions also use their power to engage in rent-seeking behavior.  They strong-arm companies into paying wages and benefits that are above what the market says their labor is worth.

It's the same concept with the minimum wage.  One unintended consequence of these efforts is that high school kids end up making poor career choices on the basis of this inaccurate information.  Unions and liberals manipulate traffic signals and change the signal color from red to green.  Kids see the green light and drive directly into oncoming traffic.  This results in a vicious cycle of inefficient labor allocation that negatively impacts our economy to a great degree.

This concept is certainly not a new one.  In 1848 the economist Frédéric Bastiat wrote an excellent essay on the opportunity cost concept.  Here's an excerpt...
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
Then in 1946 Milton Friedman and George J. Sigler wrote on how ceilings on rent were actually counter-productive...Roofs or Ceilings? The Current Housing Problem

Unintended consequences can be very rough sometimes.  But in the case of unions, there was one very righteous unintended consequence.  At the height of their power in the 50s and 60s, unions demanded wages that were so high that it became economically sound for industries to move their production overseas.

Well...that might not sound awesome to most...but it's very awesome to me for a couple reasons.  First, I studied development theories at UCLA and learned about all the numerous and extremely costly attempts by our government to help third world countries develop.  Nearly all the attempts were complete failures that had severe negative unintended consequences.  Talk about a depressing field.

Second, having lived and worked in several developing countries I quickly learned to value the well being of people in those countries as much as I value the well being of Americans.

So from my perspective, it's awesome and not a little ironic that unions have unintentionally done more to help people in developing countries than all of the intentional USAID and IMF efforts combined.

People in unions unintentionally donated their jobs to people in developing countries.  People in unions lost choices while people in developing countries gained choices.  But it's important to keep in mind that the marginal utility loss of going from 50 to 49 choices isn't as large as the marginal utility gain of going from 1 to 2 choices.  The people in developing countries gladly chose these "donated" jobs over subsistence living.  As more and more people learned the skills necessary to do these jobs there were more and more people who were able to take these skills and start companies of their own.  The demand for labor increased while the supply of labor stayed constant...so wages of course increased.  Now these newly developed countries are moving their industries to developing countries where wages are considerably lower.

Interestingly enough, Paul Krugman (of all people) touched on this idea in his paper...In Praise of Cheap Labor - Bad jobs at bad wages are better than no jobs at all.

A race to the bottom?  Yeah, no...it's a race to the top.  The profit motive within the proper framework unintentionally leaves a trail of developed countries in its wake.  Developing countries continue to converge in order to put themselves in the path of this unintentionally virtuous cycle.

So from the narrow American perspective the outcome was negative while from the broader global perspective the overall outcome was extremely positive.  America took a small step backward so that the Asian Tigers could take a giant leap forward and catch up to us.

China however, was not one of the Asian Tigers.  At the same time that the Asian Tigers were leaping forward with an open market approach...China was attempting to leap forward with a closed planned approach.  Rather than open China up to foreign investment Mao Zedong and his fellow planners decided it would be a good idea to collectivize agriculture in order to direct more resources towards industrialization.

While the market approach gave people more choices the planned approach took choices away from people.  The disparity between the results was incredible.  The market approach resulted in the Asian Tigers actually leaping forward while the planned approach resulted in 20-30 million Chinese people starving to death as a direct result of state induced famine*.

Mao Zedong's unintentionally disastrous efforts unintentionally resulted in the pragmatic recommendations of Deng Xiaoping finally being given genuine credence.  That guy was seriously righteous...he had been going around saying that he didn't care whether a cat was black or white...what mattered was whether it caught mice.  He opened China up to foreign investment...people were given more choices...and as a direct result China has now truly leapt forward.

It would seem straightforward that it's safer to err on the side of giving people more, rather than less, choices.  This idea is more eloquently expressed by Thomas Jefferson..."I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it."  Libertarians love that quote...but it needs a really good dash of Deng Xiaoping's pragmatism...
Pure libertarianism needs something to curb its extremity.  That something is pragmatism.  
Philosophical pragmatism is an essential American development.  Its animating principle is that truth is social and constructed rather than transcendent and objective.  It holds that ideas prove their worth in action, and that the results of an idea are the best criteria by which to judge its merit.  And since what works for me might not work for you, pragmatism advocates a strenuous openness to all perspectives. - James Walsh, Liberty in troubled times
Deng Xiaoping plus Thomas Jefferson equals pragmatarianism.  Pragmatarianism advocates that people be allowed to choose where their taxes go.  Taxpayers wouldn't have a choice whether they paid taxes but they would have a choice which government organizations received their individual taxes.

Taxes are not too dissimilar from charity.  The ancient Jewish charity law..."Tzedakah"...has 10 levels of giving that are ranked from least righteous to most righteous.  The least righteous way to give is to give begrudgingly.  The most righteous way to give is to give in a way that enables the recipient to become self-reliant.  Right there we can see the basis between the disparity between the liberal and conservative approaches to welfare.

For the large majority of people we can say that taxes in their current form can be considered the least righteous way to give.  People have a vanishingly small say in how their own taxes are spent, so it's understandable why they would begrudge paying their taxes.  A pragmatarian system would give taxpayers a choice to allocate their taxes to the most righteous government organizations.  A truly righteous government organization is one that produces results.

From my perspective...when I consider all of our government's failed attempts at helping other countries develop...I'm incredibly incredulous regarding our government's ability to help us continue to develop**.    What helped those other countries become self-reliant was when people in unions unintentionally sacrificed their own jobs.  The corporations that then set up factories in developing countries were not motivated by altruism...their sole motivation was to increase profits...but the unintended consequences of their actions were more altruistic than any intentionally altruistic efforts by government.
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. - Adam Smith, The Wealth of Nations
When it comes to the welfare of people in the US...should we trust government intervention or trust market forces?

Whatever your answer is...I'll respect it and only ask that in return you respect my own.  It is fundamental to truly appreciate that the most righteous level of political altruism is to allow people to directly support the government organizations that they value.  Hyperpartisan obstructionism isn't just counter productive on the party level...it's also counter-productive on the individual level as well.  We are all just blind men feeling different parts of an elephant and coming to our own conclusions.  To come to the correct conclusion we have to piece our perspectives together.

Pragmatarianism would allow us to piece all our perspectives together.  The invisible hand would take all our individual, valuable and essential puzzle pieces and assemble them together to display the perfect picture.  The cumulative choices of millions of taxpayers will reveal exactly what the ideal scope of government should be.


* I highly recommend reading Dogshit Food by Liu Heng.  The story is included in the Columbia Anthology of Modern Chinese Literature.

** For the life of me I can't find or remember the source of the ironic idea that people in the middle ages were too stupid to realize that they were in the middle ages.  Anybody know the actual source?

3 comments:

  1. (Eselpee)

    Your words make sense and give a feeling of logic - I won't disagree nor disrespect them.

    While I agree with you that demanding fair wages resulted in more jobs in developing countries, and fewer in the USA, could you please speak to:

    "Since 1970, executive pay has increased 430%, far above a 250% increase U.S. corporate profits -- and wildly above the 26% increase in wages for ordinary workers."*

    How does Pragmatarianism work in a plutocracy? How do we proceed in a way that promotes individual liberties, choices, rights, responsibilities, and minimizing unforeseen negative consequences?


    (*http://hope.journ.wwu.edu/tpilgrim/j190/richgetricher.html)

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  2. Eselpee...rather than congress trying to do good things with all our taxes...we should allow taxpayers to try and do good things with their own taxes.

    You and I have different values. This isn't a bad thing...it's a great thing. So why would it make sense for you and I to be forced to agree on how our taxes should be spent?

    If you are concerned with the welfare of ordinary workers then you should have the freedom to use your taxes to try and help benefit ordinary workers. How can you best help ordinary workers? Maybe unemployment benefits? Maybe greater accessibility to education? That's up to you to decide...but if you make a "mistake" then you're only making the mistake with your own taxes.

    When congress makes a "mistake" it makes a mistake with all our money. This amplifies the unintended consequences.

    If you get a chance you should read about the benefit of tax choice from a liberal perspective...Your Money, Your Choice.

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  3. Thank you for referring me back to your main point.

    Congress has been bought, and therefore democracy is merely a smoke screen for our true form of government, plutocracy.

    I am unconvinced by your example of corporate greed and union blunders accidentally helped people struggling in another land, that individually assigning tax funds will help individual liberty, choice, rights, and responsibilities in this country.

    Its a good thought and I hope you speak to it in greater detail...meanwhile I will read Your Money Your Choice.

    ReplyDelete