risk mania

Doug and I stayed up way too late last night playing an epic game of Risk. It was great until I had to get up this morning.

Alex emailed me about banking and command-economies vs. free markets, and I intended to give a brief reply, but instead I kept writing, so I thought I'd just post it so you can decide for yourself whether I'm a soulless suit or a silly socialist.

You ask two sweet questions my friend, and a third one implicitly, for that matter.

I'll start at the second paragraph. Electronic funds are really cool. We essentially have the physical currency world and the electronic one. "Money" gets moved around among the worlds and between them (EFT and ACH are two acronyms you may have run across using a bank). For example, my employer does a direct deposit to my demand account every other Friday and Hartford Mutual Funds puts an ACH hold on the first day of every month to move funds from my demand account and place them in my Roth IRA. No currency changes hands, but the "money" moves from the Commerce account my work uses through my account at Bank of America to the Roth IRA being held for me by US Bank National invested in Hartford's Aggressive Growth Allocation fund.

"A dollar" in your checking account and "a dollar" in your savings account and "a dollar" in your wallet are tantamount to the same thing, but they aren't the same thing in practical terms due largely to your access to it and the ability of it to be monitored. For a few examples, there is enough drug residue on most bills in circulation in the US to link someone to a drug crime, banks are not obligated to give you your money when you request a withdrawal from an account that is not a demand account (a savings account is not one), banks are obligated to report cash transactions of $10,000 or more, and there are even provisions in the Patriot Act requiring financial services employees to report certain kinds of transactions if the kind of payment involved is suspicious. The $10,000 limit is something that Rush Limbaugh had a little fun with; he couldn't just take out all the money his housekeeper wanted to keep his drug habit quiet because if he had, the Feds would have been automatically alerted, and well, our police state is just as interested in telling people what sort of economic transactions are acceptable and what are unacceptable as most any other police state that's ever existed. And of course, taking out just under 10k repeatedly is also illegal. That's how money laundering gets people. It's really kind of amazing, when you think about it. The federal government has decided that, under some circumstances, merely exchanging your own electronic funds for physical currency that you also own is so bad you should be put in jail. But I won't ramble too much on this stuff, it's more for your implicit question.

This website has lots of definitions associated with banking and money hyperlinked together you can explore. There are people who spend their whole adult lives studying banking and financial services, so you can learn as much as you have time to read.

Your first paragraph is a classic question of public policy and philosophy and even religion; it's probably the single thing I find most intriguing about economics. How does society allocate scarce resources? Money is a tool for exchange, but at the end of the day it's not the trade itself.

The reason you are frustrated about ideological treatises [in the textbook Alex has] is that to go much deeper into economic theory essentially necessitates ideology. The reason is that economics requires a huge number of assumptions, and the assumptions themselves are a main source of disagreement. (Unlike, say, gravity. No matter what the American and Soviet militaries may have thought about each other, when they built airplanes they used similar assumptions about the effect of gravity on a fighter jet. Both sides thought attributes such as "faster" and "not crashing" were good.) But when (intellectually honest) people discuss economics, there are legitimate differences in what "gravity", "faster", and "not crashing" mean, let alone whether they are good or bad.

The reason this is frustrating is that many of the people who shout the loudest about such things are being (intellectually) dishonest. "Free trade" should mean the unfettered ability of private individuals to exchange items between them on their own terms. Usually, however, it really means the unfettered ability of large organizations to do what they want regardless of what "citizens" or "voters" or "consumers" want. When I read Adam Smith, I obviously don't read an authoritarian command-driven state. But I also don't read an authoritarian corporate state, which is in effect what we have been becoming for some time. Competition, perfect information, the protection of property rights, costless bargaining, and more require the state to be larger than any single company or group of companies. Not to mention the US Constitution, which despite what some on the aristocratic right would prefer, is still the law of the land.

One of the things that the "free marketeers" who aren't really for free enterprise but actually want an odd cross between feudalism and fascism cry wolf about the most is the inefficiency of government. What's ironic is that the large corporations that define much of the workforce are actually more bureaucratic; they literally have become states themselves. It's a PR move, a power play, devoid of merit. Scale economies are what make centralization beneficial, not whether that centralization happens in "the private sector" or "government"; competition is what makes firms add value to society, not the fact that they are "private". Two excellent examples are pharmaceuticals and insurance. Drug companies spend more money on marketing and earn more in profits than they spend on R&D. If we are going to have a regulated drug economy (both illicit and prescription) then what is the point of allowing drug companies to waste billions of dollars bribing doctors and doing aggressive direct-to-consumer marketing? The point, of course, is that executives of drug companies want to make lots of money, and politicians like drug money. But that's not what they say; they say they support the free market and don't want government to interfere. Of course, the volume discounts negotiated by the Canadian government show how ridiculous it is to claim drugs couldn't be cheaper. In the insurance world, who would you guess has the lowest administrative costs offering old age and disability coverage for people of various ages and health? It's the Social Security Administration, of course. Something like 1.5% administrative overhead, unheard of in the private sector. That's why national health insurance will happen; it's just a question of when. Insurance companies spend a lot of money weeding out unhealthy applicants and litigating claims. Irrespective of the moral issues involved, it just makes sense to have a Health Insurance Administration or some such name insure all American citizens from birth to death. (Note, this is not the same thing as national health care, a very different proposition.) National health insurance means that general tax revenues pay for a part of a doctor's visit or teeth cleaning or surgery, not that the government itself provides the doctors or hospitals or medical equipment. The distinction between who pays for something and who provides something is an issue that many on the right love to blur.

Your implicit question is why we don't give people a basic education in all this. I think it's pretty simple, actually. It's not that these issues don't affect people or aren't important. There just isn't much incentive to make people knowledgeable. The ideal consumer is civicly uninclined and doesn't ask too many questions. Governments and prosecutors love the ability to freeze people's assets regardless of whether they have actually been convicted of a crime. (Except for the very rich, of course; they are allowed to threaten national security. I'm not kidding. Their secretive, and illegal, offshore accounts are the reason Congress stopped its drive in late 2001 and early 2002 to have better financial tracking. And Senator Kerry has unparallelled experience from his days investigating the contra scandal and BCCI.) There's not really a constituency or special interest pushing for economic literacy. Unfortunately, I think, some of the best education advocates on the left are instinctively hostile to concepts like free trade, private enterprise, and ownership without really thinking through what troubles them. And on the right, there is the inherent contradiction between the "free" market and the materialistic corporate plutocracy that too much eduction causes people to question. Either you trust people to make their own decisions, or you don't. And trust is the key issue here. Our monetary system only works because people trust it will work.

Alright, I gotta go to bed now. If you want to annoy an economics professor, ask him if we have a free market and then proceed to ask questions about the specific ways that the government overrides the market (agriculture, drugs, asset forfeiture, patents, etc, etc). Or contest each assumption about a perfectly functioning market and ask why government shouldn't address those market failures. My impression is that a lot of economists love discussing the theoretical world more than the real one.

Your reward for making it through all that is another quiz. What a surprise. This one is nice and flattering, to boot.

You Are A Good Friend

You're always willing to listen
Or lend a shoulder to cry on
You're there through thick and thin
Many people consider you their "best friend"!


At 1/06/2006 5:33 PM, Anonymous Blue Cross of California said...

Great blog I hope we can work to build a better health care system as we are in a major crisis and health insurance is a major aspect to many.


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