Sunday, January 29, 2012

Why capitalism has not failed, or an excellent post by Tim Ambler

Over at the Adam Smith Institute blog, Dr. Tim Ambler makes an excellent defense of capitalism and accurately blames the current crisis on the unholy alliance between large governments and businesses being forced to sleep with them to grow big. Some of the pertinent extracts are as follows:
One of yesterday’s headlines, “Davos elite confronts capitalism crisis”, reflects the widespread view that the financial crisis shows that capitalism has failed and “we need another economic model”.
The anti-capitalists see making money from other people’s needs as wicked. Business should be there to help people, they say. Of course, communism was seen as good because profiteering was illegal, but that was a main reason for its collapse: it removed the profit incentive.
The middle, Davos, ground is that making profits in moderation is acceptable provided it takes place within the “stakeholder” context. In other words, business should not be preoccupied by making money for its shareholders but should also take care of suppliers, customers, employees and society as a whole. A corporation should only be given a licence to trade if it meets these wider responsibilities. Profit is still basically reprehensible but is accepted as necessary to meet these social goals. The hysteria generated by NHS reform suggests this view is widespread.

As usual, though, and I quote:

The pious folk who believe this rubbish have forgotten, if they ever knew, that profits provide everyone’s income whether it be in employment in the private sector, or via taxes in the public sector, or through their investments. Cash flow needs to be positive and marketing provides the cash flow. It’s actually quite simple: make money and do not be distracted by corporate responsibility. Making money makes everything else possible. The alternative is that we continue to decline. 

Rubbish indeed. One such "pious" commentor on the site responds:
Companies should be regulated enough to make sure they also serve the people not just themselves, especially when companies grow large and become arrogant and reckless with other people's money and lives.     
Aren't the threat of losing productive employees and paying customers to a competing firm that provides better work conditions and a "socially responsible" product, if that is what society actually wants-- as opposed to a liberal's wet dream for what a company "should" produce-- regulations enough? And isn't the fact that such a scenario does not exist in a country like China merely argument for the case that Ambler makes-- that government does not lead to individuals being better off as compared to a truly free market?

Tuesday, January 10, 2012

The economics of textbooks, or one reason why healthcare in the US is so expensive

A friend of mine, Jelena, gave me the idea for this post. As graduate students and most American students are wont to do, I try my best to buy used books when I can to save precious currency for other, more valuable things. The advent of Ebay and is a blessing for us, reducing information asymmetry and transaction costs, thereby leading to lower prices (Case in point: my dynamics book. List price $100+, price I paid: $35, including shipping).

So, today, I met Jelena, an undergrad econ student, while walking to the library. She was carrying a plastic bag full of books for the semester ahead of her. After the usual New Year pleasantries, she happened to mention that her books for 3 classes cost her $500. Aiming to educate this helpless student, obviously new to the American way, I attempted to enlighten her on the benefits of online textbook purchases. She proceeded to tell me that she was well aware of this exotic means of transaction, but her government (read the taxpayers of Montenegro) was paying for her education and books, as a result of which she proceeded to buy brand new, amazingly expensive versions of the texts. (As an aside, what a sweet deal! For her, anyway.)

When people spend somebody else's money, they are less likely to account for the efficacy of their purchases. The same goes for consumers of healthcare (and government, but that's another topic). In the US, most insured do not face the full cost of their treatment, leading them to purchase the most exotic and expensive services, as well as an inefficiently higher amount of even basic services, driving up prices for the entire economy. This is just one piece of America's healthcare puzzle.