tempeh and green bean stir-fry

[keturn]

A few weeks ago now I finished reading Henry Hazlitt's Economics in One Lesson, and there are some things from that I wanted to write down before moving on to No More Throw-Away People.

As you know, I haven't studied much economics, but Hazlitt's work is categorized as being from the classical school of thought, very Adam Smith Wealth of Nations

Comments

[pmb]

All of the logic makes perfect sense until you realize the components are *people* and people are neither money-maximizers nor particularly rational actors. But yes, the traditional formulation is that externalities are why buying local and organic is good and why subsidizing the same might not be bad. Also, transaction costs and the costs of hidden information are totally glossed over.

Of course, the real hidden assumption here is that efficiency is the right goal to be striving for. In many cases, it appears that efficiency is the opposite of robustness, and I would, as a general rule, rather have a less-efficient robust system than a brittle efficient one.

[freyley]

"In many cases"? I haven't seen this argument spelled out anywhere, so I'm not sure what it means. Our brittleness right now seems as much the fault of the "too big to fail" policy and perhaps other governmental subsidies than of any brittleness imposed by efficiency.

[pmb]

First you need a model of robustness/resilience (cf. Buzz Hollings etc) then you need a model of what efficiency is striving for in practice (you end up talking about things like j.i.t. delivery versus more traditional warehousing) and then you ask whether the more efficient way of doing things (j.i.t.) is more or less robust when a disruption occurs. We saw many instances of this in the current recession where firms that had switched to just-in-time stuff ended up getting screwed when their supply chain crapped out, because they had no flex built in. So when a related firm sank, so did they

[freyley]

Thanks. That's a fascinating argument, and I tentatively agree with much of it. I suspect that you could argue for brands and brandy loyalty as a form of getting over the bumps and thus allowing a company not to be optimally efficient all the time, but more robust.

It's also an argument for government intervention in producing standards and requiring that those standards be followed for anything that can be genericized, so as to make it easier for supply chains to be swapped out.

I do think this gets lumped into competition among entities -- you're supposed to be able to pick up with an alternate company if one company fails. But contracts would prevent you from taking a hiatus if your supply chain disappeared and you needed a new one.

[polyhymnia]

What pmb said, and also a milder version of apocalypse insurance: with food in particular, there's a possibility that transporting food will eventually become far less cheap/feasible than it is right now, and when that happens we won't necessarily have the time to build up our local food chain. Better to do it now

[keturn]

"so in those cases the $2 goes to someone else to spend; the money stays here and is spent in this economy, and that does make a difference."

Okay, that is the argument that reading Hazlitt makes me most suspicious of. I'm no longer convinced that works out any better in the long run. Care to make that case in more detail, or refer me to someone who does?

(See also other thread, muffin man rides a bike.)

[polyhymnia]

This isn't a study but it's an article that refers to them, and I think the metaphor it uses with blood is illustrative:

http://bbjtoday.com/blog/buying-local-money-local-economy/2105

When money flows out of the community, in an ideal free-market economy it eventually flows back in, but in our current economy, it flows out and stays out -- into the coffers of businesses far away, who invest it elsewhere.

I think the counter-argument to this is that if money is flowing out, the home community should be competing better; it should have its own businesses to bring money back in. That's a reasonable argument and I don't exactly know how to counter it.

[freyley]

Yes, I can see an argument that if we spend money at Home Depot, Home Depot turns around and gives that money to its shareholders, who are mostly upper class, who invest the money in foreign countries, who come back and buy townhouses in New York City. In other words, because we don't have microcurrencies, the argument below avoids what's actually happening, which is wealth transfer from local communities to globalized, ritzy cities. There should be some trickle down that gets back into the local community via things that they make and sell globally, but it may not be the whole dollar.

[radiotelescope]

A nice formulation I've seen (IANAEconomist) is that "capitalism" is not the same as "free market". Capitalism means the people with the capital are in charge. They have no particular fondness for free competition, not once they're on top.

This isn't news; we went through this a century ago.

[keturn]

"This isn't news; we went through this a century ago."

And one of the interesting things about Economics in One Lesson is that it was first published in 1946. The new edition was published some thirty years later in 1978. Now it's been some thirty years since that. That's not terribly encouraging.

[glowing_fish]

Capitalism never survives in a free market.
This is actually Economics 101, a basic non-controversial tenet of mainstream economics, that seems to be glossed over a lot.

[joyquality]

Let's say I'm a bike mechanic. If I buy mittens from local knitters, then the local knitters would have money to spend on bike repair. If I buy mittens from Olympia knitters, then they would also have money to spend on bike repair, but presumably they'd take their bike to a mechanic in Olympia, not to me. Isn't it in my own interest then to buy from the local knitters?

[qousqous]

But what if, with all that extra money in the Olympia economy going around because of their booming mitten-export business, some people in Olympia decide they want to buy more hats from renowned Portland haberdashers? Haberdashers who then buy muffins in Portland, of course.

[jes5199]

oh, sure, it seems like it might work out that as much money will come in as go out, but ... it's a little hard to be sure, right? what if there's a sneaking suspicion that in Olympia, they're more likely to order hats from that awful Vancouver. And besides, isn't every transaction a little bit wasteful?

[freyley]

wasteful of what? or perhaps, where does it go?

[jes5199]

I'm not sure that you can just say that subsidies only do the obvious reallocation. There are emergent effects - a new train might mean that everyone spends 1% less on gasoline, and that might be a whole lot of muffins.
Subsidized knitting might mean that knitters get to make a living knitting - instead of, say, going on welfare or doing telemarketing. The cost of knit goods goes down, since there's more available. So you get $6 mittens, $2 tax, a muffin, and less misery.

[keturn]

okay, the less-gasoline thing I buy, but some of this I'm more suspicious of. Particularly the "cost of knit goods goes down" argument. If the cost of knit goods in Portland was already low enough that the local industry couldn't be profitable without government intervention, how is it going to sustain itself when the market price drops further?

[jes5199]

how about $7 mittens, $2 tax, half a muffin, and less misery?

[freyley]

More subsidies.

It's worth noting that many free marketeers are against policies that indirectly subsidize or distort the market because they may have alternative effects. For example, placing a tariff on knitted goods coming into this country has different effects than simply giving money to local knitters. The latter is usually preferred by economists if you wish to expend money on your valued things as a governmental action. The former is usually more politically viable because it's an action against an out group, rather than defining in groups and out groups within the US.