The Free Market vs. Subsidies

[soliloquy76.livejournal.com]

This started out as sort of a thought dump in my journal, but a fetching young lass convinced me to post it here as well. Pardon any lack of cohesion.

I've been thinking about the free market and how that could work (or not) in the United States in a global economy. First, I should disclose that I'm by no means an expert in economics. Second, let's define some terms. A free market is defined as:

An economic system in which prices are determined by unrestricted competition between privately owned businesses.

This is the foundation of the Austrian school of economics pushed by libertarians and some conservative-types. The global economy can be defined as:

The international spread of capitalism, especially in recent decades, across national boundaries and with minimal restrictions by governments.

As we all know, we currently live in a global economy where various level of the free market exist. Each country has their own regulations, wage and human rights laws, etc which ultimately determine the cost of goods and services from those countries. China, for example, is the fastest growing economy in the world because their human rights laws and wages are so poor that workers are a cheap commodity. It's why we're all able to afford PCs, iPods, LCD TVs, etc. It's also why manufacturing in the United States is virtually nonexistent and (arguably) why we're seeing such high unemployment as jobs are outsourced to countries like China, India, and Mexico.

So how does the United States compete and get those jobs back? In a free(r) market, we would have to reach parity (or come close to) with the lowest common denominator. American workers would have to be competitive with Chinese workers, for example. Our quality of life would necessarily suffer. Is this something free market proponents accept, and by accepting this reality, advocate?

What got me thinking about this was my recent purchase of a Chevy Volt. For those who don't know, it's a Plug-in Hybrid Electric Vehicle (PHEV) produced by GM. GM, of course, was saved by the federal government in 2009 because of the credit crisis of 2008 and the subsequent recession. If GM hadn't been saved, not only would millions of jobs have been affected or lost, the Volt would have never seen the light of day and the US would be considerably behind the curve in development of next-generation vehicles. Japan already has the Prius (with a new PHEV variant), and the Leaf which is totally electric.

Now I was on board with the "end government subsidies" crowd not too long ago, but in conversations with some rather rabid anti-government conservatives, it got me thinking that not only are government subsidies not always a bad thing, they're necessary if the United States is to compete with the rest of the world. Every auto-producing nation in the world receives some sort of government subsidy, including Japan. By removing ours, we're effectively killing that industry in the United States.

My question for the free market advocates out there is that, given the global market we're in where other countries are subsidizing their industries, how do we reconcile not doing so domestically to remain competitive? I realize this is an oversimplification of a complicated issue, and like I said, I'm not an economics expert. Hopefully any free market advocates in here can set me straight.

Comments

[a-new-machine.livejournal.com]

Actually, this has a bunch of different factors missing. For instance, American workers are among the most productive per wage-hour in the world. So we don't have to "race to the bottom." Instead, we can offer a better product (harder-working, more productive, better-trained employees) at a higher price. Then China gets to be the Geo Metro of the labor market, and we get to be the Mercedes-Benz. The idea that there is no differentiation in the product (the labor) being sold is one of the key problems with the "race-to-the-bottom" model.

[soliloquy76.livejournal.com]

That's why I hesitated on posting this so soon. It's an oversimplification, sure, but overall we are not competitive with China. If we were more productive, meaning we crank out more widgets per dollar, at what point does it even out? China is still a better value or so many jobs wouldn't have been moved there.

[johnny9fingers.livejournal.com]

Excepting that Mercedes-Benz is German and you'll be competing with people that can build a car that can turn a corner and be reliable too.
America makes some great products: Gibson and Fender spring to mind. But man your cars are as bad as, if not worse than, ours.

This is not a failure brought about by subsidies. The US car problem is down to a captive market, crappy design, poor quality control, & failure to keep up with technological innovation. I mean where are your export markets? Mexico? Canada? Mercedes sell the same models worldwide. US manufacturers can't compete in the world market, mainly because the internal market is so skewed, so captive, and so conservative (with, in this case, the emphasis on blinkers).

Despite US auto manufacturers having a head start on almost all other car makers they fell behind in the 60's & 70's, and have never really caught up.

And if you think I'm exaggerating, I would ask what your automobile export figures are? Especially when you remove foreign companies like Honda, Nissan, and Mercedes, which manufacture on US soil, from the equation.

The subsidy and innovations like the Volt may be the best thing to happen to the US auto industry in a long while. It has given it space to rethink and retrench.

[blue-mangos.livejournal.com]

lol, I think she meant somewhere else. But we'll take it ;o)

[ddstory.livejournal.com]

I doubt she did ;)

[underlankers.livejournal.com]

The other side of why they're more prosperous is that having more laborers and undemocratic societies means that corporations are free to kill their workers for more profits with the consent of the government knowing that if there are 1 billion people under the rule of a state the supply of workers will be inexhaustible. The other *other* side of it is that China traditionally is an economic powerhouse, it stopped being one from civil war and invasion, its recovery was to be expected short of more civil war and invasion. The other other *other* side is that the CCP is respected for having made deliberate efforts to rehabilitate and to expand areas of China's government neglected by prior regimes and for keeping the boundaries of China at the second-largest they've ever been in totality, not for creating prosperity in itself.

[enders-shadow.livejournal.com]

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

Yes, of course. That is why the workers revolution, must be a global revolution.

[mrbogey.livejournal.com]

As an addendum to that lesson, I'd assert consequences include what was lost as well.

Bastiat was pretty smart in asserting that everyone knows the economic benefit of a bridge or a military. What they don't know is the items not made because of such. Some people employ this lesson very narrowly and usually only towards the military.

[soliloquy76.livejournal.com]

Hence subsidies are good.

Not good, but necessary to compete. Granted, I don't have the numbers to compare domestic vs foreign productivity, overhead costs, purchasing power, etc.

GM's resources would have been bought and used in something else - that labor would have been used elsewhere.

This seems like a huge assumption. Given our current state of unemployment, I'm not buying it.

When you have a subsidy on something, you're admitting that other people don't value it enough.

Not necessarily. We subsidize the oil and farming industries (presumably to keep costs down). On a global scale, how can we compete when other countries are also subsidizing their industries?

[underlankers.livejournal.com]

Resources do sit idle in every situation where even if they exist they cannot be adequately exploited. Hydrogen as an energy source would be far superior to petroleum but the engineering to do that doesn't really exist in any feasible, safe fashion so it's not used. See the difference between *potential* resources and what's *actually* there? By this argument the history of the modern world should have been the clash of the Russian and Brazilian superpowers for global hegemony.

[mrbogey.livejournal.com]

And this is what I get for replying without reading the entire thread.

[dzlk.livejournal.com]

"This value can only be determined via a market mechanism. I.e., the value of something can only be considered via how much someone will give up for it."

BTW, this confuses price and value. Granted, the subjectivist side of the calculation argument does really seem like a solid demonstration that value just is price and can't be otherwise but it misunderstands what value theory is actually used for in Marx.

[underlankers.livejournal.com]

The irony of the laissez-faire system is that in practice it will every single time lead to unfree markets dominated by giant conglomerates which are better-suited to merge with all their rivals, as given complete freedom to rule the market more wealthy and powerful corporations simply rig the system in their favor, destroy small businesses with impunity, and in the most exaggerated cases become quasi-governments in their own right (see: all proprietor-colonies of which the British East India Company and the United Fruit Company are the most notorious examples). The reason for this is of course that without any means to limit the pernicious effects of inequality inequality translates into the needs of the few outweighing any influence by the many.

But mention this fact to libertarians......

[yes-justice.livejournal.com]

laissez-faire system is that in practice it will every single time lead to unfree markets dominated by giant conglomerates which are better-suited to merge with all their rivals, as given complete freedom to rule the market more wealthy and powerful corporations simply rig the system in their favor, destroy small businesses with impunity

I've seen this in the software industry. To the detriment of the engineering.

[a-new-machine.livejournal.com]

There's another related question. Now, we saw with Solyndra that a company that should have died in its crib became pretty big, and remained so inefficient that it couldn't prosper without subsidization. How many companies are there, though, that receive subsidies, and that's the *only* thing making them viable? I'm not sure. I'd wager that without the lax private property enforcement (or outright corrupt seizure), currency manipulation, and direct cash subsidies, a large chunk of China's businesses wouldn't continue to operate in the black. That means that their businesses aren't going through the normal weeding out done by normal market forces. How much inefficiency are they allowing to continue? At what point do the benefits of the free market (specifically in making companies produce better products for less money to capture share of a competitive market) outweigh the negatives of not having subsidies? Isn't that a sort of benefit in itself of *not* having subsidies? One wonders how much it's actually worth, though.

[soliloquy76.livejournal.com]

Solyndra received a government loan, though, right? Does that really count as a subsidy?

As to the rest of your comment, the same question applies: how do we compete with a country that engages in this type of behavior? Market forces work fine at weeding out poorly performing countries that play by our rules. China doesn't play by our rules. In fact, it seems to use them against us.

[peristaltor.livejournal.com]

Much of the complicated issues on which you touch are covered very nicely in Ha-Joon Chang's Bad Samaritans, a book investigating the dogma of neo-classical economics and, more specifically, the tenet of Free Trade:

Belief in the virtue of free trade is so central to the neo-liberal orthodoxy that it is effectively what defines a neo-liberal economist. You may question (if not totally reject) any other element of the neo-liberal agenda -- open capital markets, strong patents or even privatisation -- and still stay in the neo-liberal church. However, once you object to free trade, you are effectively inviting ex-communication.

(Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press, 2008, p. 67.)

Chang was especially enlightening when he described how England went from supplier of raw fleece to producer of the best wool through active government involvement to stimulate the industry under the Tudors. Free market made England a place for sheep; government involvement made it a place for manufacturing and sheep.

You mention your Volt. Consider what happened when GM was free of the subsidies you mention, the ones that kept them alive and brought you the current Volt. Over a decade earlier, it built the best all-electric car history had until then known, the GM EV-1 (originally Saturn Impact); when it became clear these cars would actually want to be owned by people, they were dealt with accordingly:



Yes, I'm still bitter. Which has nothing to do with subsidies. Sorry.

[soliloquy76.livejournal.com]

Yeah, I saw the documentary about that. It was a big concern of mine in deciding to buy the Volt. After much research, I realized the risk of it happening again was minimal, especially considering I'm not leasing it. And, for the record, the Volt is an amazing car.

[mrbogey.livejournal.com]

Do you realize how much the EV-1 cost?

GM killed the "best" electric car that cost seeral times more than a regular car, had batteries which wouldn't last in poor climate conditions, and had range and charging abilityrhat would not suit most Americans.

I'm thilled the EV-1 died so they'd design a better car.

Imagine how great things would be if they were still making that lemon. They'd be deeper in the whole and stuck with that legacy support.

[gunslnger.livejournal.com]

Is this something free market proponents accept, and by accepting this reality, advocate?

Logic flaw. Accepting something does not imply advocating it. If you think it does, then you would be conceding the Christian Right's argument against promoting birth control in junior high and high school.

the US would be considerably behind the curve in development of next-generation vehicles.

So what? Since there are other alternatives that we can buy, why does it matter if "the U.S." has one? If the world economy was a free market, we wouldn't care where something was produced (and we shouldn't).

My question for the free market advocates out there is that, given the global market we're in where other countries are subsidizing their industries...

So, you're asking why we want a free market for everyone in the future if others don't have a free market now. That's a pretty disingenuous question to ask.

[politikitty.livejournal.com]

A race to subsidize industry out of a bid for competitiveness seems like over-all bad policy. I'm all for legislation to correct for market failures, but the existence of bad government in one nation hardly seems like a good reason for bad government here.

Comparative advantage is an important aspect of markets. It's how a market allocates goods and people find jobs that suit them.

Sometimes it has shitty consequences. But what exactly is the alternative? Steal the jobs back from impoverished Chinese who have limited job possibilities? And America is supposed to have a generation of college-educated worker bees take jobs that require little formal education? For China, it makes sense that they should foster jobs that are out of reach for the average worker. It doesn't make sense for Americans to fight to keep jobs the next generation is on average overqualified to do.

I think we vastly underestimate the amount of good we create by letting those jobs go. And I'm not talking about my relatively cheaper electronics, though I do love them. That's just the carrot we get in order to do the right thing. The good is the concrete increases in the standard of living for the rest of the world. (For similar reasons, I also find it hard to get so outraged at the disparity between healthcare prices in America and the rest of the world. While Canada might not deserve the huge price break, the third world definitely does. And America is rich enough, we actually can afford to subsidize them. [cue 10,000 nit-picking clarifications on healthcare.])

The problem is that means if America wants to still be the superpower deserving of being the richest nation in the world, we need to focus on our competitive edge. And that's way easier said than done because we're trained to be a nation of innovators. But right now we trapped in a wave of pessimism, trying to mimic the paths of previously successful people, without fully appreciating that each person who jumps on that bandwagon drags down the entire profession. Policy that defines how to be a unique profitable snowflake is something of a nightmare to create. And that problem makes such huge public crises of confidence that much harder to shake.

[anfalicious.livejournal.com]

US agriculture and manufacturing would collapse, leaving them unable to feed themselves or make anything. Then you essentially have 300 000 000 Americans with pitch forks trying to fend off the rest of the globe who are coming at them for some retribution and access to fields that can be productively farmed if you don't want your farmers to live in first world conditions.