Category: economics

“Skin in the game”: The market for high-stakes services

~ Adam Kotsko ~ 4 Comments

It is a commonplace in public policy that exposing citizens to more price signals for important services is an important part of bringing down costs. In the health care arena, for example, it’s often said that the reason medical costs are so high is that customers by and large are not paying their own bills and don’t even know the costs of the various procedures — if they were the ones who had to pay the difference in price between a brand-name or generic drug, they would be more likely to make the sensible, cost-effective decision.

This theory is completely, 180-degrees wrong. Even if we assume that consumers are rational utility-maximizers, “saving money” is not the relevant utility to maximize in the medical situation — preserving one’s health and, ultimately, one’s life is the priority that overrides all others. Even total financial ruin is preferable to death. Further, in the absence of specialized medical knowledge, it is understandable and even rational to use price as a proxy for effectiveness. Even if there is a point of diminishing returns, that extra little bit of effectiveness may be the decisive factor.

We can see a similar dynamic in other high-stakes scenarios. Higher education is an economic good, but it is an economic good of a very particular type: it permanently affects your long-term economic prospects, and you only get one shot at it. Here again, it is reasonable to use price as a proxy for quality in the absence of other information — and it is likely that the elaborate attempts to generate hard data about learning effectiveness will lead to the unsurprising conclusion that schools with better resources deliver better outcomes! Again, even if there is a point of diminishing returns on the price vs. quality graph, people will want to maximize the quality to the extent possible, in their one chance to go to college. In the choice between thwarted life prospects and unmanageable debt, unmanageable debt surely seems preferable. The analogy with legal services is easy to draw as well — when one’s freedom is at stake, no price is too high.

Once we acknowledge that there is a qualitative difference between high-stakes, life-or-death outcomes and financial outcomes, we should expect people in a private market to drive up costs for high-stakes services at every opportunity — which is in fact what we witness in practice. The only way to control prices is to control prices, i.e., to limit what can be charged for the relevant services either through government regulation, through negotiation on behalf of large groups of customers, or through the creation of a “public option” for the service in question (like public universities in the postwar era).

The theodicy of ethical consumerism

~ Adam Kotsko ~ 6 Comments

I wrote a few weeks ago about the ideological function of free will: we don’t blame people because they have free will, we say they have free will so we can blame them. In the theological realm, the goal of granting us free will isn’t to enhance our dignity or the meaningfulness of our life, but to make sure God has someone to blame for all the bad things that happen — and I believe we can apply the principle of a homology between the theological and the political realm here as well.

A perfect example of this is dynamic is ethical consumerism. It often strikes me as bizarre that we’re even given a choice between the gross processed food and the healthy organic food, or between the hideously wasteful product and the ecologically conscious product — much less that the “price signals” are invariably tilted toward the bad option. Wouldn’t it be better to remove the bad option in the first place? Why is something so important left to arbitrary individual choice?

Here I think the fact that we know consumers will generally make the wrong choice is not a bug, but a feature of ethical consumerism. The political class and business elites have already collectively decided that ethical farming and environmental sustainability are not important goals — and so they have left them up to individual consumer choices so that they can disavow responsibility and blame all of us for not choosing correctly.

Whenever we’re offered a free choice, we’re being set up.

A thought experiment

~ Adam Kotsko ~ 9 Comments

Imagine there was a new drug that could indefinitely increase a person’s physical strength — the more they have, the stronger they are. In the aggregate, the increased use of this drug would increase the total physical strength of the human race.

Now imagine two regimes for distributing this drug. In the first, access to the drug is limited to a relatively small portion of the population, who are able to get as much as they want. Human physical strength overall would be growing under this regime, but the vast majority of the population would be effectively weaker with all these Incredible Hulks walking around — in fact, even if their own strength remained constant throughout the process, most people would be in greater physical danger by virtue of the very existence of the Hulks.

In the second, access to the drug is widespread across the population. Everyone is able to do one-armed push-ups and free-standing hand-stands, but no one is able to gain a significant edge over anyone else. Here I think it would be more meaningful to talk about a general increase in human strength, even if the aggregate effects of the drug were less overall.

If the first distribution regime were the only possible one, I think we’d all agree that it would be better not to have the drug at all than to allow, say, 1% of the population to become Incredible Hulks and walk around among us — even if the Incredible Hulks were able to “create jobs” by forcing the weaklings to slave for them.

“My power is made perfect in weakness”: On institutional breakdown

~ Adam Kotsko ~ 3 Comments

One point from Hardt and Negri’s Empire has always stood out to me: namely, that institutions typically become more powerful as they break down. The most familiar example is the university, which has in many ways squandered its cultural credibility and has even actively victimized some of its key constituencies (student loans, adjunctification, pervasive rape on campus). Yet the demands we make on the university are ever-increasing. It’s as though the very breakdown of the university highlights the fact that we need “something like” the credentialing role it performs to make modern society manageable — and so we settle for “something like” the university (i.e., the actual-existing university).

One can see the same dynamic at work with contemporary capitalism. Clearly the economy is not working, yet the very injustice and discontent it breeds highlights the benefits of having an apparently impersonal mechanism for distributing economic rewards, lest we degenerate into a post-apocalyptic hellscape of survivalist anarchy. During the government shutdown, I started a series of tweets jokingly predicting absolute social breakdown if the U.S. defaulted, and many of my readers seemed to be deeply disturbed by them — it felt a little too realistic that the social bond in a highly individualistic nation with a lot of guns lying around may turn out to be more fragile than we’d ever imagine. The same holds for the U.S. Constitution. It is widely acknowledged to be highly irrational in its design, and yet the idea of “rebooting” seems unthinkable to most Americans.

If institutions make their demands more strongly felt precisely when they’re failing to deliver on their promises, it seems that the reverse would also hold: we are more able to reform our institutions when their hold feels less urgent. I imagine that much of the strong regulation of capitalism during the Cold War era came from the existence of a living, breathing alternative to the free market — even if the Soviet model did not seem desirable compared to the US model, everyone could tell that the USSR was not a post-apocalyptic hellscape. During the financial crisis, by contrast, it was commonplace to hear people say that if a key financial apparatus broke down, we simply “wouldn’t have an economy anymore.”

Similarly, as I was saying yesterday, in a world where every area of life is increasingly saturated with cutthroat competition, there doesn’t seem to be any alternative to the traditional family as a space of meaningful relationships — and hence people persist in propping up the model and even want to expand it to previously excluded populations, even though it winds up being a costly and painful situation for increasing numbers of people.

Since I can’t figure out how to wrap this post up: “hence the need for full communism is all the more urgent.”

The solution to unemployment isn’t better-trained workers: Or, Systemic problems have systemic solutions

~ Adam Kotsko ~ 18 Comments

Following Chomsky’s advice, I follow the business press to see what the ruling class thinks is going on in the world, and more specifically, I subscribe to Bloomberg Businessweek, which occasionally allows reality to creep in (global warming is real, deficits aren’t always bad) as opposed to the more nakedly ideological Economist. Recently, for instance, they ran a piece on the minimum wage which included the fact that raising the minimum wage does not actually decrease employment outside of the artificial environment of Econ 101. Yet it also included this little gem:

“Raising the minimum wage is a short-term fix,” contends Wal-Mart’s [vice president for communications, David] Tovar. The long-term solution, he says, involves “expanding education, training, and workforce development.”

This kind of nonsense drives me absolutely crazy. It makes no sense to assume that changes in the composition of the workforce will lead to significant increases in aggregate employment levels. Continue reading “The solution to unemployment isn’t better-trained workers: Or, Systemic problems have systemic solutions” →

It’s the *political* economy, stupid!

~ Adam Kotsko ~ 18 Comments

We live in an era where there is a deep desire to view humans as machines. Humans are not machines — they are free beings who can do surprising things for a variety of reasons or no particular reason at all — but our whole society is set up to hide that fact. Public policy is now the art of “nudging” “incentives,” setting up conditions where human-machines will respond appropriately. Important social choices are outsourced to something called “the market,” which is presented as a kind of naturally-occuring decision-generating machine despite being a product of human choices that runs on human choices.

It makes sense that people would turn to such impersonal, supposedly a-political models of our shared life. Politics has always been traumatic, particularly in the 20th century. We’ve all heard it before: “You think people can take collective control of their destiny in a deliberate and purposeful way? So did Hitler and Stalin!” But politics in the sense of purposeful human decisions about the distribution of power and resources is irreducible. Even if there were a supercomputer perfectly calibrated to distribute the best possible outcomes to everyone, the decision to entrust it with this responsibility would be a human decision — as would the ongoing decision to continue to submit to it. We like to pretend that something called “the market” effectively is that supercomputer, but it isn’t. All it does is cover over the human decisions that are being made.

The irreducibility of actual human decisions holds even at the level of the global market. Continue reading “It’s the *political* economy, stupid!” →

The job skills employers crave!!!

~ Adam Kotsko ~ 21 Comments

Periodically, we learn that employers need a particular set of skills and universities should re-tool accordingly. These in-demand fields command higher wages, and so students are encouraged to flock to them. Indeed, politicians often claim that producing more graduates with said skills will help with unemployment and increase wages overall.

Let’s look at the economics underlying these claims. Under what circumstances does more widespread availability of a product lead to higher prices for that product? I’m pretty sure that the laws of supply and demand would indicate just the opposite result — significantly increasing the supply of a product leads to commodification, creating a buyer’s market where sellers have to compete on price.

Furthermore, since when have employers clamored to pay more people higher wages? If there’s a single characteristic trait of contemporary capitalism, surely it is the constant demand for ever-cheaper labor.

Hence, I conclude that when a particular field or skillset is trumpeted as the Next Big Thing demanded by employers, the goal is to get students to flood that field or skillset in order to commodify it. And this isn’t just a hypothetical — isn’t it exactly what has happened with computer science majors within the last ten years or so?

For that reason, I would advise students to actually avoid such “hot” majors, unless they have a good reason to believe that they will be significantly ahead of the curve. By the time the in-demand field is being propagandized in the mainstream media, it’s almost certainly too late for that.

Given the pressures leading inevitably to the commodification of particular job skills, I believe that a liberal arts-style education that increases students’ adaptability and ability to pick up new skills is a much better — indeed, safer — investment than any directly job-oriented program of study. But what do I know? I’m just an idiot who cares about my students’ actual well-being, not a job creator who wants to exploit them on as cheap and flexible terms as possible.

Really basic stuff about government debt

~ Adam Kotsko ~ 21 Comments

I have become increasingly frustrated with any discussion of the national debt — equally so with conservative scare-mongering and lukewarm liberal responses of the type “well, the deficit is a really serious long-term problem, but….” In reality, there is no inherent problem with any level of government debt for a country that controls its own currency. It can pay back any amount of debt essentially on-demand. Even foreign creditors have no particular leverage over a country with currency sovereignty: the worst they can do is “threaten” to trade their interest-bearing assets in for non-interest-bearing cash. Foreign debt is only a problem if the debt is denominated in a currency over which the country has no control (e.g., gold, another country’s currency, or the Euro), which is not the case for the U.S.

This claim does not require advanced Marxist theory, but simple accounting knowledge. When the government goes into debt, what it’s concretely doing is selling bonds. The government receives cash for those bonds, and the buyer gets an interest-bearing asset in exchange for their cash. If we look at it from the perspective of the U.S. as a whole, it balances out, by definition, every time. The nation is neither richer nor poorer because the U.S. has issued debt — the government has liabilities, but those are equal to the assets it has created for the private sector. This would be true literally no matter how big the debt became. It’s basic Accounting 101.

Continue reading “Really basic stuff about government debt” →

The People’s Corporation

~ Adam Kotsko ~ 28 Comments

Yesterday during one of my Twitter rants, I reintroduced an idea I had floated several years ago: namely, that the creation of a corporation that could actively reorganize production while expanding could be a possible vehicle for leftist goals. After all, if the corporation is the most powerful form of organization in the world today, why shouldn’t we have one?

When I first brought up the idea, some people objected that any corporation would be essentially forced to make ever-greater profits and therefore give up on the goals a leftist corporation would presumably have. While it’s true that every business has to “make money,” it is not the case that every business must always make more and more profit. Continue reading “The People’s Corporation” →

“He who will not work shall not eat”: An explanation

~ Adam Kotsko ~ 13 Comments

This quotation from 2 Thessalonians 3:10 is often trotted out to make the case against government benefits for the poor. What I’d like to do in this post is to clarify the context of this quotation to show that it cannot be construed to contradict the overriding biblical theme of concern for the poor.

Scholars believe that Paul came to Thessalonica fleeing persecution and fell in with a group of laborers (most likely leatherworkers, which is presented as Paul’s profession elsewhere in the New Testament). They formed a close bond, and Paul was able to win them over for the gospel. The occasion for the first letter to the Thessalonians arose when one of the leatherworkers apparently died. The remaining members were concerned that this person would miss out on the Second Coming because he had died slightly too soon — but Paul clarifies in the letter that actually the dead will be raised first, and then “we” will be taken up to join them. Obviously the situation envisioned here is that the End will be coming sooner rather than later, certainly within the readers’ lifetime. This letter is one of Paul’s most deeply felt writings — it is palpable that he really loves these guys and doesn’t want them worrying.

Shifting the scene to 2 Thessalonians, the tone has shifted dramatically. Instead of the tender consoler, Paul here is playing the role of the taskmaster. This shift, along with apparent contradictions in content, has led some scholars to conclude that this letter is actually a pseudonymous “correction” of the first letter, attempting to tone down some of the apocalyptic enthusiasm. I agree with this assessment, but for the purposes of this post it doesn’t really matter whether it was the real Paul who wrote 2 Thessalonians or not. Apparently some of the laborers have decided to quit their jobs in anticipation of the End, and the author clarifies that the End is not coming quite that soon — in the meantime, everyone should continue contributing to the community.

Two points stand out to me. First, this letter is almost certainly addressing a community of able-bodied men with a set profession. Second, it is responding to a scenario where people are voluntarily refraining from work out of what the author (whether Paul or someone else) believes to be a misguided apocalyptic enthusiasm. Given these facts, it seems deeply questionable to extract this verse as a general principle for public policy, much less to cite it as somehow overriding the clear priority of helping the poor that is pervasively attested throughout the Hebrew Bible and New Testament.