Economics is an… interesting discipline.
Economics can be divided into various schools of thought:
- Neo-classical (mainstream)
- Post-Keynesian (Steve Keen)
- Neo-Keynesian (Paul Krugman, Joseph Stiglitz)
- Austrian (Ron Paul)
There are many more schools of thought but these seem to be the current main ones.
Unfortunately most schools are caught up in severe dogma from very poor assumptions such as:
- Consumers are rational.
- This is the worst assumption anyone can make. Human beings are known to do things that benefit them in the short term, but do not apply any weighting in their decisions to the long-term (e.g. global warming, waste, air/river pollution etc).
- Human beings are lazy and are unlikely to switch provider (particularly when there are costs to transfer from the current company to a new one such as with phonelines etc).
- Humans have limited time to make decisions making it impossible for them to weigh up all of the options available.
- Consumers have perfect information
- Advertising and the media seeks to undermine your rational decision making sets by obscuring important information about their product and appealing to emotion. Controlling the advertising/media is extremely expensive and therefore only widely available to larger firms. You will not even hear about a new great product if it is not advertised.
- Reductionism (macroeconomics can be derived from microeconomics)
- Finance (banks, money, debt) can be ignored
- Income is redistributed by ‘a benevolent central authority’ prior to exchange
- Markets operate under ‘equilibrium’, rather than be in permanent disequilibrium like reality.
- The way this is resolved is they add shocks at certain times to their equilibrium to create the disequilibrium behaviour.
- The net behaviour of individuals all pursuing their own interests results in the best social outcome for everyone. Really?
And many others. Post-Keynesian economists – or at least Steve Keen’s work – seem to be the school that has more accuracy based on their assumptions, and how their models represent empirical data.
A great 4 part series explaining how modern day capitalism differs from its philosophical roots.
1st part: capital and society
2nd part: personal property, money and finance
3rd part: wages and labour markets
4th part: capitalism, culture and society
The idea of a free market sounds like a fantastic idea; where prices are determined by the supply of resources to the market, and the demand of the public. But this is just a theory; you need to try and account for the starting conditions that are present if a truly free market was allowed, and how it would work in reality.
Free market (neo-classical) economics operates under the laws of supply and demand to determine the price of a good. Without going into the details of how flawed neo-classical theory is:
Supply is determined by the number of units of supply provided by a firm. Who would be able to control the supply of firms? The shareholders, who operate behind the scenes of a company, as they own the company.
Demand is determined by the number of units of demand provided by a consumer. Who Would be able to control how much demand there is? Given that there is one family in the US that own as much wealth as 40% of Americans, they could very easily manipulate demand (or supply by taking control of the firm) by using the disproportionate wealth relative to the rest of the participants in the free market.
In a free market all firms automatically tend towards monopolies as it is more cost-efficient by combining management, using economies of scale, combining patents, merging or acquiring to obtain a larger market share, etc.
This means in an unregulated market, financiers behind the scenes would be able to control supply, demand and form huge monopolies. A very good way for financiers to make the public believe that there is competition, is to keep the companies separate, but buy the majority of their shares so that they control them all forming an oligopoly, while remaining hidden from sight. Therefore they have no accountability through democratic processes. If you actually look through the assumptions of free market economics one of them ‘income is redistributed by a benevolent central authority’ – in order to ensure the power of the market is equally distributed amongst the population.
Inelastic goods – goods that are necessities such that the demand for them will remain similar irrespective of price – would be particularly easy to monopolise and charge extortionate prices as the consumer has to buy these goods in order to survive e.g. water, healthcare, food, transport, electricity etc.
Regulation, and in my opinion national ownership of inelastic goods and services that are essential to the functioning of society, are absolutely necessary in order to ensure that the economy works towards the public’s interests, rather than private interests. This means a significantly sized government is necessary, because at least in a democracy they have to pretend to care about the public as they can be held accountable.
A significant problem in free markets is that when there are national boundaries existing between countries and corporations get so large that their wealth exceeds that of a country, rather than corporations competing for markets in a country, countries are then competing for the corporations business. This essentially means a race-to-the-bottom in terms of regulations and corporate taxes, because the corporation can hold the country’s economy to ransom.
The only way a free market might work is if a mass redistribution of power and wealth occurred prior to a free market being implemented, and that legislation mechanisms would be put in place to prevent monopolies forming and wealth concentrating itself. You could compare the free-market with survival of the fittest in nature: if a select few starts off the survival game with tanks and the rest only have sticks, it is going to be a complete massacre. And this is literally what will happen, billions will die and billions will live under what is essentially miserable slavery.
People defending free markets often defend monopolies by showing that due to the competitiveness of a free market some companies are able to compete against monopolies to a certain extent. What is immeasurable though is how many companies with a perfectly better product failed or didn’t start at all due to huge barriers to entry created by the monopoly in the first place. What is the probability that one will get through these barriers? How long will it take? If the monopoly sets the prices of an inelastic good so high, what good is it to the public if a competitor arises 10 years later?
“Liberalism and state-interference are not opposed to each other. On the contrary, any kind of freedom is clearly impossible unless it is guaranteed by the state. A certain amount of state control in education, for instance, is necessary, if the young are to be protected from a neglect which would make them unable to defend their freedom, and the state should see that all educational facilities are available to everybody. But too much state control in educational matters is a fatal danger to freedom, since it must lead to indoctrination. As already indicated, the important and difficult question of the limitations of freedom cannot be solved by a cut and dried formula. And the fact that there will always be borderline cases must be welcomed, for without the stimulus of political problems and political struggles of this kind, the citizens’ readiness to fight for their freedom would soon disappear, and with it, their freedom. (Viewed in this light, the alleged clash between freedom and security, that is, a security guaranteed by the state, turns out to be a chimera. For there is no freedom if it is not secured by the state; and conversely, only a state which is controlled by free citizens can offer them any reasonable security at all.)” – Karl Popper, ‘The Open Society and Its Enemies’ (Chapter 6).
Free markets are essentially the parallel of survival of the fittest in nature. Yes you can bring prosperity for a while, but you will have many shocks along the way and eventually a shock that ends up resulting in mass extinction. This is inherent to any system that is built on randomness (or in human terms: irrationality). Deregulated free-market capitalism is like running a nuclear reactor without any controls. You may be able to get it to work for a bit, but when it starts destabilizing you have no way of preventing it from causing a meltdown.
Corporations are tightly controlled structures, no free-market mechanisms occur within a corporation; this is why the chances of shocks within the corporate structure are far more unlikely. All decisions are carefully made backed with significant analysis, rather than relying on the However, external shocks in the economy, which are based on where capital is allocated by the free-market whims of financiers seeking short term profit, can cause the corporate structure to collapse.
It is claimed that getting rid of governments and allowing the free-market to reign increases the individual’s freedom, yet it is institutions like the government that put into law our freedoms such as human rights, without which we would have none. The problem is not the government in itself, the problem is that the government is not operating in the public’s interest.
“Genuine free trade doesn’t require a treaty” – Rothbard
There are many free trade agreements that the US is cementing with other countries including: TTIP, TPP, TISA, NAFTA and more. All of these agreements will lock in around 70% of global GDP into neo-liberal economics, and make opting out extremely costly or impossible. The countries that will be excluded from these agreements are the BRIC countries: Brazil, Russia, India and China, in addition Iran is not included.
Wikileaks: Free Trade Agreements
Quote from US Whitehouse website: “In fact, early in our history, the U.S. had to deploy “gunboat diplomacy,” or military intervention, to protect private American commercial interests. ISDS is a more peaceful, better way to resolve trade conflicts between countries.”
Trans-Atlantic Trade and Investment Partnership (TTIP)
TTIP sounds boring and harmless on the front of it, but the name is merely doublespeak to give corporations far more power over the public in the EU, and allow additional methods of transfer of wealth from the public to private interests. You will not see it advertised this way by most politicians. Aspects of TTIP:
- Investor-State Dispute Settlement (ISDS). See below
- Corporations have a large influence over the legislation of TTIP. 92% of meetings are with corporations, the rest with public interest groups
- The negotiations for it are conducted in secret from the public – The TTIP papers are not allowed to be removed from a room in Brussels. No mobile phones, no notes can be taken.
- Privatisation of public assets is part of the agreement in order to avoid, so called, ‘state monopolies’. It also makes it more expensive/difficult to nationalise assets
- It will undermine employee rights, food standards, environmental standards etc.
- It will make all of these changes irreversible
The terms of Obama’s proposed TPP ‘trade’ treaty with Asian countries won’t be made public until the treaty has already been in force for at least four years. The terms of Obama’s proposed TISA (Trade In Services Agreement) with 52 nations won’t be made public until the treaty has already been in force for at least five years. Obama’s proposed TTIP treaty with European countries has been so successfully hidden, that even the number of years it will be kept from the public isn’t yet known.
Investor-State Dispute Settlement (ISDS)
ISDS is an integral part of TTIP that gives corporations the right to sue governments in secret courts (no public scrutiny) with corporate lawyers if their actions affect their profits. It is essentially an additional method of transferring public funds (paid by the tax payer) to private corporate interests. Governments rarely win the cases.
Real examples of misuse of ISDS:
- Swedish polluter Vattenfall is seeking over US$3.7 billion from Germany following a democratic decision to phase out nuclear energy
- Canadian company Lone Pine is suing Canada via a US-subsidiary for CAN$250 million after the Canadian province of Quebec imposed a moratorium on shale gas extraction (fracking) over environmental concerns
- Tobacco giant Philip Morris is demanding US$2 billion from Uruguay over health warnings on cigarette packets
- In El Salvador, an Australian company is suing the government before a closed tribunal of corporate lawyers for $300m (nearly half the country’s annual budget) in potential profits foregone. Why? Because El Salvador refused permission for a gold mine that would poison people’s drinking water.
- Find more real examples here
Potential examples of what ISDS could block:
- New legislation designed to protect public health – such as new measures to curb tobacco consumption, or sugar or alcohol consumption
- New moratoriums or bans on Genetically Modified Organisms (GMOs)
- New legislation to label GMOs in both fresh and processed foods;
- New legislation designed to address climate change and promote renewable energy over fossil fuel energy
- New regulations to restrict the use of harmful pesticides within both commercial and residential markets