Gary Becker's World View -or Something Like That

One feature I like from Chicago political-economy school is their optimistic view on market-like competition and the ability of people to generate it --regardless of any (usually government) attempt to suppress such competition.

Gary Becker interview here is one example. Unlike the right-wing radicals who saw the passing of healthcare bill as a doomsday for America, Becker remains rather optimistic that voters as well as competing interest groups generally would place more realistic assessment and control on this political and politicians' product.

I share his view on the role of interest groups competition - including on the latest Pansus brouhaha.

My favorite lines, however, is his explanation on people's anti-market bias. Becker says at ease:

"There's one bias that we're up against all the time: Markets are hard to appreciate. People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

Yes, indeed market is hard to appreciate - mostly based on appeal to emotion.

On market, behavioral economics and poverty

In my Facebook note, which have somewhat become the substitute for blogging, we have a productive exchange on, again, market. Specifically, on why most economists believe in the market, what are the limits of the market, and how the economics as a discipline has evolved and integrated the so-called 'non-mainstream' approaches. One of the 'non-mainstream' approaches is the field of behavioral and experimental economics. Basically, they show how the rationality assumption is often violated due to cognitive, emotional, bounded rationality etc.

I just recalled some readings by Harvard's Sendhil Mulianathan that addressed how psychology and behavioral perspectives can help us understand more why rationality assumption often fails, particularly in the context of poverty: this one, this one (with Richard Thaler), and this one (with Marianne Bertand and Eldar Shafir). Those three are basically emphasizing each other. He discussed some cases in which the rational maximization model may not be a very good approximation of human behavior, especially when we talk about poverty: underinvestment in education, undersaving, loss aversion in property rights assignment, misaligned teacher's motivation or low take-out rate of social programs.

I admit that, yes, we have to keep rethinking our epistemological position on rationality and how the market works and doesn't. On the other hand, we as economists do know that market often fails, hence it results in suboptimal outcome. But what we doesn't always know why it fails, let alone what solution should we prescribe. The reason is because "all working markets are alike, every failed markets fails in their own way." Meaning, we need to see things case by case and come up with specific - take a deep breath - policy implication, if any.

So why do we still stick to our mainstream or traditional economic tools? Because it is still a good tool. It enables us to: 1) compare the outcomes when the market works (called the benchmark condition) with the one under market failure, 2) analyze which assumptions are violated, 3) think about what - take a deep breath - policy implication, if any.

Yes, the market works for the poor

In 2005, The Economist published their special reports titled "A Digital Divide." The argument was one of the main reasons for the persistence of poverty is the lack of access to market (goods, labor, or financial). Information and Communication Technology (ICT) has the potential to provide the access to market. The problem is the poor tend to have limited access to such technology. Hence, one way to help alleviating poverty is to provide greater access for the poor to ICT.

A few years ago, this idea did sound absurd. What? Internet or mobile phones for poor farmers or fishermen, while most of them still even struggle to buy food? (Even Rizal once was skeptical. Back in 2005, I asked him how ICT can help the poor. "Sell the computer, buy them rice," was his answer).

However, anecdotal evidences do show that ICT can, and does, help the poor. The Economist's this week special reports provide a series of article - one may see it as a conclusion for their 2005 reports - on how ICT, mobile phone in particular, have transformed lives in the poor world in almost a revolutionary way. It connects buyers and sellers in remote areas; helps small businesses taking orders on the spot; enables farmers to get weather forecast hence deciding whether or not to plant their crops. Amongst all, in India and Africa, mobile phones are the new financial intermediaries:

... mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash.

The question is, are anecdotal evidences good evidences? Contemporary studies seem to support the idea. This study is an example. (Of course, there is always a debate on external validity, generalization, etc.)

There is a bigger picture I'd like to point out: this is an example of how market incentives work, and work for the poor. Ten years ago, mobile phones were still a luxury. But in just a decade, costs have fallen dramatically so virtually almost everyone who wants to have a cell phone can have one. Competition and market liberalization has contributed to this falling costs.

On the other hand, (poor) people in the developing world are potential consumers. The market sends this signal to the producers and network providers, who keeps innovating their products. The innovation did not stop there; came Grameen Phone, came M-PESA, and so forth.

So, don't lose faith in the market economy, yet...

Capitalism, with a subsidy

The end of gentlemanly capitalism
Tony Curzon Price
The global financial panic triggered by uncertainties in the United States home-loans market is much more than an institutional wobble, says Tony Curzon Price:
it is a system-crisis that requires a radical solution.
13 - 08 - 2007


Over the past week, we - the rich-world voter and taxpayer - have bailed out the hedge-funds, their bankers and their counterparts caught in the global squeeze on credit. Again. It happened in 2001 and in 1998. The financial system has once more fallen into the soft, bouncy, but ultimately comfortable safety-net (trampoline?) that we - all of us together, through our central banks and the losses we are prepared to underwrite as taxpayers - extend to troubled financiers.
Are we right to keep bailing out the bankers, offering them a safety-net that turns their business nto a risk-less, one-way bet? There was an innocent time when we - as voters and taxpayers - were right to always be there as "lenders of last resort". But finance has become self-servingly postmodern too: the banking system knows how to take advantage of the social-security we have extended, and we are only storing up trouble by keeping them afloat. We should resist the temptation to "hug a hedgy''. Now is the time for some tough love for the newly stressed and bedraggled hedge-fund managers. Only this will allow the emergence of a fair and stable financial order.
But, the fund manager might retort, why endure the pain that a wholesale financial restructuring now would entail? Can't we - that is, you - give in just one more time, and hope that our binge of bad investment is pardoned in the dilutive (and real) forces of technological and global-south catch-up growth?
Tony Curzon Price is the editor-in-chief of openDemocracy. He worked as a consultant economist for more than ten years. Since 1997, he has lectured on economics and energy policy to postgraduates at Imperial College, London, and at the École Polytechnique Fédérale de Lausanne (EPFL)

Among Tony Curzon Price’s recent articles in openDemocracy:

20
This is an offer the rest of us should refuse, for it resembles nothing so much as the argument for repeated concessions to the welfare-Keynesianism of the 1960s and 1970s. The crisis of that model, and the lack of principled, intellectual and political, resolve among the policy-makers of that era in response to it, eventually undermined the modern dream of fair, full and fruitful employment. So today, the continuation of healthy global growth in the world economy is threatened by institutional blockages, this time from systematically malfunctioning financial agencies that seem at every step too powerful to cross. We live in a moment when technology and trade offer great hope for the development of good lives. This generation must not allow itself to squander through cowardice, as did its predecessor, the opportunity for sustainable economic betterment.
The masters of go
The lineaments of crisis are plain. Financial markets have fallen sharply. Central banks have acted in concert as "lenders of last resort'' to troubled funds. Bond dealers show from their trading behaviour that they are no longer expecting interest rates, which had been rising, to rise any further in 2007. The consensus is that the United States federal reserve and the central banks of Europe and Japan have been right to intervene, to offer cash when none others will, in order to avoid a system-wide crisis. The world's finances rely on a basic assumption that markets will continue to exist. If I need to make a cash payment, I will be able to select which of my assets to sell and will actually be able to sell them at some price.
In a system-wide crisis, no one wants to trade. There is no price at which anyone can be convinced to hold a contract, because no one knows what its value is. In this circumstance, a fund manager is a helmsman in a storm: aware of every danger of his position but powerless as wind, then waves, batter him here, then there. But unlike the helmsman, the storm is made worse if another ship in the vicinity goes down. If a bank actually faces bankruptcy, all the contracts and obligations held by that institution will be bad, thus infecting trust in every part of the financial system.
The central banks bail out the funds in order to stop anyone seeing a ship go down, as a way of stemming contagion. That is the defence. This is why we, as citizens and voters the owners of the central banks, lend money in conditions in which no banker would lend. And the argument is strong: contagion and system-wide crisis will have a real impact that will cause hardship: when firms and households find borrowing is hard, demand drops, jobs go ... recession. There is a real case here for us to bail the hedge-funds.
But the metaphor of the storm is misleading. Meteorology is not caused - at least not predictably - by the decisions of the helmsmen it affects. Financial crises are. It is because we can be counted on to be lenders of last resort that traders and managers can discount the risks of system-failure and therefore behave imprudently with increasing ease and frequency. The pattern is familiar from the libertarian critique of welfarism: while a safety-net for the deserving poor is good, the existence of the safety-net will create a class of idle, undeserving scroungers. It is hard to be good without encouraging others to be vicious.
Fund managers have been enjoying a one-way bet for six years or more. A credit-worthy institution could borrow very cheaply and lend on without any concern about becoming systematically over-stretched. In the extreme case, the Japanese central bank has been lending money almost for free. Those with access to free money could lend it on to those without such privilege and pocket not just the difference, but, through gambles, multiples of the difference. This is the magic of the "carry-trade".
More at the link below. Or, click on the title.

http://www.opendemocracy.net/article/globalisation/institutions_government/end_of_capitalism