Pur Autre Vie

I'm not wrong, I'm just an asshole

Wednesday, March 14, 2012

Competition for Thee but not for Me

I am sometimes critical of capitalism and the values it propagates, but there is no denying that markets are the best way to organize most economic activity. But note this dynamic: the ideal outcome for most people is to be sheltered from market forces while everyone else is subject to them. When everyone has to compete for your business, you will probably enjoy a wide selection of reasonably-priced goods and services. But it is very unpleasant to compete for your livelihood.

And so people have developed all kinds of mechanisms to shelter themselves from competition - monopolies, unions, tenure, laws that make it difficult to fire people. One measure of a society's commitment to markets is the extent to which it undertakes to force the market on people by prohibiting their attempts to evade it (e.g., anti-trust laws). Of course, it is not clear that it is optimal to maximize competition - if people are risk-averse, then maybe some level of protection from markets is justified, even if it distorts prices and reduces output.

This raises the possibility that social democracy can bring large benefits by giving everyone the same shelter from market forces, while otherwise breaking up all efforts to evade them. Uniform and non-discriminatory generosity, on the one hand, and total exposure to market forces, on the other. You still have price-distortion, since people's incentives are blunted by the social safety net, but a social safety net is probably morally required in any case. Tying the social safety net to a complete lack of anti-competitive distortions may be a very good trade. In fact, one possibility is that if you try to carry out a pro-competitive project in the absence of a strong social safety net, you will fail because people will be too determined to resist. Only by softening the market can we make it acceptable. This is one way to view the argument that the New Deal was about "saving capitalism from itself." Maybe the same logic applies to Bismarck's reforms.

There is a problem of political economy: it is possible that the only way to sustain social democracy is to have powerful labor unions to provide a constituency against fiscal conservatism. Then the unions will prevent you from carrying out the pro-competitive project, at least when it comes to unionized sectors of the economy. I am not sure how this has played out in the social democracies of northern Europe, except that Denmark supposedly has a very flexible labor market in which it is easy to hire and fire people. If that's true, it seems like a very good outcome.


Blogger Sarang said...

Yes, I've puzzled over the political economy aspect of this. Prev. posts: http://glassbottomblog.blogspot.com/2011/07/theories-of-politics.html and http://glassbottomblog.blogspot.com/2010/08/politics-of-poverty.html

I've changed my thinking on this a little, because of the sense that there is more path-dependency/culture-specificity in the data than any simple equilibrium analysis gives you a handle on. It is clear to me that Scandinavia OUGHT to be agitating for lower taxes and higher levels of spending, which ought to bankrupt the stoat, etc. In short, the California outcome seems so extremely natural that I don't know why every democracy doesn't end up there. I can think of a few lines of explanation but all of them come down to "Scandinavians are just more sensible" or "Scandinavia has successfully made high taxes a nationalistic issue via stereotype."

2:58 PM  
Blogger James said...

Sarang, the only things that occur to me are:

1. The Scandinavians have a legitimate goose that lays golden eggs, and they are reluctant to kill it. Maybe no one ever thought California was built to last. (This may be question-begging.)

2. I don't have all the statistics on this, but Scandinavia is fairly urban I believe (Denmark is 87% urban). My sense is that urban voters are generally more supportive of genuine social democracy, whereas in California the budgets were always based on a tacit agreement not to point out each other's fantasies.

7:32 AM  
Blogger James said...

Well, the census website is difficult to use, but it says that California was 92.6% urban in 1990. Presumably that hasn't changed too much. Who knows whether that is comparable to the CIA's classification as applied to Denmark.

8:20 AM  
Blogger Sarang said...

I suppose it's also the case that Denmark has a much more "visible" welfare state; in other words the Suzanne Mettler argument, http://themonkeycage.org/blog/2011/02/08/the_invisible_american_welfare/

I think "urban" is misleading here because most small-to-medium American cities have basically no public transit, shitty commons, etc. by N. European standards. So there seems to be less to lose and status quo bias should be correspondingly more powerful. Politicians might be wary of touching any welfare-state shibboleth because the other side will scream "death panels" and people are protective of the welfare state.

(Still, why is the system stable against starve-the-beast? Are people better-informed? More receptive to slippery-slope arguments?)

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