 There are some who tell us the best policy is to just leave the market alone Not to intervene Don't regulate keep the government and the politicians out of the economy and everything will turn out great and There are others who have argued and continue to argue That too often doesn't turn out well for too many of us and And or the environment so that Whether regrettably or not It simply is unwise and not prudent To engage in Attempts to regulate The market in one way or another so that's the usual form in which the discussion Goes on and and you can pretty much divide economists into two competing camps on that subject Some who are for less intervention somewhere who are for more intervention There's another question that I think is a deeper question for the long term and I will put it this way In a truly desirable economy One in which we've designed procedures For organizing and coordinating our economic affairs In a way that is truly Democratic in a way that is truly fair and equitable in a way that is really actually designed To be environmentally sustainable If we think about what such an economy would be Would it be a market economy and That's not an issue that most people today are spending a great deal of time thinking about And I would say Legitimately so but it's still a question that I think is important and in some sense a serious evaluation of The pros and cons of markets Is not only helpful in the thinking into the future about whether or not We want to start thinking much more seriously About alternatives to the market mechanism all together, but I think that in the debate over what would be Necessary and fruitful interventions and market processes. I think it's very very useful to review You know very very seriously what it is that people have argued and what the case is for in what ways is it that markets Are helpful in what way is it that marco's have that markets have problems associated with them? So that's really what I'm going to do today And the case for markets Is made more often with a bigger megaphone In the bigger media and with louder voices And that includes within the economics profession There has been a dramatic trend within the mainstream of the economics profession To sing the praises of markets and worry less about Market failure or the failures of markets than really any time in history In some sense the last 30 years has been a kind of free market jubilee Both within the economics profession in societies as a whole, etc Now Some of this will come out only in questions and answers afterwards, but I think that one can easily trace The source of a great deal of our present economic situation Precisely to this 30 year trend in the direction of Neoliberal free market policy And if I'm right about that That the predictable trend of moving farther in the direction of free markets Non-interference in markets in any form or way If it is responsible for our economic crisis, well, then that's a serious thing to take into consideration Because this is the greatest economic crisis in the last five generations This is the greatest economic crisis since the Great Depression And what is ironically different about this economic crisis, which began over four years ago now is Four years into this crisis I would argue that we are not pursuing any problems in the economy Pursuing any policies that are likely to bring it to a close and likely to improve likely to improve matters as a matter of fact almost every government in the advanced capitalist economies No matter what the political party's persuasion seems to be Center right center left almost every political party. That's a traditional party. That's a large party is in fact pursuing policies that will predictably make this crisis even worse than it already is and In that one regard I would argue that the situation is even worse than it was in the 1930s Four years into the Great Depression Governments had started to pursue the kinds of policies necessary to pull us out and There is no sign that that is true today now But to the job at hand First of all, let me sort of situate the disagreement I'm going to read you a short passage about markets and then I'm going to read you a second short passage about markets And I think they clearly sort of Frames the discussion Makes it very clear that well one can read this quite differently or at least some people do Markets are an efficient way of producing and distributing a very large number of mundane items Market incentives are a dependable way of getting our bread baked Markets allow us to make the best use of the information dispersed throughout a society Markets give their participants a certain kind of freedom Expanding the range of choices and giving each person a variety of partners with whom to deal Those words were written by David Miller and Paul Estrin back in 1994 They're actually proponents of market socialism not market capitalism, but it certainly embodies the sort of flavor of the positive features of markets and the different kinds of positive features that People claim and argue our characteristics of markets Well, here's the opposing view Rather than efficiency machines optimal incentive systems cybernetic miracles and human liberators when we examine markets We find institutions that generate increasingly inefficient allocation of resources Unleash socially destructive incentives that are unnecessary Bias and obstruct the flow of essential information for economic self-management management substitute trivial for meaningful freedoms and lead to irreminable Inequities in the distribution of goods and power My Michael Albert and I wrote that in 1990 So there is a debate out there Let's dig in to what the particulars are well The first claim is that whatever else their virtues or liabilities may be at least Markets can be a raw relied upon to distribute scarce productive resources efficiently and Distribute the goods that we like to consume efficiently as well In other words markets will achieve efficient allocation of resources there's even a theorem and I have been teaching microeconomic theory at the PhD level and other levels for 30 years I know the theorem I teach the theorem. I proved the theorem my students better prove the theorem And this is what the theorem says it says under certain assumptions a free market Will lead to a Pareto optimal outcome and A Pareto optimal outcome for any student that's taken in economics class You know that that's the economists name for an efficient outcome And we define it that way in honor of a of a Late 19th early 20th century Italian economist named Wilfredo Pareto. That's why it has such a silly sounding name to it. Oh So a free market system if we leave everything to be decided By the market process Whatever else will result at least we'll get an efficient outcome That's what the theorem says. That's what the theorems interpreted as meaning but In graduate textbooks and when carefully worded this is what the theorem actually says If there are no externalities in any markets if every market is perfectly competitive If every participant in every market has what economists call perfect knowledge Which basically comes down to Nobody ever makes a mistake about the consequences of any choices. They make for them at least personally And if all the markets are in equilibrium Then We will have a Pareto optimal outcome, then we will have an efficient outcome That still sounds pretty good Because you know assumptions assumptions, okay, I Mean are those assumptions, you know really likely to hold in the real world No, but are any assumptions in any theorizing or about anything Likely to be completely and totally true No So, okay, there are some assumptions But there's always assumptions you can't prove anything without making assumptions and assumptions are never ever going to be absolutely true Still sounds pretty good Well, let me begin to sort of pose the issue In a slightly different way Would it be just as accurate to state this theorem as? Only if there are no externalities Will we get efficient outcomes? only if There are no non competitive market structures no monopolies are all agopolistic industries out there Only if there's no markets that are out of equilibrium Will we get efficient outcomes? Meaning if We have any serious problems in any of these regards The theorem if you really read it carefully and think about what it says Says if we have any serious difficulties in any of these areas The theorem tells you to expect Serious difficulties in outcomes simply with regard to efficiency I'm not talking at all about whether or none the markets will give you a fair outcome And that's something that deserves to be said right at this point Does the theorem say this efficient outcome will be fair? No It doesn't say anything about whether the outcome will be fair It simply says the outcome will be efficient and if one cares about more than efficiency in terms of what you want out of your Economy then presumably this would be one consideration Not all that needs to be taken into account Okay What are these assumptions and what's the likelihood that they hold true? And I begin I think one of the reasons this is sort of worth a process that's worth going into Thoughtfully is it becomes apparent when you see these assumptions Where it is that certain problems that have become more and more visible since 2008 and Certainly regarding the environment has become more and more visible for a lot longer than that Where it is these problems come from They come from basic problems in market systems. They come from market failures that if you Actually read and study the textbooks carefully Should not be should not come as a terrible surprise Well, let's talk about externalities Because here's what the standard assumption amounts to Nobody believes that there's no market without an external first Let me briefly say what an externality is an externality is defined as the following when a buyer and a seller Get together and make a decision a car producer produces a car a Car buyer buys the car They negotiate a price We produce the car we consume the car the buy seller and the buy buy the the car producer and seller and the car buyer They make the decision and Presumably they make they each make the decision by doing what the car seller looks at all the pros and cons of making this car and Basically decides would it be profitable to make this car or not? The buyer looks at all the pros and cons to the buyer of buying this car I'm gonna have to pay so much. I have to give up income. That means I can't buy something else What's the car gonna do for me? I need transportation. It'll be a little quicker to go here and there convenient whatever So the buyer and the seller weigh the consequences to them into the balance and they Come to a decision and make a deal But what if there are some other people out there who are affected by the decisions they come to? If there are we call those people external parties And we call the effects on them that the buyer and the seller of the car have come to we call those external effects Now I picked this example because rather quickly I can point out that there may be some external effects in this case When you make cars in Detroit in the United States We used to do that Sulphur dioxide comes out of the smokestacks and The prevailing wind pushes that sulfur dioxide over southeastern Canada and northeastern United States The rain comes and it comes down as acid rain And it pollutes the lakes in the Adirondack Mountains There are people who work their whole lives They retire they buy a little land around the lake in the Adirondacks They build some cabins other people they know come in vacation there. They have a little business The lake no longer has any fish in it The leaves are turning yellow and it's not fall Well, that's a negatively affected person if you park your car outside in Boston When the acid rain comes down it damages the paint and you have to get a repaint job sooner than you would have otherwise Now all of these negative external effects of producing an extra car in Detroit are Presumably rather small each individual The effect on each individual is presumably rather small compared to The effect of producing a car on the car maker and the effect of buying the car on the car buyer Ah, but it what matters is not whether the external effect on one Affected party is smaller big what matters is whether the external effect on all of the external effect parties added up together is Big or small compared to the effects that were taken into account when the buyer and the seller weighed the options weighed the pros and cons Now in the case of the car industry it turns out That the more important in damaging external effects aren't associated with producing another car They're associated with consuming another car and we were relatively unaware of this For a long period of time we being people in general Now maybe people should have noticed and did notice that every time there's an extra person consuming a car doesn't that mean there's more congestion out there in the roads and Everybody that's out there already is a little more inconvenience than they were before Does it contribute to local air pollution? Yes But the biggie that we now understand is When you drive a car and you burn gasoline in that car you generate greenhouse gas emissions and the generation of that greenhouse gas emissions is leading to effects on Literally hundreds of millions of people stretching out into the future Thinking way in the future consuming more cars now is Going to cause Some poor person living in Bangladesh to have to be relocated because their country is under water 20 or 30 years from now And it's the world always done a brilliant job of dealing with refugees I've been hearing a little bit about the refugee situation Right about the time of World War two here in Finland. Those are never pretty situations Well, aren't those negative external effects associated with consuming cars? Yeah Did any of them get taken into account? When we as a society decided how many cars to produce and consume when we use the free market process to make that decision No Now the real question comes down to this The theory, you know, the the theorem says if there's externalities To some extent the market decision-making process precisely because it doesn't take those effects into account is going to give us to some degree an efficient outcome But is this the kind of thing I should worry a lot about or is this just one of the world is not a perfect place You know accept it live with it embrace it Well, it depends in the car market the question would be is the magnitude of the external effect Are we producing maybe 1% too many cars? If that were true if that were the case I wouldn't worry about it, but maybe we're producing 50% too many cars And if that were the case Would anybody really say the market process is leading us and helping us make efficient decisions about how many cars to make So here's the question In what percentage of our markets Do we have these externalities and in any market where we have some externalities Are they of a magnitude that's significant? And what is the belief that markets if left alone are always going to lead to an efficient allocation of resources really come down to It comes down to the following presumption in Most markets there aren't externalities and in the few that there are they're not that big And if there happens to be one where there is sort of a significant externality Then maybe we should intervene, but is there any evidence to support that belief? And this this is an amazing part of the story How many people here? How many people here are economic majors? Any graduate students who are economic graduate students? Are you going to have to write a dissertation at some point to get your degree? Yes, you are at least in PhD programs in order to hand out doctorates in economics We have to somehow come up with a dissertation topic that the student is going to do 90 times out of a hundred Faculties are going to say we need to help you engage in a piece of empirical Empirical investigation We need to help you set up an empirical investigation or test about whether some Assumption we make in economics theory is true or false hundreds of departments With hundreds of people in these departments doing dissertations You would think that we would have a whole ton of dissertations Out there trying to figure out in all these markets We've got when we use this I mean what more important economic institution do we rely on besides the market? You would think there would be a ton of dissertations empirically testing whether or not we have significant External effects and markets and to what extent we do in particular markets. These are believe me I know I advise dissertations. This is a red made to order dissertation topic You want to start and be done in less than a year and be out there with your ticket? This is the way this would be the way to do it. You won't find any dissertations in this area it's like This is a quest this we do not Investigate this is an assumption that we simply don't look into seriously You wouldn't believe all of the trivial theories and ideas that are empirically tested with the fanciest Statistical techniques that you have never dreamed of that are completely unimportant and nobody cares And here should be the thing that we should care about more than almost anything else and there is practically no literature on the subject okay now It is my favorite subject and I'm a micro theorist more than a macro person So this is why I wax longer and more poetic on this subject than macro failure And in all honesty the biggest problem today is macro failure, so I need to get on to it but I'll say a few words about what is out there in an in a dissident Part of the of the discipline which doesn't happen to be mine There was one person who spent 20 years of their life Trying to answer the question. Do we have significant external effects in the American economy? They were looking at it in the 1950s. They were using data from the 30s in the 40s They wrote a book that came to the conclusion. Wow You could almost say this entire economic system is the system about externalizing costs under other people These effects are very very large and he went industry by industry his name was k. William cap And he was somebody who was known as a as an institutionalist economist An institutionalist economist fell somewhat out the mainstream Which really explains why he was doing this investigation because the mainstream doesn't I can give you one other study that's been recently cited That addresses this issue This comes from a study called the hidden costs of energy It was done by the National Research Council in the United States And they tried to estimate the magnitude of the externalities that go unaccounted for in some energy markets And they asked if you generate Electricity by burning coal What's the market price as compared to the real cost when you take the negative external effects into account? The external cost is a percentage of market price for 70 percent That's not just a little off Electricity generation burning natural gas off by 19 percent Transportation automobile gasoline off by 25 percent Heat production with natural gas off by 42 percent in a market system If you don't get the prices right You don't get efficient outcomes That's not graduate level microeconomic theory. That's econ 101 We rely on prices being accurate to get efficient outcomes in a market economy Well, this is how far off some of those key markets are Those key market prices and that means they're generating a tremendous amount of inefficiency As a matter of fact it's sending some very bad signals some very counterproductive signals to users of Electricity about how they ought to get that electricity People are being under charged for electricity that comes from burning coal by 70 percent as Compared to what as compared to electricity that's produced with solar panels or wind turbines You want to know why the renewable energy industry is not competitive Well, there's two reasons The first one is that well, we don't actually have free market economies We actually have a considerable amount of government interference. We have a considerable amount of government welfare programs Actually a lot of corporate welfare programs The fossil fuel industries in the United States are the largest single recipient of government subsidies and They suffer they also enjoy the advantage that 70 percent of their cost to society Is not even in the price in the first place Okay Well, that's the problem of externalities I'll be very brief about the assumption that if and only if the markets are all competitive Will we get efficient outcomes? What do you mean? You mean if the market isn't competitive then the outcome isn't efficient. That's exactly What I mean, and that's what the chapter on monopoly in the textbook teaches And that's what the chapter on oligopoly in the market in the textbook teaches The more non-competitive the market structure the more inefficient The allocation and use of resources will be Well here the question is what are the trends? So Is the world really moving in the direction of market structures that are more and more competitive in which case that would be good to know Or is the move is the world moving exactly in the opposite direction? Well, unfortunately the evidence says We tend to move in the direction of less and less competitive market structures more often than not That means this problem is getting bigger. It's not getting smaller What are the two policy correctives when we talk about and I want to go back to externalities in half a second because The quite the natural question that arises is okay. Well, if you've got an externality that's significant is does that mean there's nothing you can do about it? I mean even in the context of a market system is there some policy intervention Now notice there are a bunch of people out there telling us we shouldn't ever intervene in any way in the markets because they always give us in They always give us the most efficient outcome But once you've actually seriously looked into it and realized if there's externalities You don't get an efficient outcome the logical question that arises is is there a policy cure for that? And since I've gone back I'll say what it is It's called a Pagovian tax named after Professor AC Pagu who was the senior lecturer in economics at Cambridge University in the 1920s I think in the well into the 30s And he's the one who first brought to him He's the first he's the one who first brought to light at a theoretical issue the whole issue of externalities If you go back to Adam Smith, and you read the wealth of nations it's apparent that In his mind this Issue of whether or not when buyers and sellers make deals maybe they're Affected parties who weren't at the bargaining table whose interests weren't taken into account It's very apparent that that problem never crossed his mind I'm not blaming Adam Smith for that in 1776 Adam Smith lived in what I call in what ecological economists call a largely empty world And in an empty world when people do things they don't have as many effects on other people But I think you could certainly make the case that we live in a fuller world rather than an empty world today and Certainly the rise of the modern environmental movement has made painfully apparent When there are some significant external effects, which is basically their name for it is pollution So Adam Smith never Adam Smith Understandably was first of all he's concerned with a lot of other things that people didn't understand about Economies and markets and second of all they lived in a context where this wouldn't be the kind of thing that was likely to come to mind But by the time we have 1920 we have a the senior professor of economics at the most prestigious college in the world Teaching this as something that at least at the theoretical level is something that you need to take into account And he also proposed a solution He said if you put if you have a negative external effect and you put a tax on the good That's equal to the size of the negative external effect Then what will happen is the market decision-making process will incorporate that? formally ignored negative external effect and It could it will then in theory give you the efficient outcome, and he's completely right If you could put a perfect Pigovian tax on every single good in every single market that was exactly equal to the magnitude of the overall negative external effect that was that was that that existed in that market then I Can prove the theorem that says The market system will go back to giving you an efficient allocation of resources So there is a policy intervention, but notice first of all you have to be willing to make the policy intervention and in this particular case it It's obvious that it's gonna be very difficult Because if you if you only had one externality in one market you only have to correct one price But if you correct that price and there have to be extra happen to be externalities in two or three markets Correcting the first one might actually throw you farther off in the other markets So if you've got multiple externality The actual problem of figuring out How you are going to make all these price correctives with your corrective Pigovian taxes is Literally a logistical nightmare, but there's another problem that comes in even before that and that is You have to know how high to put the tax As soon as I know there's a negative externality I know I need a tax to move the market in a more efficient direction But how high should the tax be? Does the market system send us any signals that we can use to figure out how high all these Pigovian taxes would have to be by the way, are there positive externalities in some markets? Yes Do they cause problems as well? Yes Positive externality is going to mean you don't produce and consume enough of that thing Which is also inefficient Is there a solution from professor Pagu for a positive externality? Yes, it's called a Pagovian subsidy But this whole system of subsidies and taxes that you would have to arrange In a market system, there is no signal for how high they have to be would people argue over it you bet and Would there be any way to settle the argument? Except just who's got more political influence and can get the tax higher or lower No Okay, what's the cure for competition lack of competition when you've got? oligopolies monopolies non-competitive market structures Well, one is antitrust You got these companies three or four of them Break them up and have 300 or 400 That would give you a competitive market I don't want to go into this at great lengths I'm just going to say that when you look around in the world at large How many governments are engaging in more rather than less anti-trust activity? It's the answer is very easy Everybody's engaging in less My country actually of all countries is the one that at one period in time Engaged in more serious anti-trust activity than any other and we're not doing it anymore and The Germans the Japanese and everybody else never was doing it anyway So that's not happening What's the other answer to? The inefficiency that comes because the industry is not competitive Regulation you set up a regulatory authority and the regulatory authority doesn't let The small number of suppliers Decide how much they're going to make of something and what price tag on it because if you let them decide they will make a decision That's inefficient at least the inefficient outcomes Not to speak of gouging consumers number. We're not worried about fairness yet. I haven't even gotten to that Well, there's a problem with regulating industries of any kind It's called regulatory capture You set up a regulatory agency you set up a regulatory agency to regulate the financial industry. I want to use that as an example it's actually called the central bank and Suppose this regulatory agency starts to do a good job in the public interest Whatever the poly whatever form of regulation it is that sort of is most effective. They start to engage in it Do you think the industry that's being regulated is going to like what they're doing? Of course not Because the industry that's being regulated is going to know full. Well, they could individually make more profits if they weren't subject to this regulation So they're going to lobby endlessly For the regulations to be weakened to be sort of changed exceptions Yes, we messed up once it was called the crash of 29 You did come in and regulate us you passed the law called financial regulation the Glass-Steagall Act But that was a long time ago. We've learned our lessons We now know how to manage risk. We're not going to cause any problems You the regulations are no longer necessary now the regulations are just keeping us from doing things that would make the economy more efficient You really think that the financial industry isn't going to be saying those words to the regulators and to the politicians That control the regulators day in and day out and there's the rub The rest of us have no real incentive to really pay attention to this anymore the rest of us have so little at stake about whether or not as individuals whether or not we have competent financial regulation and The Wall Street banks have everything at stake and in the case of the financial industry in case you had noticed They don't actually produce anything so they're not busy even producing things They have nothing to do but sit around 24 hours a day figuring out how to get around regulations Which raises the issue do we really think we're going to be smart enough and clever enough to come up with new regulations that After some period of time they want to figure it out and that is exactly what happened in the aftermath of the last great financial crisis of the 30s Some competent regulations over the financial industry were put in place and in case you didn't notice there weren't any financial crises for about 30 years Worthy and there was one in the United States in the early 80s and it wasn't really the banks which were More regulated still then it was the savings and loan industry which is a subset of the financial industry and They had had a bunch of regulations removed on them and what they were allowed to do and that's where the crisis was You would have thought we would have noticed Oh Deregulate the financial industry expect trouble, but instead we can ahead and kept deregulating more and more and more and eventually And eventually this led to the disaster of 2008 So there may be industries where when you look at it from a very practical point of view You just say wow the job of regulating these guys It's going to be very very difficult. Maybe we need to think of some alternatives. I for one am more than ready To nationalize the financial industry I think the prospects of a capitalist economy running even reasonably well in the future are very very dim if we don't do something very very drastic and I also happen to believe that What the financial industry does isn't rocket science they collect savings and They process loan applications and just decide This person credit worthy. We don't have to be right all the time Even stupid government officials can do that I Would trust stupid government to make those kinds of decisions rather than Allow the financial industry to go ahead Because there are too many perverse incentives for them to leverage it and bet in ways that Predictably will lead to disasters that they don't have to pay for and we have to clean up but in any case in General the question is if you don't have competitive industries Then you're not going to get efficient outcomes What are the policies that you could possibly use in a practical world? You're not abandoning the market system, but what can we do to make sure that we? That we get more efficient outcomes. Well, it's either antitrust or its regulation and there's problems with both This equilibrium what is this part of the theorem say that Only if all the markets are in equilibrium Have you got an efficient outcome? Well, I can tell you a big market. That's not an equilibrium right now the labor market And there it's painfully apparent in the United States. We have a 9% unemployment rate officially It's more like 16% if you counted it the same way other countries do One in every six or seven Americans is either out of work or underemployed That means we are producing roughly We are producing roughly only 85% of what we could that means the goodie pie out there that we all have to enjoy Is 15 or 16% less than it could be? That's efficient There is nothing more inefficient Than a depression there is nothing more inefficient than a great recession by definition what they mean is That a big big chunk of your productive potential and resources your labor your machines your factories are Sitting around doing absolutely nothing rather than producing the kinds of goods and services that we need So the question is well, how often do market economy suffer from these macro inefficiencies? And we're living in a time when that's really the primary question that people should be asking themselves And the answer is too often and the question is is there something governments could do about this? Short of choosing a whole different system. That's not a market system. Well sure there are and These things what the governments can do about macro inefficiency were policies that were pioneered here in Scandinavia Before Cain Cain's learned them from his Scandinavian economics professors So there's no accident that the Scandinavian governments and economies were the first to practice What are called macroeconomic stabilization policies? What is this? There are times in the economy When all the consumers want to buy and all the machines that the business sector wants to buy Doesn't add up to be enough to buy all the goods and services that a fully employed economy a fully employed economy can produce And what happens in that case? Businesses are going to discover they can't sell everything. They're making They're going to lay off workers when they lay off workers. That's people who don't have paychecks or income anymore They're going to buy even less. You're going to get a recessionary spiral It's happened over and over and over again in the history of the world's market economies and Finally as a result of the worst catastrophe of this kind the Great Depression of the 30s and Because finally somebody who was a lord in England rather than a brilliant economist in a Scandinavian University Stood up and explained it and wrote about it in two books. That would be John Maynard Cain's and I don't mean to take any credit away from it We learned there's something the government can do in that situation The government can come in and provide the extra demand for goods and services that is Preventing everybody who wants a job and businesses who would like to hire them and sell goods if they could do so profitably from doing so Now that is what fiscal stimulus is you hear out there discussions about fiscal stimulus Fiscal stimulus is the government starts buying more. Why should the government buy more? Sometimes the government should buy more because the things they're buying we really want a lot healthcare education for our children But sometimes it's there are times when it is particularly useful for the government to buy be buying more of Anything rather than less of anything and those times are when the economy is sunk into a recession This was not common wisdom in 1929 1930 Very few economists Understood that and there were practically no governments that were pursuing that policy as a matter of fact Herbert Hoover was doing exactly what Almost every government is doing right now Herbert Hoover in the United States who was president when the Great Depression hit his Treasury Secretary was named Andrew Mellon the Great Mellon Bank Mellon and His Treasury Secretary came to him and said guess what tax revenues are down Yeah Because there's all those people out of work. They don't have any paychecks anymore, so they're not paying any taxes So tax revenues are down and Andrew Mellon said well the fiscally Responsible thing to do is to cut back on our government spending We can't afford it anymore and Herbert Hoover did that and what might have been a great recession and In 1930 31 turned into the Great Depression as a result Keynes was the one who saw that he saw that that was the wrong response It might be the rest. It might be the responsible response for an individual family to do And this is why it's so easy for is this why it's such a difficult truth to grasp And this is why it's such a shame that a difficult truth to grasp That was once grasped and understood and in an accepted part of Economic wisdom for 30 or 40 years that was practiced in the Scandinavian model with better effect and more Successfully than anyplace else. I used to teach about all the clever ways that Sweden and the Scandinavian economies had Of making sure that the government would increase its spending a little decrease its spending a little Anytime the unemployment rate got to be a little bit too high that they were just brilliant at figuring out all sorts of clever ways to do this Because sometimes the unemployment is high in one part of the country, but not another And if the government just comes in and spends more it's going to Stimulate demand not just where it might be most needed, but every place so fine tuning. This is difficult You all were the masters at fine tuning this The other thing that Keynes recommended was this look The monetary authorities have a role to play in this If you want the business sector to go out and invest more and They're not doing that right now because they don't think they could sell what it is. They're making Well, then if you lower interest rates, they will find that it's cheaper to go ahead and engage in investment Then you'll encourage them to invest So by increasing the money supply and driving interest rates down you can also stimulate so this is called fiscal stimulus when the government spends more In a particular time period for a particular purpose to get you out of a recession or a Prevent a depression. It's called monetary stimulus when the government when the monetary authority the central bank Temporarily increases the money supply some all these follow these pop these policies That were well known and well used for decades have fallen into disrepute. They have fallen into disrepute That's basically that's basically all you can say Fallen into disrepute. What do you mean? Well Keynes was wrong Keynes was proved wrong the logic for a family applies to a government If somebody in my family loses their job and our income is down The responsible thing for us to do as a family is to cut back on our spending But if we cut back on our spending Does that have the effect of making a second person in the family lose their job? No, but when the government cuts back on its spending when its tax revenues is down That has the effect of lowering the government's tax revenues even further What has been the result of all the fiscal austerity, which is the opposite of? fiscal stimulus fiscal austerity is telling governments Cut back on your spending Don't spend on this don't spend on that Much of the focus is on what are the programs that are being cut out and legitimately so Are you really cutting back on welfare programs that are hurting people? Are you cutting back on education and now there's more students in every class? In the United States right now in our school systems. We are eliminating art education We are eliminating music education in the state of Hawaii the public elementary schools have dropped one day a week Why can't afford to pay the teachers five days a week? So we're only going to send the kids to school four days a week in Hawaii It's a good idea. They should all be on the beach all the time anyway. I know that But this is a disaster so part of the focus is oh isn't this fiscal austerity Having a terrible effect on all sorts of programs welfare state programs that really do help people and Isn't that too bad? But we're told oh It's unfortunate But we have to do it why because the government has a debt But the literal effect of fiscal austerity in Greece Spain Portugal and Ireland those governments have gone ahead and massively decreased government spending and It's had such a depressing effect on their economy that their tax revenues have gone down even further Well, doesn't that mean they're even farther in debt than what before they began? Yes This fiscal austerity is not only inhumane punishing people who had no responsibility for causing the problem in the first place This fiscal austerity is actually counterproductive Cains taught us that Scandinavian capitalism understood that and we have lost sight of that Okay, is the market system going to distribute the burdens and benefits of economic activity equitably Remember the fundamental theorem says nothing on this subject absolutely nothing If we simply allow labor markets to determine what wage rates will be if we let capital markets determine what the rewards to capital will be are we going to be pleased with the outcome and Certainly people who thought that the results of the Scandinavian model Were better in this regard that they produced a more fair distribution of income and wealth The answer you should come to is no Free labor markets and free capital markets will do exactly what has happened for the last 30 years When the economic historians get around to looking at this period in history When they go back 30 years from now and look at this period in history, you know what they're going to write They're going to say the single most important obvious thing that happened from 1980 up to 2010 or 11 or 12 and however long we let it go on is It was the most rapid increase in inequality of income and wealth that the that the world has ever seen Well, first of all that makes the whole economy less stable Because it's harder to manage The demand when ordinary people get income they spend it more or less quickly almost all of it When more of the income goes to the super wealthy No matter how obscene their consumption patterns are they still can't spend it And you have to figure out well Where are we going to somehow get the extra demand come that comes from the fact that they're not spending all their Incomes so we can have a full employment economy. I'm not saying it's impossible But it's it becomes a more difficult problem to solve particularly in the context where we now have a common wisdom that says we shouldn't be engaged in Fiscal stimulus we shouldn't be engaged in trying the government getting involved in trying to manage these These discrepancies between demand and supply in the aggregate That's inefficient when the economy does that when the government does that Particularly in that environment. It's more difficult to keep the economy from sinking into something like a recession or a depression But if we're just focusing on whether or not it's fair Well, that was the primal scream that you heard about a year ago You want to know what Wall Street what what occupy Wall Street was it was a primal scream That said Haven't you been watching Have you noticed that for 30 years almost a hundred percent of the productivity gains of the world's economy have been captured I Know the slogan is 1% Serious economists have looked at it if you read Paul Krueger and he had a wonderful article on this He said occupied Wall Street is wrong It's actually the top tenth of 1% It's even more ridiculous than they realize That's where all of the new income and wealth is gone from whatever sort of increases in productivity Have gone on the global economy for a 30-year time period So the primal screen says you got you can't be serious. This is absolutely out of hand The 99% is beginning to notice guess what our economic prospects are going no place The real wage in the United States is lower than it was 30 years ago the real hourly wage So whether or not Well, what sort of interventions in the labor and the capital markets, you know would do something about this All the things that the free marketeers tell us we shouldn't do because they would make the economy less efficient Unions usually to some extent will win higher wages So unions would reduce the degree of inequality in the outcome Minimum wage laws There's nothing that somebody who believes in the efficiency of free markets hates more than a minimum wage It's in every textbook. I've ever used when I teach micro theory on the other hand Does the actual argument in the textbooks say that? The wages of people working won't be higher because of the minimum wage. No, that's exactly the objection It will make the wages higher So unions minimum wages Progressive taxes Taxing wealthier person richer people and higher income people at higher tax rates than low income people Those are the ways that you to some degree dampen What otherwise will be a tendency to dramatically increase the the degree of inequality and outcomes? Okay, the last issue is and this is sort of the last defense of markets, okay So maybe they're not always efficient There's externalities Think what those macro inefficiencies are though the East Asian crisis Basically set the whole East Asian region of the global economy back two years two years of two years worth of lost Production in a whole region of the global economy. You're telling me that's efficient Argentina falling off a cliff for three or four years and now The Great Recession that basically shows no end Okay, so maybe there's some macro problems. Maybe there's some externalities. Maybe there's a lack of competition But for whatever else you might say about the market system At least it gives us economic freedom at least It leaves us free to make the choices that we want to that we want to make Um, well, let's see what kind of democracy this is and here I'll be very brief and just sort of raise the issues That should be raised and thought about One has to do with How many votes people get in market democracy In the United States, we have so many medical doctors If you look and see you will find out that we have a lot of medical doctors practicing plastic surgery in Hollywood We have very few medical doctors practicing basic medicine on indigenous reservations in Oklahoma Now the claim is that one of the nice things about the market is that Desires that are that if people want things more intensely Then the market will essentially prioritize Greater intensity of desire and want over lesser intensity of desire and want and that that's a good thing and That is a good thing The fact that the market will Prioritize a greater intent because supposedly if the want is more intense people be willing to pay more and the demand Will be higher and then the resources will flow into producing more of that But think about the situation I just described You're really going to tell me that the intensity of desire for plastic surgery in Hollywood to sort of remove One more wrinkle from a cheek That the person who wants that Has a greater intensity of desire than the mother of a child that's going to die of dehydration Because the nearest clinic was 200 miles away in Oklahoma No Well, then if the market responds to intensity of need and desire and Efficiently decides where the doctors should go what went wrong? Well the answer is just as plain as the nose in your face the people in Hollywood are voting a thousand more times According to what they desire then the mother in Oklahoma is If you went out and asked people well How democratic do you think an election would be if we let some people vote a thousand times more than other people? Everybody would know that's not them. That's not what I mean by democracy And yet that is the only kind of democracy that markets give you they give you Dollar voting you vote as many times as you have dollars It's actually very similar to you vote as many times as you have shares of stock when you go to the stockholders meetings It's not what most people are thinking about when they think about what democracy really means How about these these external parties? One of the things that is claimed as a virtue for markets is and and when you look at it this way It is a virtue don't markets minimize what economists call the transaction cost of Buyers and sellers finding each other and making deals They basically do They basically minimize the the time and trouble transactions costs of buyers and sellers and making deals But you know how they do that? By systematically disenfranchising all the external parties That's why it's so convenient and there's no transactions cost to making the deals So in fact what market decision-making process is Fires and sellers make decisions that have effects on all sorts of other people and from a purely political point of view Those other people are disenfranchised by the market decision-making process Well, that's not exactly democratic either Finally and this is a very subtle point When you think about economic systems and the markets is sort of just one institution and part of one kind of economic system What any economic system does is Essentially decide The terms upon which different things will be available to people who want them Okay, and the way that institutions economic institutions accomplish that is by minimizing the transactions costs of Getting certain kinds of things But this is where there is a serious bias in the way markets organize all of the decisions that we go through Markets do Minimize the transactions costs for people to express their preferences for what we call individual consumption Something that I buy and it's it's something that only I care about Markets do a good job of minimizing the transaction costs of expressing your desires for individual consumption They do nothing to minimize the transactions cost of Expressing your desires for collective consumption Consuming something like a library in the city of Helsinki. There's a real bias in the market economy About what it's easier to get and what it makes the at what it makes it more difficult for people to get And I would argue that it's actually more subtle than that when you live in such a system Why beat your head against the wall? I mean people's preferences change over time It's not like we're born with certain preferences. We make choices. We do things and that changes who we are Well, why would it make any sense for people to go out there and develop? Greater and greater preferences for the things the system makes it harder for you to get no This the sensible thing is to go out there and to the extent that it's possible You want to increase your preferences for the things that the system makes it easy for you to get Individual consumption is easy to get Collective consumption does not in market systems now We come up with procedures to sort of decide that but they're cumbersome feedback They're cumbersome procedures and they aren't the market So one of the things that is sort of taught in the in the microeconomic textbooks is well markets at least give us consumer sovereignty Meaning the consume what consumers want will be what the markets go ahead and provide Well, it's consumer sovereignty dollar voting Consumer sovereignty in the United States rights says says we must want plastic surgery a lot more than basic medical care in Oklahoma So it's that kind of consumer sovereignty and it's also a consumer sovereignty where whenever whatever your income is You're sort of deciding what it is you want It's going to be easier to get individual consumption than it is going to get anything else You might want because that's what the markets minimize the transaction costs of getting and they don't do anything to reduce the Transaction costs of getting the kinds of things that the Scandinavian model said we believe in these things. We know we like these things We know we want these things So thank you very much Is there an alternative? Not command planning That didn't work Communism is not the alternative It is in the dustbin of history May it rest in peace But if not that is there any other alternative? well, some people here in Finland and Some of us in the United States think that there is an alternative. It's not terribly difficult to imagine or think through We call it participatory planning We think it's even more democratic and does a far better job of delivering real meaningful economic democracy than Markets do but that's not the subject of today's lecture and thank you very much