October 20, 2010

Economics for Edu-Pundits II

(Part I is here.)

Most people don’t understand the distinction between capitalism and capitalists (i.e., businessmen).  The former is almost always good when there is a high degree of free competition; the latter are usually bad and often attempt to stifle competition.

Being pro-capitalism is not the same thing as being pro-business, yet this is often how those who favor government intervention in markets tend to paint those who favor capitalism. Free-market economists like Adam Smith, David Ricardo,and Milton Friedman have been harshly critical of businessmen.  Smith wrote against “the clamour and sophistry of merchants and manufacturers.” Any suggestions about laws and policies coming from such people, he said, ought to be “carefully examined, not only with the most scrupulous, but with most suspicious attention.” Skepticism about the business community has remained part of the tradition of free-market economists.

Businessmen seek to reduce or eliminate competition because it is in their self-interest to do so.  By reducing competition, they are able to squander scarce resources and increase their own profits.  It is competition that forces the efficient use of resources by businessmen, lowering prices and thereby competing down profits.

Today, the preferred method businessmen use to stifle competition is through the political process by lobbying the government to intervene on their behalf through subsidies, by keeping out foreign and domestic competition, through favorable regulations, by bailing out failing companies, and the like.  The reality is that businessmen don’t like free-markets and competition any more than Marx did. And government, both parties, is often all too willing to comply with these lobbying requests.  Business leaders are not wedded to a free market philosophy or any other philosophy. They promote their own self-interest any way they can, like other special interest groups. Economists and others who are in fact supporters of free markets have known this for at least two centuries.

Often only businessmen receive the scorn for their anti-competitive, self-interested behavior.  But their willing partner in this malfeasance, government, is just as much to blame. Behind every market scandal there is inevitably a bad regulation which played a significant part.

So what does all this have to do with public education? Plenty.

In public education, government has intervened to replace the businessmen with government officials (the school board). public schools are basically run as non-profit organizations.  This presents a special problem which I’ll discuss in a subsequent post.  For now, it’s only important to recognize are being run along traditional corporate lines with government officials serving as businessmen.  And, if government has been all to willing to intervene on behalf of private businessmen to stifle competition, it’s not difficult to recognize their willingness to do the same when they are the businessmen.

Since government officials are political actors they act in their self-interest not to seek profits (there aren’t any), but to seek political favors from school officals and employees and other related third parties.  Let’s go down the list.

Management.  The administrators who run the schools.  Always highly compensated, as in most industries.  But these guys have extracted a special advantage from their government overlords – zero responsibility to perform well.  when schools fail, like they are in the inner cities, these guys should be the first against the wall.  Are they?  Almost never. What typically happens is that they get reassigned or voluntarily move to another school to burden themselves with.  They have also been successful in shifting responsibility down to the next tier – teachers.

Teachers.  The employees, unfortunately not professionals, who in theory should be merely following orders from on high.  So when schools fail, it’s technically should not be their fault.  But, these are no white knights either.  they’ve formed themselves in unskilled labor-like unions and have successfully eliminated all competition in the labor market which might have served to keep their compensation in check and to make them somewhat responsible for performing with some degree of competence.  Their unions have been highly successfully in lobbying government for favors that are in their self-interest.  Teachers and administrators have in effect stepped into the shoes of the businessman who would normally be running schools.  They are now the loathed businessmen, as the public is starting to recognize. And they are certainly acting like capitalists  by converting what would normally be excess monopoly profits into increase compensation and job security for themselves.

Third party contractors.  All the people who provide services to schools – builders/contractors, publishers, schools of education, and anyone else who provides any service to schools.  These people benefit by being awarded contracts through the political process and by having administrators who aren't too concerned about  the bottom line.  This is why we see Taj Mahal like buildings and overly-produced and priced textbooks.

Only two groups are being screwed in our present system –students and taxpayers (i.e., the public).  The groups that the schools are supposed to be serving.  Bear that in mind the next time you read some lofty rhetoric about “public institutions.” “public good,” “society does to advance its own objectives,” “education being too important to be left to private enterprise,” and “the social harm that would be caused outweighing the profits.”

Forget about the public-good and private-enterprise labels.  That is a difference without a distinction.  We could easily have the same awful system under private enterprise.Private businessmen have also been successful in lobbying for the same kinds of reduced competition benefits.

The trick is to avoid the kinds of problems we see in the present public education system. The next post will discuss how that can be accomplished.

9 comments:

Rich said...

This week in Michigan the government has sued Blue Cross/Blue Shield for their negotiating tactic of demanding the deepest discounts of any private insurer. This could be an example of the goverment attempting to maintain a free market, but it could also be an example of a business (Medicare) trying to weaken it's competition. If it is the latter, this does not bode well for education or any other form of government regulated "for the common good" program.

Dick Schutz said...

Capitalism; good. Capitalists; bad.
Business; good. Businessmen; bad
Government; bad. Period.
Free market; good. Period.
Regulation; bad. Period.
Teacher unions; bad. Period.


And so on.

Sophistry; bad.

Where would you place Lawyers associations, the American Medical association, and all the other licensed trades and professions in your analysis, Ken? How about the various trade associations?

Where do we find a true "free market"? The financial sector?

Do you believe that fire fighting and police should be privatized?

How about the Armed Services?

Did Alan Greenspan learn the wrong lesson?

Does "We the people. . ." have any meaning?

Does "Democracy" have any meaning?

Is there any country in the world that is doing "capitalism" right?

Are you going to test Jay Mathews and the other edu-pundits who read your blog on your econ course?

Do you expect to see any difference in their future blogging when compared with the edu-pundits who do not read D-Ed Reckoning?

Do you have any ideas for turning-around weak edu-pundits?

KDeRosa said...

Capitalism; good. Capitalists; bad. [check]

Business; good. Businessmen; bad [check]

Government; bad. Period. [wrong]

Free market; good. Period. [wrong]

Regulation; bad. Period. [wrong]

Teacher unions; bad. Period. [wrong. see above]

And so on.

[per above, a highly competitive free market properly regulated by government typically gets better results than any other alternative]

Sophistry; bad. [check]

Where would you place Lawyers associations, the American Medical association, and all the other licensed trades and professions in your analysis, Ken? How about the various trade associations?

[at the same place I place unions; they have a role to play in having professions regulate themselves, but they should not be permitted by government to restrain competition]

Where do we find a true "free market"? The financial sector? [There is no perfect free market, but many competitive ones. mostly the ones government doesn't deem important enough to intervene in. you can always identify these by the increasing quality of the goods and services and the decline in prices. the financial sector is highly and poorly regulated, hence the problems.]


Do you believe that fire fighting and police should be privatized? [police: no; firefighting: maybe. As public pensions, salaries, and benefits continue to outpace those in the private market, there will be increased pressure to privatize. My trash services were privatized and I now get better service and the borough saves lots of money]

How about the Armed Services? [no]

Did Alan Greenspan learn the wrong lesson? [who knows]

Does "We the people. . ." have any meaning? [it does. what's your point here?]

Does "Democracy" have any meaning? [same as it always has]

Is there any country in the world that is doing "capitalism" right? [no, but some are doing it better than others. some city-states like hong kong and singapore seem to be doing this more right than wrong. the US does it better than any big country]

Are you going to test Jay Mathews and the other edu-pundits who read your blog on your econ course? [if I were being paid to teach them, I would comply with whatever standard my employer requires. AS it is I am merely offering opinion than can be freely ignored or not-learned. in actuality, if I were getting paid as a writer, it would be to attract eyeballs and my compensation would be commensurate with the eyeballs I attract]

Do you expect to see any difference in their future blogging when compared with the edu-pundits who do not read D-Ed Reckoning? [see above.]

Do you have any ideas for turning-around weak edu-pundits? [no]

Dick Schutz said...

Do you have any ideas for turning-around weak edu-pundits? [no]

Hmm.

Gee, Ken. I just assumed that you got paid for doing the blog. That's an example of a free public contribution by a capitalist. Doesn't a black swan prove that all capitalists are not bad?

I don't see the open competition in edu-punditry doing anything to improve the quality of the endeavor. To the contrary, bad punditry is increasing at an accelerating rate.

Just as bad money drives out good money and bad ed research has driven out good research (with few exceptions). non-regulation can have undesired as well as desired consequences.

Would you trust the pharmaceutical industry to self-regulate?

The Singapore city/state, which you tout, is about as highly regulated as one can get. Isn't it?

I'm flunking your econ course (which I'm just auditing, because I'm not an edu-pundit), because I don't understand your "main idea." Since examples of the implementation of capitalism don't exist, it seems to be an exercise in imagination without any grounding.

Maybe I can get it with your third lecture.

KDeRosa said...

That's an example of a free public contribution by a capitalist.

Is it? Just because I don't receive a financial benefit, doesn't mean there are not other non-monetary benefits.

It's not that all capitalists are bad, but that they will act in their own self-interest which often takes the form of reducing competition.

non-regulation can have undesired as well as desired consequences.

Would you trust the pharmaceutical industry to self-regulate?


I don't remember advocating non-regulation or just self-regulation. Capitalist absolutely need to be regulated no avoid them forming cartels and all the other stuff they do to reduce competition, thereby ingratiating themselves.

The main problem we have is dopey regulation that often serves to reduce competition either intentionally or inadvertently.

One of government's core functions is to assure that markets remain free and competitive.

The Singapore city/state, which you tout, is about as highly regulated as one can get. Isn't it?

Socially-absolutely.

But see above re economic regulation. Their economic freedom index is pretty high. There is a "right" amount of regulation.

Roger Sweeny said...

Where would you place Lawyers associations, the American Medical association, and all the other licensed trades and professions in your analysis, Ken? How about the various trade associations?

Milton Friedman's PhD dissertation criticized both the AMA and the ABA as anti-competitive and exploitive--high class labor unions. It almost didn't get published for that reason. (It eventually did as Income from Independent Professional Practice, with Simon Kuznets as co-author.)

There is a big literature in economics complaining about licensure that serves to keep outsiders out, trade associations that lobby for government favors, and "regulatory capture" of an agency by the people it regulates.

Some economic models talk about "perfect competition" but there has never been and never will be perfect competition in real life, any more than there will be "true capitalism." Governments are always involved, providing laws and courts and armies at a bare minimum.

That makes it really hard to talk about these things because it is never a matter of "is it a free market?" There are instead a whole boatload of questions: How is the market free? How isn't it? What difference does it make for this, this, this, and this?

Dick Schutz said...

Just because I don't receive a financial benefit, doesn't mean there are not other non-monetary benefits.

Does "capitalism" recognize "non-monetary benefits. If so, there has to be a place for "public" concerns. No?

It's not that all capitalists are bad, but that they will act in their own self-interest which often takes the form of reducing competition.

That's not a "capitalist" characteristic. It's a characteristic of all animate organisms.

One of government's core functions is to assure that markets remain free and competitive.

So we have bad governments regulating bad capitalists to ensure that "markets" remain free and competitive? Is that what you are saying?

Their [Singapore] economic freedom index is pretty high. There is a "right" amount of regulation.

True. But where the "isms" fall apart is that operationally it's not possible to compartmentalize "social" and "economic" To have a free economic market like Singapore may well require a totalitarian social market like Singapore.

Singapore's social market wouldn't fly in the US. Not as long as we have the Bill of Rights.

Here's an article on Singapore ed that cuts through the tis/taint:

http://www.aasa.org/uploadedFiles/Publications/Journals/AASA_Journal_of_Scholarship_and_Practice/Winter_10%20FINAL%203.pdf

You have to scroll down to page 50 to access the article.

I'm still not following you very well, but I'm ready for lecture III.

Roger Sweeny said...

One of government's core functions is to assure that markets remain free and competitive.

So we have bad governments regulating bad capitalists to ensure that "markets" remain free and competitive? Is that what you are saying?

That's a logical problem that no amount of thinking can find a perfect solution for. Though experience may be some help.

Tracy W said...

Does "capitalism" recognize "non-monetary benefits. If so, there has to be a place for "public" concerns. No?

I don't know entirely what you're trying to say here, with all the scare quotes and possibly the reification of capitalism, but of course people in capitalist systems recognise non-monetary benefits. Most of us want money not for money's sake, but for the things we can buy with it - food, housing, healthcare, saving the tiger, etc. And even the most dedicated coin collector does spend some of their money on those things too. Another example of non-monetary benefits is the leisure-labour tradeoff, in other words, some people will sometimes accept less money in trade for more hours of leisure.

Public, I don't know how you define this and thus I don't know what you're asking about.

That's not a "capitalist" characteristic. It's a characteristic of all animate organisms.

Yes, people kept acting like this even in the most idealistic stages of communist countries. What's special about capitalism/market economies is that the structure of private property channels this action into ways that are useful for all society.

To have a free economic market like Singapore may well require a totalitarian social market like Singapore.

Or it may not. It's an interesting question. Can the general public be persuaded to support a free-market economy?