Wednesday, 21 October 2009

Abused Medicine

It is remarkable to me how economists can continue to push on and not be disillusioned about the disconnect between their work and reality. I'm not saying that what economists do are naive, useless or unrealistic. In fact, I think economics should represent the ideal state of affairs of transactions and give-and-take. But there are many things in reality that will always distort economics and affect the elasticity of the supply-demand of some resources.

Off-handedly I can think of the following very basic supply-demand distortions:

Minimum wages/employment
When an industry experiences lessened demand for its good or an oversupply in production, a firm should do something to reduce cost in order to stay afloat, and a part of this is linked to employment conditions. A free market dictates that wages are fluid in order for it to function well and should decrease when costs rise. But the reality is that labour often organises itself to resist such wage-decline and employment changes.

Lack of labour fluidity
In a nutshell, the free market states that the system always remains in equilibrium because of resource mobility. In the arena of labour, when one industry declines, another has to rise and this should pose no problems as labour can relocate itself to fill up the demand in those new industries. But this hardly happens easily. When a worker faces the prospect of leaving his/her current job for another, he/she has to learn new skills and sometimes give up a whole way of life. The global free market also largely overlooks the fact that traveling across borders, implicitly asserted as necessary, poses a great deal of inertia.

Another supply-demand curve distortion is marketing. It basically seeks to exploit consumer psychology to somehow keep demand high despite price increases. Price should be an indicator to the consumer of his/her utility for the good, and by right if the good doesn't change, a price increase should reduce consumer demand for it. But because of marketing, the price mechanism is affected and consumers continue purchasing goods despite price increases.

These things often create distortions that have to be compensated somewhere else in the market, but the repercussions aren't often traded off one-to-one, also because the consequences are unforeseen.

There are more I can think of if I decide to stretch my imagination, but the idea of economics being largely idealistic and somewhat utopian remains given how it can be distorted. I'm still for the idea that its role as an objective, neutral and rational prescription for policy or other matters is great, but in the hands of self-interested people with the know-how for exploitation and utility maximization (which just sounds downright political to me) this doesn't quite make sense.

But that's why sometimes I still have my reservations for blaming free markets alone for the plight of the third world, the lower class and the poor - it is really the people who want to run the free market in a political manner that results in the class inequalities of today. Sweatshops wouldn't happen if corrupted governments and their poor regulations can be exploited to keep labour oppressed (recall institutional strength - good legal frameworks - as an importance precursor for free markets), and fast food companies wouldn't be on such a roll if policy wasn't so strongly dependent on commercial interests (recall the separation of the state and economics as cardinally ideal). Seriously, what kind of justification can one conjure up to lobby against improved safety guidelines for workers?

That's why it looks kind of like abused medicine to me; something created in order to cure but instead misused as a drug.

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