Thursday, April 26, 2018

The impact of free markets

In 1965-6 I took Economics 1, as it was then called, at Harvard.  The course probably represented the best education that the GI generation had to offer.  It was taught mainly in sections and I was lucky to have a very good section man, who tried and failed to recruit me into economics after I aced the first hour exam.  The rare lectures were spread around the department and featured some giants in the field, such as John Kenneth Galbraith and Otto Eckstein.  The fall term dealt with micro-economics, the spring with macro-economics. The latter was much more interesting, because that generation was so focused on using fiscal policy to ensure the maximum possible employment.  They had learned in the 1930s from John Maynard Keynes that the government had a key role to play in fighting the depression, and the policies they favored had helped prevent anything similar.

In one section, I remember, we spent perhaps 20 minutes discussing a maverick economist from that generation--a certain Milton Friedman, an apostle of the free market.  Dr. Major made clear that he did not take Friedman's ideas very seriously, but, he said, "I think it's good for you to be exposed to this."  We smiled.  Little did we know.  I doubt any other economist that we studied that term has had more influence on the actual shape of the world in which we have spent our adult lives than Milton Friedman.

I am not going to go over the various specific advances that free market ideology has made since the Reagan years or review their economic effects.  Markets have become much freer and we now now what the effects of that are.  Free markets make it easier for rich people and institutions to become much richer. In a globalized economy, they make labor cheaper.  This in turn shifts more political power to the wealthy who can use it to make markets even freer.  One result of free financial markets was the great crash of 2008, but now, with the Republicans back in power, even the mild reforms in the wake of that crisis are being repealed.  In the last few days, however, I have seen two striking stories about the impact of free markets which show their effects on key areas of our lives.

One is housing in our major cities.  In the middle of the century, rent control held down rents in many areas (including Cambridge, Massachusetts, where I lived under it for six years), saving opportunities for students and the working class. Now it hardly exists anywhere, and it is almost impossible for such people to live within the city.  The student apartments that my friends and I lived in in the 1970s have been condoized, and sell for more than half a million dollars a bedroom, in many cases.  Now comes the latest development: the influence on the market of AirBnB.  Apartment prices are being bid even higher by speculators who want to turn units into short-term rental properties, and a lonely city councilman who wants to do something about it is encountering heavy political pressure.  The same drama is playing out elsewhere.

The second story is much more interesting and much more frightening.  It concerns the impact of markets on health care, and specifically, on drug-makers choices of diseases which they wish to attack.

A note to clients--apparently, pharmaceutical companies--from a Goldman Sachs analyst has been leaked.  A new form of gene therapy has been remarkably successful in curing hepatitis C, a sometimes deadly disease, and in ridding patients of the infection so that they can no longer infect others.  While antibiotics originally cured a great many bacterial infections, this is a chronic viral infection--like HIV--and its potential disappearance should be grounds for rejoicing.  Yet the Goldman Sachs analyst sees it as something to worry about.  The drug maker made a great deal of money in a short time, but the the new therapy is now going to disappear. Curing diseases is not a particularly good model in the long run.  Finding long-term palliative care for a chronic condition is much better--and that is the kind of care big pharma wants to develop.

This was not news to me.  Big pharma has been very slow to develop new antibiotics, which cure people, even when they are desperately needed to deal with resistant bacterial strains.  They like pain relievers and other drugs which people can take for the rest of their lives.  I asked a friend of mine who has run numbers for drug companies whether they prefer working on treatments for long-term illnesses at least a decade ago, and he smiled and replied, "Sure! They have stockholders."  Any corporation wants to  get the public to spend the maximum amount of money on its products.  In no other advanced country is the health care industry as economically powerful as in the US--and we spend about twice as much on health care as other advanced countries. This is anything but accidental.  Drug research should be government-funded and directed towards vaccines and cures for the worst diseases.  The biggest breakthroughs in medicine in the 19th and 20th centuries came from individual scientists working on their own like Pasteur, Ehrlich and Fleming--not from pharmaceutical companies.

Another dysfunctional market probably helped produce the Goldman Sachs letter--the labor market for our smartest young people.  Since the deregulation of our financial markets, our largest financial institutions have been paying the highest salaries.  They have successfully been recruiting the smartest college graduates and PH.d students in almost every field--even fields like civil engineering.  They like people who are smart and competitive, and they educate them to see the world in a certain way. Because that world view has such a terrifying internal consistency, it is easy for people to assimilate into it.

Four years ago, I did four long blogs here about Thomas Piketty's book, Capitalism in the 21st Century.  (Here is the first--the others followed.)  It began with a simple insight, one I think that was also at the foundation of the first Capital, by Karl Marx: capital tends to accumulate faster than the rate of economic growth.  That's another way of saying that the rich get richer and the poor get poorer.  And because their whole goal is to get richer, those who make drugs don't want to cure diseases, they want to treat chronic ones.  This is one spectacular instance of how capitalism can work against the public good.  Western Europeans still understand some of these issues, but there, too, capitalism and inequality are gaining ground.  We may be headed for a world of capitalist dynasties.

5 comments:

Doris Gazda said...

Having a government led by people who chose to not believe in science, this will only get worse.

Bozon said...

Professor
Great stuff. Thanks for this post.
Economics.I agree with almost all of it.
One wonders if the macro course went back and hit Ricardo and Smith. I am sure it did. The font et origine of the free market concept.
This was one of the passages I noticed because I took up Piketty's work after reading your posts...
"It began with a simple insight, one I think that was also at the foundation of the first Capital, by Karl Marx: capital tends to accumulate faster than the rate of economic growth. That's another way of saying that the rich get richer and the poor get poorer." Piketty paraphrase

This is really, in recent decades, a point about the top .1%. What about the other 99.9?

As I noted on my posts, there are other implications...The capital that accumulates most is increasingly dispersed to only the very highest elites everywhere, not to the middle 90 or so %. The wealthier societies will see, and are beginning to see, an enormous drain of prosperity, over time, from the convergence of average or median incomes.

Capital accumulates faster than economic growth, true enough.

For the middle 90% in the West this spells not merely stagnation but steep decline, going forward, as higher average incomes inexorably converge toward lower ones. The lower global incomes, believe me, are incredibly low, and are shared by billions of people, far outnumbering Western poor.

I have posted some notes on this topic on my site.

All the best

Bruce Wilder said...

Your observations in this post are of the moment in a particularly urgent way.

I like that you relate it to college Economics in the 1960s and the figure of Milton Friedman, who was hugely influential as an individual and as the leader of Chicago School economics. He had opponents -- you mention Galbraith whose books were popular and widely read, but who had no "school" or following in the academy. Galbraith was an institutionalist in the tradition of Veblen, and institutionalism was wiped out after the war with the advent of Samuelson's mathematical codification of core economic theories. Samuelson wrote his Ph.D. thesis, which was published in expanded form as his landmark, Foundations, at Harvard, but he came from Chicago and went to MIT where he shared an office with Robert Solow, another giant of late 20th century economics, for good or ill.

I wonder if Economics 1 used Samuelson's textbook. My college used the number 2 textbook of the day, Lipsey Steiner, which followed much the same outline and pedagogy as Samuelson's, but the authors were noted sceptics regarding the implicit precepts of the Chicago approach to economics. The Chicago School built up its economics by attempting to outline how an economy might work as a system of markets, coordinated by market competition driving toward an equilibrium in price. Samuelson had given the Chicago School approach an elegant expression as a system of theorems, a kind of Euclidean geometry: sweeping, insightful, and consistent in a way that invited bright minds to extend its application.

The Chicago School model of an economy as a system of markets stabilized by its own seeking after a general equilibrium in market price was an idealization and the general method of economics was to try to understand the economy by comparing this elaborately worked out logical ideal with the "messiness" of institutionalized reality. The economists among the architects of the New Deal and the international order constructed during and immediately after WWII were only sometimes of the Chicago School; more commonly they were institutionalists like Galbraith, who administered the system of price controls during the war. The American economy of the 1960's was a carefully constructed, complex and managed system dominated by private and public bureaucracies, the existence of which was scarcely imagined in Samuelson's Euclidean system. Friedman's genius was to feed the anti-authoritarian impulse with a story of the economy as an example of spontaneous self-organisation, in which the deliberate planning of the second Agricultural Adjustment Act, the Tennessee Valley Authority or the elaborate financial engineering of Carter Glass, not to mention public utility regulation, industrial unions, professional associations and so on.

A generation educated in the economics of "the market economy" was ill-equipped to resist the politics of dismantling the institutional economy of carefully balanced "countervailing power" (Galbraith's phrase). A leftish neoliberalism formed to offer token resistance after the Reagan-Thatcher revolution, but accepted the basic ideological assumption that policy ought to promote "market" solutions. The collapse of the communism of the Russian Revolution (right on a schedule of generational change that ought to impress: 72 years exactly, with the death of Stalin as its midpoint) was interpreted triumphantly.

energy flow said...

https://qz.com/1250100/income-inequality-russia-and-the-us-are-now-equally-unequal/?utm_source=qzfb
http://piketty.blog.lemonde.fr/2018/04/10/capital-in-russia/

I did MBA studies in early 90s and got that free market globalist inoctrination and later took up import export where I helped expand China's trade surplus. Now I see things much like you do.

Above some links with graphs from piketty on wealth inequality over last century between USA, Russia, France. We are all back where we started except France but they have growth problems. So loosening the reins helps but can cause situations of inequality which lead to revolution. Trump election is Friedmann's fault, in a nutshell. Protest against wealth inequality. All this left wing attack against his racism, against deplorables, against Putin are missing that Bill Clinton embraced, like Tony Blair, European social democrats the unitary globalist philosophy of Friedmann that growth, inequality are the price tp pay for progress. Apparently the French and Italians never got the message and live in a slow growth statist society where ghe rich have less freedom. So realistically seen, life is a tradeoff. If I work a job if I am an acheiver I stay, otherwise bye bye it will be exciting but stressful, otherwise boring, constricting, safe. This is a difficult choice of lifestyles on a national scale. If we can turn it around to more fairness when both parties are in pockets of industry and follow free trade, globalist, free market agenda is question here. New parties or party takeover from base must happen. Military, pharmas, wal-mart, Amazon are huge. Money buys influence in congress and press. Naysayers can be targeted for smear campaign as conspiracy theorists or in extreme cases die mysteriously if too insistent on muckraking, rocking the boat. We are back to where GM got union activists murdered. The more tthings change the more they stay the same. Like I read that after Kennedy assassination around 55 people died mysteriously who talked to, itnessed key events in the process. Why does Trump change from isolationist to military expansionist so quickly? Maybe he values his and his family's life. Why are Chinese, Russian, Iranians so afraid of USA, UK, because they never saw a contract they didn't find a way to break, like the social contract between classes after WWII under Reagan, Bill Clinton(bipartisan effort). Basicaly a big crisis with war, financial collapse could change things for the better, otherwise it seems very difficult. Next week or so you will be back on page with neo pravdian mainstream propaganda dissing our illustrious leader in his battle with DNC or agreeing with fictitious chemical false flags to provoke WWIII instead of seeing what is root of problem as you have touched on today. 'Follow the Money, cui bono'.

Michelle H. said...

I'm researching the negative side of Assimilation (think: the fictional Star Trek Next Generation villain 'The Borg' and their decree "Resistance is futile.") Regarding your statement, "Another dysfunctional market probably helped produce the Goldman Sachs letter--the labor market for our smartest young people....They like people who are smart and competitive, and they educate them to see the world in a certain way. Because that world view has such a terrifying internal consistency, it is easy for people to assimilate into it." Could you explain what you mean by "terrifying internal consistency" as it relates to easy assimilation? Thanks!