Wednesday, October 8, 2008

The Twisted Mixed Economy

After World War II, most of the western world realized that what would work best for a complex industrial society that subscribed to a few basic principles was the creation of a mixed economy. The principle for a mixed economy is simple: let the free market do what it does best, and let the government do what it does best.


The free market is great at coming up with new ways of using wireless communication technology, but it is not very good at figuring out a way of treating a patient with leukemia while a company is turning a profit. Sick patients are simply not profitable which is why healthcare, along with other sectors of the economy, can never be suited for the free market. In a mixed economy, sectors such as healthcare are hence “broken out” of the free market, and the costs are shared by everyone, to the benefit of everyone.


For many years, America has rejected the idea of a mixed economy, because it would require using public money for public goods. Americans seem to have preferred to use private money for private goods, while rejecting the very idea that things such as public goods exist. However, there seems to be a new line of thinking in America that has gained significant ground lately: using public money for private goods. Philosophically speaking, this is a truly remarkable policy, and one that on the surface would seem impossible to implement without a popular revolution. Indeed, the revolutions in both France and Russia had strong links to the private consumption by the royalty paid for by the public, which angered the masses to the point of revolution.


Why would the public give up its resources and get nothing in return, as it did with the Wall Street bailout? Such arrangements have rarely been seen since the abolishment of serfdom in Europe a few hundred years ago. In that case the factor was the threat or use of force. That is not the case in America today, but it seems that the real factor behind the new arrangement is deception.


The real economy and the financial industry were once quite separated. The financial industry was only a facilitating sector that helped the real economy to function more smoothly. However, bit-by-bit, the financial industry was able to weld itself together with the real economy, so that the desired co-dependence occurred. Some ways in which the industry did this was by taking control of America’s retirement system through the offering of 401(k)’s. The demutualization and privatization processes of recent decades have proved to be enormously helpful vehicles for the financial industry to further increase the dependence of ordinary people on Wall Street. At the present time, the American people in general, firmly believe that success in their lives is strongly linked to Wall Street, and many of them are probably right.


It is this link that led the American people to believe that the recent bailout was a good idea, because without it, we would see the crumbling of a system on which they depend. They depend on this system to provide them with the things that citizens in a true mixed economy are provided with by means of public money (and hence with no risk of losing the provision of services). If the system disappears, what is there to take its place?


And that’s the most important question of all. It will soon become very apparent to all Americans that this country cannot depend on Wall Street for its overall social safety. Wall Street is simply not interested in whether or not you can get an education, if you can afford to feed your kids, or whether you live or die. This sounds harsh and incendiary, but it is the simple truth.


The system of pure capitalism must be replaced immediately with a truly mixed economy that provides American citizens with the social safety that is afforded every other citizen of the Western world without the risk of having it all taken away by market swings. The twisted mixed economy of late, in which the poor support the rich, will hopefully be a short-lived philosophy. 


Anonymous said...

How can we develop a social safety net like the Europeans, when every politician refuses to even mention the words: tax increase?!

Look at massachusetts? the voters are going to vote on whether or not we should get rid of the income tax?? and you know what? I think it will pass and that will mean 12 billion dollars less for the state.

If americans want to have a social safety net they have to be willing to pay more taxes, like the Europeans.

Jacob said...

Yes, that is true. The reality is that Americans only respond politically when there is a crisis. Anticipating problems and acting to prevent them is not a part of American political culture. Because there is no social safety net now, the economic crisis will create a lot of suffering similar to that of the depression. My bet is that we'll see a similar political change of direction as we saw then, towards a more comprehensive social safety net. Taxes are incredibly high for low-income people in this country, that is the first thing that has to change.