“The Market is Not Awesome,” Episode #4

In the first two-thirds of the fourth episode of Crash Course Economics, the hosts explained that supply and demand do the best job of sending signals to consumers and businesses on how much people want something and how much of it there is. The hosts use the examples of strawberries and oil to communicate how these ideas work in real life.

The Fire Department

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It seems like the hosts love how markets almost-magically satisfy consumer demand, but only to an extent:

So markets and supply and demand are awesome. But sometimes, they’re not awesome. For example, we don’t want to use the market approach when it comes to firefighters.

This is a common argument: the market is great to an extent, but there are some things that the market is not good for. Since Crash Course came out strongly against government subsidies of businesses (and did an excellent job of explaining it, in my opinion), I was prepared to hear a thorough explanation of why we should forget what they said before, and favor a completely government-funded service instead of the market. Instead of an explanation, Crash Course gave a doomsday characterization of what a privatized firefighting service would look like:

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9-1-1, what’s your emergency?

-My house is on fire! How much do you charge to put it out?

It’ll be $10,000, what’s your credit card number?

-They’re all melted!

This probably goes without saying, but because of the infrequent and catastrophic nature of house fires for a household, a privatized fire department would almost certainly charge as an insurance-based system, not a pay-for-it-when-I-need-it service. People privately purchase the same protection for medical and automotive problems (not to mention damage recovery insurance against floods and even death itself), so why not fires?

Unfortunately, Crash Course’s only argument presented was that a privatized fire department would charge too much for its service, and therefore the market wouldn’t work. Or maybe Crash Course is arguing that business would take advantage of desperate consumers whose houses are burning and charge them an unfair price. Besides laws voiding contracts under duress (which would likely be the case here), Crash Course would do well to remember what they argued just minutes before:

As Crash Course argued earlier in the video, the market could certainly provide a suitable price and system for most (if not all) goods and services, fire department included.

The Organ Market

Crash Course brings up an even bigger subject with the example of buying and selling organs, a practice that is prohibited in the United States. This piece of the video strays a bit from economics and delves more into philosophy and morality:

What about the market for human organs? After all, there’s a huge shortage, and thousands of people die each year waiting for transplants. Should there be a competitive market for human kidneys?

A free marketeer would say “sure, why not? If a donor wants $15,000 more than he wants his other kidney, why stop him?”

Well, ethics. I mean, there are several problems that arise in an unregulated market for human kidneys. First is the moral question: is it fair for a poor person who can’t afford a kidney to die while a rich person lives? Well…no not at all!

Not to be the bearer of bad news, but we already live in a world where rich people survive in situations where poor people do not, including organ donations. Rich people can travel to other countries to get organ transplants, while poor and even middle class people cannot.

The question is: should more people have access to a service, even if not everyone would be able to have access to the service? Should this only apply to organ transplants or all medical services in general? What about in health-related areas like nutrition and safety? Should certain goods and services be prohibited because some can afford them and others cannot?

Another problem results in the law of supply. When there’s an increase in the price of kidneys, there’s an incentive for people to steal and sell kidneys.

First of all, legalizing the sale of kidneys would decrease the price of kidneys, since the current price can only be found at high, black market rates. Second, I imagine that doctors and hospitals would have some standards that would prevent someone from walking into a hospital with a bag of organs to be used for transplants. Hospitals (and if not, governments) would be able to set the standards to prevent stolen organs from entering the legal transplant system.

Currently, you can sell your blood or plasma for money. Is Crash Course concerned that people will steal and sell blood or plasma?

There may be a good argument against the voluntary buying and selling of organs, but I don’t think it’s in this video. If you do have a good argument against it, please drop it in the comments.

The Supply/Demand Graph, Episode #4

The Graph

Crash Course’s explanation of Supply and Demand is pretty spot on. Most economic schools (all but Marxism as far as I know) agree that the equilibrium price is reached where the demand and supply curves meet. The demand curve is determined by how much money buyers would be willing to pay for a product, and the supply curve is determined by how cheap of a price sellers would sell a product.

Marxists, however, believe in the Labor Theory of Value, and would probably reject the the graph entirely. The Labor Theory of Value states that a product’s value is determined by the amount of labor required to produce it, so if a product takes someone 1 hour to make and a different product takes 5 hours, then the second product must be more economically valuable.

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(courtesy of SMBC Comics)

Government Subsidies

Crash Course notes correctly that the concept of “fairness” or “the right price” is subjective and is not based in economics:

Some people might want to talk about a price being fair or right, but that all depends on your point of view. The buyer always considers a low price to be a fair price, while the seller considers it unfair and vise versa. In general economists don’t really like to push opinions about prices. Voluntary exchange suggests that the price is there for a reason.

However, immediately after this, they input a little bit of their personal bias when they argue against government subsidies for business who are hurting because of low demand:

For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left, and the equilibrium price and quantity fall. Farmers might go to the government for assistance, but most economists argue there is no reason to bail them out. The market has spoken: strawberries are so over.

While I agree with their position, it’s little awkward to give a policy position immediately after saying that economists don’t like to push opinions. As I’ve noted previously, the market sometimes shifts jobs from one industry to another, and those who argue in favor of corporate subsidies are usually ones the who are afraid of having to change jobs.

But economists are correct in saying that the government should not bail out industries, because it would do a net harm to the population generally, even if it helps a sector. Crash Course acknowledges this when they say:

If the government helps the farmers by giving them a subsidy, it would be putting resources toward something that society doesn’t value. That would be inefficient.

Here I do wish Adriene would have mentioned what the most efficient way to use the resources would be: by not taking it from people in the first place. Since the market (i.e. people spending their own money freely) is the most efficient method of choosing what society wants, why do resources need to be taken from the market in the first place?

Markets and Efficiency, Episode #4: Supply and Demand

After a very long break from the previous video (over 2 weeks), Crash Course released their fourth part of the economics series. This video was on supply and demand, and in this blogger’s opinion, contained both good and bad points.

What are Markets?

Crash Course begins the episode with defining what a market is:

A market is any place where buyers and sellers meet to exchange goods and services. The key to markets is the concept of voluntary exchange, that is that buyers and sellers willingly decide to make a transaction.

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Let’s say you go to a farmer’s market and you buy a box of strawberries for $3. You value the box of strawberries more than the $3 you gave up to get it. The seller valued the $3 more than the box of strawberries. The transaction is a win-win because you got your strawberries and the farmers got their money.

This is a great point, but it’s not something too many people would disagree with. Crash Course’s really bold move came when they carried the principle of voluntary exchange to the labor market:

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This same process happens in the labor market. Say that instead of the farmer’s market, you got your strawberries at the local supermarket. The cashier voluntarily decided to work there. He values the $10 an hour he makes there more than he does sitting at home, watching The Walking Dead. At the same time the owner of the store values the labor of the cashier more than the $10 an hour she pays him, and so it goes on and on up the chain of production, from the the driver that delivered the strawberries to the farmer that grew the strawberries to the tractor that the farmer purchased.

I say this is bold not because it’s wrong (I think it’s correct), but because it implicitly argues against the minimum wage, which prevents two people from making a voluntary exchange for labor that is less than than the decided minimum. The arguments in favor of a minimum wage state that some voluntary exchanges (in this case, labor for a cheaper price) do not make both parties better off, and it should be made illegal. In fact, some argue that these exchanges are in fact not voluntary at all and should be called “wage slavery,” which upon first listen, sounds pretty oxymoronic (i.e. slaves get wages?).

Efficient Markets

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Crash Course also remarks on the efficiency of the market system:

Competitive markets turn out to be pretty great about allocating and distributing our scarce resources towards their most efficient use.

If farmers produced too many strawberries, then the price will fall as sellers try to sell them off. Lower prices means less profit to strawberry farmers, and those farmers will have an incentive to produce something else, like lettuce or brussels sprouts.

If farmers don’t produce enough strawberries, buyers will bid up the price and the farmers will have an incentive to produce more, which then drives down the price, and that’s like magic, except it’s not.

Very true, but I wish the video would have addressed the common arguments of central-planning advocates, namely when they believe that sellers charge too high of a price (which they refer to as “price gouging”) or too low of a price (which they refer to as “predatory pricing”). Even Mr. Clifford himself said that sometimes markets get things wrong, so why wouldn’t this be an example?

Crash Course may have given an answer to these objections in the current episode, albeit indirectly:

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Businesses, and in particular large corporations, are often villainized as greedy, heartless institutions, that take advantage of consumers, but, if markets are transparent and buyers are free to choose, then businesses will have a hard time taking advantage of people.

In other words, prices are determined not to defraud or take advantage of the consumers, but because enough consumers value that product at that particular price.

Mr. Clifford even concludes this part of the video with a somewhat-snarky stab at general free market opponents:

If you really don’t like the policies or practices of a particular company, then don’t shop there. After all, in the free market, every dollar that is spent signals to producers what should be produced and how it should be produced.

This first part of the video was mostly great, stay tuned for future posts on the not-so-great parts of this video. Feel free to drop your thoughts on the video (or my critique of it) in the comments.

The Circular Flow of Products, Resources, and Money

How do goods, money, and resources circulate between individuals, business, and government? Crash Course explains it and uses this graph to represent the circular flow:

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Notice anything strange in this illustration?

Both households and businesses give and receive in the cycle, since people receive money (which are used to buy goods) for their labor, and businesses receive labor for the money the pay to their employees.

Government, however, only gives money in this graph. Since government does not create wealth (it only takes and redistributes it), the graph is missing the arrows of money going from households and businesses to the government (i.e. taxes).

I’m not the only one who noticed the error in this graph. Josh, a fan and commenter of CCC, mentioned this in the comments of the previous article:

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Nice catch Josh.

To be fair, Crash Course does mention taxation when explaining the graph, however:

Where does the government get the money? Well, they get some of it from taxing households and businesses, and they get some of it from borrowing, but we’ll talk about that later.

Maybe because the government gets its money from both taxation and borrowing, they did not want to include any representation of the inflow of money before explaining borrowing. This is the only explanation I can think of.

While Crash Course’s illustration does contain a clear error, it is not as crude as economist Paul Krugman’s illustration, which he presented to his Econ 348 students at Princeton:

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In Krugman’s example, people just pass money back and forth to each other. The exchange element is completely missing.

Episode #3 – Economic Systems and Macroeconomics, Part 3

Do Markets Get Things Wrong?

In addition to the government’s role in providing services, the government also regulates sectors of the economy. Crash Course explains the need for this because sometimes “Markets get things wrong”:

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The government sometimes steps in when markets get things wrong…We consumers…are not worried about air pollution. We don’t think much about who made our car, what they were paid, and what the conditions of the factory were like.

Here the audience is given examples of where the government intervenes, but less explanation into what it means for the market to get it wrong. I assume that this means that without government regulation, companies would pollute more, people would be paid less, and working conditions would be worse.

A Note about Pollution: I don’t think any economist of any school would argue that businesses should be able to pollute as much as they want as a part of economics. Pollution involves a party’s violation of property rights of the surrounding areas, and even if businesses weren’t specifically regulated, victims would still have legal tort claims for violation of their property rights.

Nonetheless, would factory pay conditions be worse without government regulation? It’s hard to say, but we do know a few things. For example, since the main business regulating agency, The Occupational and Health Administration, was created, workplace injuries have reduced, but let’s look at statistics from before OSHA was created:

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Workplace standards increase over time even without regulation. But still, what if the current workplace environment is not up to your personal standards? You want to intervene in the contract between two consenting parties to make terms better for one side. What is the cost? Let’s quote Crash Course on this:

In the words of Thomas Sowell “There are no solutions, only trade offs.” We’re going to have to give something up in order to do it.

Mandatory higher wages and increased working conditions are no different. Increased cost on the manufacturer will likely result in fewer jobs and higher prices. Would you rather have two people working in conditions worse than you’d like, or would you rather have one person without the means to support herself? This is a political question, not an economic one.

Crash Course eventually acknowledges these trade offs, although it is after they describe the need for government intervention to address when “markets get things wrong.” Calling anything a “wrong” shows personal opinion, so I wouldn’t recommend using that terminology. Instead, the market is the starting point, from which any legislator needs to understand the trade offs of government intervention.

Episode #3 – Economic Systems and Macroeconomics, Part 2

After a pretty great look at the differences between market and planned economies, Crash Course next addresses the necessary roles of government.

The Government’s Role

Mr. Clifford seems to be a fan of free markets, but only to a point:

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There are a bunch of things that governments must do because free markets won’t.

This statement would be true, even to small-government types, if you deleted one word:

There are a bunch of things that governments ~~must~~ do because free markets won’t.

Using the word must implies a subjective perspective of the speaker, since telling any party what they must do involves making judgments about what the party’s goals are. People often disagree about what they government must do, so to say that there’s anything that the government must do relies on your own political views.

Nonetheless, governments do do things that the free market wouldn’t do. I doubt anyone would argue that the free market would give money to businesses in exchange for nothing, pay people to sit in a room and do nothing because they are bad at their jobs, or spend $24 million on high-end internet routers (that only serve four computers each).

Let’s look at Mr. Clifford’s examples of things the government must do that the free market will not:

Laws, Police, and the Courts

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We need laws and police and contracts and courts to keep everything orderly.

This is probably the biggest and most essential role that defines what government is, and it is the subject of a number of books. However, for law, there are also examples of polycentric law in different parts of the world. For police, I’m sure you’ve seen plenty of private security firms, especially where the police are inadequate. And for the courts, private arbitration, mediation, and settlements already decide between 90-95% of lawsuits today. Do free markets really refuse to provide these services?

Public Goods

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We need public goods and services, like roads, bridges, education, and defense, because goods can’t get to consumers if bridges are falling down, because consumers can’t make good choices because they are not educated, and nobody really cares about the new iphone if there’s a bomb dropping on your head.

Private roads exist, and they are sometimes built where the government roads fail. But what about the roads that we use everyday, including the highways and main roads in a city? The free market does not provide for it, but would it not, as Mr. Clifford implied, if we lived in a purely free-market system? This question is the subject of so much debate that arguments about free-market roads have its own wikipedia page.

The free market certainly provides for schooling currently, and many would argue better, than government-run schooling. Education, however, does not need to cost anything.

Defense is something the free-market does not provide at all. This might be because there is not a market for an alternative national defense system (Americans pay a lot for theirs already) or because it would be illegal to create one. The free-market question to this has a complex answer (also with its own wikipedia page), but to say that the free market would not provide for this service absent a government seems dubious to me, considering a national defense would probably a highly-demanded service.

Mr. Clifford’s phrasing (these are the things the free market won’t provide) is unfortunately not supported with arguments for why the free market wouldn’t produce these things. Instead, he lists services that the government provides, most of which are also provided in the free market. The discussion of whether the free market would produce roads or defense would be a very interesting conversation, and one I hope he and Adriene delve into in future episodes.

Part 3 still to come!

Episode #3: Economic Systems and Macroeconomics, Part 1

For episode 3, Crash Course is going big. This episode talks about different macroeconomic systems and the proper role of government, all in 10 minutes. There are a lot of things to unpack in this episode, so this review will consist of multiple parts.

The Factors of Production

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There is no better introduction to macroeconomic theory than by talking about control over the factors of production. Although the term was originated and defined by Adam Smith, Crash Course decided to quote Karl Marx for the same definition: Land, Labor, and Capital.

Free Marketeers might be upset that they attributed it to Marx, but it makes sense. Communists (and socialists for the most part) are often the ones who use the phrase “Factors/Means of Production,” and if you hear someone mention it in conversation, it’s more likely that they are a Marxist than a devotee of Adam Smith.

A Planned Economy

I got confused with Crash Course’s definition of a fully planned economy and its relation to Communism:

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In a planned economy, the government controls the factors of production, and it’s easy to assume that that’s the same thing as communism or socialism, but that’s not quite right. According to Karl Marx, “The theory of Communism may be summed up in the single sentence: abolition of private property.”

If the State owns all factors of production, and therefore owns all property produced from those factors of production, doesn’t that automatically eliminate private property? In other words, how does the public control over the means of production not create communism? What else could it be?

In fact, according to the Wikipedia entry on Communism, Communism is defined by the common ownership of the means of production. There is not a mention of private property in this definition because the absence of private property is the logical conclusion from the definition.

(However, I would accept that Marx’s Communist society is stateless, so Mr. Clifford’s mention of a government controlling the means of production would not be Communism)

A Free Market Economy

Crash Course gave an excellent definition of a free market economy:

In Free Market or Capitalist Economies, individuals own the factors of production, and the government keeps its nose out of this stuff and adopts a Laissez Faire or hands-off approach to production, commerce and trade.

This is, in my opinion, Crash Course’s best work yet. They continue:

In Free Market Economies, businesses make things like cars, not to do good for mankind, but because they want to make a profit. Since consumers, that’s me and you, get to choose which car we want, car producers need to make a car with the right features at the right price. Economists call this the invisible hand.

This is a great definition of capitalism, and one that emphasizes the consumers’ essential role in the process. Instead of focusing on a business’s desire for profit (a necessary element, but not what drives market successes and failures), consumers determine the market winners through their own preferences:

Scarce resources will go to the most desired use and they’ll be used efficiently, more or less. After all if a business is wasteful or inefficient, or makes something that no one wants to buy, then some other business will make a similar product that is either better or cheaper or both. If there’s no consumer demand for a product, resources wont be wasted producing it.

Businesses could not survive in a free market if they did not provide customers with what they wanted better than the competition. Crash Course also provides a look at the alternative: a centrally planned economy for consumer goods:

Assume instead that a government agency was in charge of deciding exactly which types of cars and cell phones and shoes to make. Do you think they could quickly respond to changes in tastes and preferences? If there was only one government monopoly producing cars, do you think they would be produced efficiently?

We don’t even need to speculate what this would be like because it has already happened. For example, during the Soviet Occupation in East Germany, automotive manufacturer VEB Sachsenring had a government-created monopoly on automobile production. Their product was the Trabant, the only car available to East Germans, and often considered one of the worst cars ever built. On top of this, due to the mismanagement of the factors of production, the waiting list for one of these cars was ten years.

Is there anything that the government must do because free markets won’t? Come back later for Part 2.