The Economy Part 3
Free Trade
From the minimum basics of recessions, i clumsily segue into free trade. So what is the big deal with free trade and why do people want it? i will borrow a little from Adam Smith (though he didn't like corporations). This deals with the division of resources (one of which is labor).
i want to maximize the efficient usage of resources. To do this you have to accept that different regions have different strengths and weaknesses - no one country has it all. Countries like China and India have huge amounts of potential labor. There are so many people available that wages should be low (especially compared to the US, not the greatest example).
Some countries have ample supplies of resources that other countries can use in manufacturing or other productive pursuits. Some countries have a more educated populations who are better with technology. It is these strengths and weaknesses that necessitate free trade.
Think of it more from the demand side for a moment. Having something that is human intensive like labor done in a place with plenty of potential workers will keep the cost of labor low (supply being high relative to the demand for labor). Other resources work somewhat the same way.
Suppose you were making something that required a certain material. Also, let's say that the country you live in does not have that material (or has it, but not very much). A company would save money by buying from a place where it is abundant but may not have as many used for it (ignoring that the commodity markets exist).
This is about producing a good or service in the most efficient way at the lowest possible cost. Can this lead to the "exploitation" of something like a third world country? Yes, as much as the local government allows it. That can help keep the end cost to the user lower.
Now for some of the bad stuff... Governments tend to want measures in place that protect the interest of companies. However, this is often to the detriment of the consumer. The government may use such devices as tariffs, excise taxes (and other forms of protectionism). Protectionism promotes inefficient usage of resources (and is often tied to labor unions). It does bolster the domestic producers of a good or service though.
i hate to sound like an economic Darwinist here (not really), but the weak industries (and companies) should be allowed to fail; the strong should be allowed to succeed. If Japan can produce higher quality electronics at a lower price, they should be allowed to.
Another wrinkle is when you are talking about national defense. Some industries (like the steel industry) are necessary for national defense. So, the industry should not completely go away, it should just be limited to the most efficient and best in the industry. These companies, should however, not be bolstered by the government (like subsidies).
Subsidies are anti-free trade too, as it is another example of government intervention in free market events. It is not the government's place to prop up a failing company or industry.
Some bad things can happen with international trade (not necessarily free). Third world (less developed countries) may have corrupt governments who are not looking out for the interests of their countries. This is what some term "exploitation".
In the past, companies have overproduced goods and dumped them in a market (hurting local industries). Dumping is basically selling a bunch of what you are selling at below the cost of domestic manufacturers (or your own). It is a resource usage problem. Other countries subsidize businesses/industries defraying some of the costs.
Free trade can have its issues but having free trade and trade relationships with other countries is vital.
Externalities:
Externalities are a situation to consider in economics. An externality is an event (cost, usually "societal") not covered in the cost of selling a product. Think of it as collateral damage from producing a good or service.
An example is air pollution. Say the Y Company produces a product called Zed (the British/Canadian/probably Australian pronunciation of the letter Z). Say that the cost of CO2 in the area the product is made is determined to be $100 per ton. Say that producing 10,000 units of product Zed produces one ton of CO2. The "cost to society" in addition to the cost that is not covered or related directly to the price the end consumer pays is $.01 per unit. If the company made 1 billion units, the addition cost per unit stays the same, the total cost would go up to $10 million. There can be more than one externality related to a good or service.
i used a basic theoretical example, but in the real-world politicians tend to get a little more extreme.
Market Failure - Why Bad Things Happen to Good People
i have stated that i believe free markets should, for the most part, be allowed to function without government intervention. i see the free market relationship between supply and demand setting up an efficient mutually beneficial situation for the supplier and buyer. However, sometimes people (or organizations) will do things to mess up the supply and demand rationally created situation.
What are these you might ask... fraud, falsifying data, dumping, speculation and many others.
Speculation is a condition that is sort of like gambling. Speculation can be someone trying to corner a market so they can alter supply/demand conditions (especially supply). Speculation can be things like day trading stock or especially shorting a stock (basically borrowing shares of a stock to sell, then rebuying it at a later date). Speculation can also be buying derivative securities (like those based off of mortgages or backed by them) with the assumption of an increase in future value and a big return.
People flipping houses were speculating that the prices would stay high, and they would get decent returns. Although flippers usually add value to a house. i personally see this as harmful interruption of market forces (selling to people who will not be the end users). Maybe a better example is console scalpers - they buy out stock and resell at a profit (or return).
i will define speculation as actively manipulating supply or demand conditions and trying to make money based off of the expected value of an asset - in the short term. Technically all investing has a speculative component (and has some roles like risk mitigation - hedging). It is speculation if you hope to resell a device or asset (especially in the short term) for money but have no interest in keeping the device or asset for yourself.
Big speculations can involve, stocks, commodities, and currency exchanges (i am not a fan of the Federal Reserve Open Market Committee manipulating interest rates and currency values).
External manipulation is also a problem. What do i mean by external manipulation? This could include excessive speculation or government intervention. No country in the world has a true free market economy, but some are closer than others.
Taxes and other fees add another wrinkle to the markets (add cost). Then you have governments giving money/resources to industries/companies to prop them up (subsidies). You might also have affiliated groups (cartels) manipulating prices by coordinating output like OPEC+.
Another problem is the quality of the data and fraud. Just a few years ago you had companies cooking their books (falsifying data to look better to investors). This led to stockholder losses and a wave of desire to reform the system. The irony here is that some of this directly results from tax accounting.
The tax code is needlessly complex and has many loopholes or oversights. In a way, it encourages companies to use "creative" accounting to shift losses and revenues, so they have less tax liability.
Am i saying that government intervention is an anti-market sentimentality? In a way yes, however the government does not necessarily have the intention or interfering with the markets. Some limited market interference is necessary.
The financial sector has the SEC, FDIC, FTC and numerous other government parties. Sometime the government has to intervene to limit fraud and make the market a little safer. i am not saying that government intervention is something you want (it is more of a necessary evil).
Another market failure is "equality". i generally dislike normative economists (mostly liberal) who believe in the mythical concept of "equality". Life isn't fair and neither is business.
Economics, for me is about efficiency. Equality and efficiency are diametrically opposed concepts. In order for free markets to best function, they need to be efficient. They cannot be held back by trying to manipulate results for "equity" - a futile and impossible cause.
There are frauds out there. There are people who mean well but don't deliver. Bad stuff happens. If someone promises you a return that seems too good to be true, it probably is. Risk and return are related - the greater the risk, the greater the potential return (the reverse is something you should keep in mind - if there is a good return, the risk is probably high).
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