Monday, December 13, 2010

Government That Helps Markets

A lot of people come across this blog and think FLG is some sort of crazy pro-market ideologue. Well, perhaps he is crazy, but he isn't a pure market ideologue.

Jim Manzi's recent column in the National Review raised a lot of good points, but never touched on what FLG sees as a key benefit, or key drawback if you are Prof. Deneen, of the welfare state -- deracination.

Prior to and without the welfare state, people relied largely upon or family, friends, and neighbors for support. We still do rely upon these people for support, but less so because of the welfare state. For better or worse, we don't have several generations living under one roof. Certainly, our society's increased wealth makes this possible, but the direct impact of programs like Social Security and Medicare should not be overlooked or understated. This undoubtedly helps labor mobility, which helps the economy. Does it help the economy more than the inefficiencies, dead weight losses, and moral hazards created by the taxation and redistribution inherent in the programs? FLG doesn't know, but the increased labor mobility ought be considered as a pro insofar as economic growth is concerned.

Perhaps more obviously, government facilitates commerce by providing a competent legal system. Here in the states we tend to whine about the overlegalization of our lives. The simple act of installing a computer program entails accepting a massive contract. Robert Putnam famously lamented the loss of social capital that often acted as grease in the economy. And yes it would be great if people did business with their bowling buddies so that they didn't resort to legal action so quickly.

But there's another side to this. The New York Times had another piece about the frustration of Chinese university graduates to find acceptable jobs. FLG still thinks the H-O theorem is the explanation, but there's a key passage in the more recent article:
While some recent graduates find success, many are worn down by a gauntlet of challenges and disappointments. Living conditions can be Dickensian, and grueling six-day work weeks leave little time for anything else but sleeping, eating and doing the laundry.

But what many new arrivals find more discomfiting are the obstacles that hard work alone cannot overcome. Their undergraduate degrees, many from the growing crop of third-tier provincial schools, earn them little respect in the big city. And as the children of peasants or factory workers, they lack the essential social lubricant known as guanxi, or personal connections, that greases the way for the offspring of China’s nouveau riche and the politically connected.

Guanxi is, for all intents and purposes, the extreme form of what Putnam was arguing. China's legal system is, well, problematic. Contracts aren't particularly ironclad. Instead, it's all about relationships. A fact further exemplified later in the piece:
For weeks Mr. Li elbowed his way through crowded job fairs but came away empty-handed. His finance degree, recruiters told him, was useless because he was a “waidi ren,” an outsider, who could not be trusted to handle cash and company secrets.

Not to say the United States legal system is perfect or that wealth or power don't influence the outcomes, but it's far better for the entire society to be able to draw up a contract than to rely solely connections.

So, institutions and rule making are certainly important.

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