Monday, December 28, 2009

Thoughts on Free Markets

What I like about having a blog is that I can simply capture my thoughts, along with links that form the basis of my thinking at the time. It allows me to think out loud and perhaps get some feedback in case my views are off base.

With that in mind I want to say a few things about free markets and capitalism. Maybe later I'll think I was completely wrong, but I just want to capture my thinking anyway.

I've always fancied myself as a liberterian, but lately I'm having some misgivings about some of it and wondering if government regulation sometimes isn't as awful as is often portrayed. I know I've lambasted government generally, arguing that it's the root cause of major problems in the world, and I still think that's true, but lately I'm wondering if that's more due to the fact that the public is in a major way isolated from government and government itself is more under the control of private interests. What this would imply is that government itself is not inherently as villainous as is sometimes thought and in fact can be a means of correcting gross imbalances and dangerous actions that can come about in free markets.

Here's a good area where the government should get involved. Bum Fights. These kids apparently offer homeless people something like $50 to beat each other senseless. The first to go unconscious loses. A true liberterian would have to say there's nothing wrong with it. These are free people that own their own bodies and if they decide it's worth it to them why shouldn't they be allowed to chose?

Because it's awful and harmful to them even if they're not smart enough to realize it. Like any liberterian I don't want a government nanny state. But I think in this case the liberals have a point. Maybe the government should be used to protect people from themselves.

We do this for children. An adult can choose to go to school or not, but a child can easily be convinced that he doesn't need school if, for instance, his parents decide they don't want to make the effort to see that he goes to school. This is why have have laws that mandate that kids have to go to school. These homeless people are like children in the sense that for whatever reason they don't have the mental faculties needed to make wise choices and I think it is right for the government to step in.

Maybe these are easy cases, but let's get into something a little more blurry. Take the UFC. It's almost like a perfect example of the famous the Pyramid of Capitalism caricature. Fat cats at the top making millions while dedicated fighters slave away beating their bodies for pennies.

Take Karo Parisyan. This guy is an amazing fighter. Not a champ, but championship caliber. He's a huge draw. And yet he's having panic attacks that result from financial problems. He's trying to simply provide for his family. He's a superstar athlete that has put millions in the pockets of the owners, but he's just scraping by. Or take Hermes Franca. He got a title shot against Sean Sherk but suffered an injury in training. He took steroids to help himself recover and avoid canceling the fight because he just couldn't afford it. He needed the fight to put food on the table. See his statement here. He made $14K in that fight, but had to forfeit $2500 in penalties due to his positive test for steroids. His earnings are listed here. His opponent, the champ, Sean Sherk, made a whopping $25K.

Take Anthony Johnson. He basically had his eye gouged out and managed to earn $9K for it. This guy is not a poser. He's a serious, top tier fighter. Anybody in the UFC is tougher than anyone that most of us have met and Johnson is among the best of these. He made $17K in his recent bout, taking multiple gouges to the eye once again and basically lost probably in large part because of these possibly intentional gouges. I'm sorry, but $17K and you're among the best in the world, getting destroyed both in the gym and in the ring. And you can only do this a few times a year. Meanwhile the President and owners are making millions sitting behind their comfortable desks, destroying all competing fight organizations ensuring that there is no competition available to drive up fighter's salaries.

But then these are grown men. These are people that are competent to make their own choices. These are not children.

Well, aren't they? Aren't we all in a sense? Here's what I'm thinking. We protect children because they can be so easily manipulated into making choices that are not in their own best interest? Is that not also true of adults?

The marketing industry is huge multi-billion dollar industry that has one goal. Convince people of their need to purchase things or take actions that are for the benefit of the corporations that finance them. Do you think you can stand up to that? Do you think you are not motivated by that to buy crap that you don't really even want and certainly don't need? Are you smarter than they are?

Marketing techniques are designed not just to persuade you of your need to purchase a product but also to do so in a way that leads you to believe that you came to that conclusion independent of their influence. It's an extremely sophisticated and almost frightening thing. Watch in this video as master illusionist Derren Brown uses subliminal marketing techniques to cause two marketing experts to come up with an advertising campaign for a new product. What's amazing is that the experts imagine themselves to be coming up with ideas independently when in reality they've been manipulated to do what they do.

So how does this play out in the UFC? In Season 1 of the Ultimate Fighter some fighters express concern about the fact that they aren't paid to fight at all. They can go out and suffer serious injury and have absolutely nothing to show for it. This prompts the President of the UFC to come in and give a supposedly rousing and impressive speech, which is now referred to as the "Do You Want to be an Effing Fighter" speech. This speech is kind of embarrassing to watch as White tries to act like a tough guy and the fighters basically get no answers, but it's played up on the show like it's some sort of impressive thing. The UFC would go on to make a show about the 25 Tuffest Moments of The Ultimate Fighter. White is so impressed with himself that he saw to it that his very speech clocked in at #2. See here. The marketing message is this. Sacrifice your bodies for our business. Forget about the fact that you may end up permanently damaged and have nothing to show for it. This creates big pressure to sacrifice, and these fighters do, while the UFC rakes in the cash and the fighters for the most part leave with nothing but broken bodies. Except for the select few champions, who can make decent money at the top.

Some have speculated that former UFC champion Evan Tanner committed suicide. Past his prime and with little to show for his efforts that helped make the UFC as profitable as it is John Koppenhaver wonders if in fact this motivated behavior in Tanner that lead to his own death. That could be completely false. I have no idea. But it is the shabby treatment that fighters receive that prompts this kind of speculation. Koppenhaver says the UFC cut him due to these comments.

Free markets are great if informed people are making decisions that are in their own best interest without subliminal outside influence. Also if their choices are not being reduced through manipulation and regulation (for instance if the UFC is destroying competition through underhanded ways, which reduces a fighters options). But is this the world we live in?

And I have been wondering lately if what is maybe a little more obvious with the UFC isn't also true in other sectors of the economy where perhaps it isn't quite as obvious.

Take me as an example. I'm a mechanical engineer. When I was growing up engineers were rich people. Today it's considered pretty much middle class. But look at the gains in productivity that have been made? Today a mechanical engineer has wonderful tools available that have dramatically increased his productivity. I design with solid modeling tools. I analyze vibration and structural performance with finite element analysis. I perform thermal simulations using computational fluid dynamics. I correct potential problems before the parts are ever built. All with tools unavailable to my predecessors. I do it all and do it quickly. I can do three to four times the amount of work an engineer did in 1980. How is it that mechanical engineers have gone from being upper middle class to merely middle class? If markets are free wouldn't we expect gains in wages along with the gains in productivity? But this is not what we are seeing. We're seeing wages flat while productivity rises, and this trend seems to have begun around 1980.

So I'm having a mild shift in my thinking on wealth redistribution. People are entitled to the fruits of their own labor. But when that labor involves manipulating others to sacrifice for you in moves that are not in their own best interest, or when that labor involves bribing the government into passing laws that funnel money from the poor to the rich (see the health insurance industry and the recent changes to health care laws) then the consequence is redistribution of wealth already. It's wealth from the poor to the rich. So when there is some talk of reversing that to some degree I'm wondering if that's really so bad.

And I could be totally wrong here. This is thinking out loud.


Darf Ferrara said...

You may have a good point with respect to bumfights. Some of those guys probably don't have the mental capacity to enter into contracts. On public school you are completely wrong. Plenty of high schools are glorified babysitters and some are just dangerous. Public schooling is not a terrible thing (although privatizing it would probably help improve things) but compulsory education is mostly just a payoff to labor unions. Namely, it reduces the supply of labor, while at the same time creating teaching jobs.

The UFC example just shows that some people make bad decisions from your standpoint. If you decide that no one is capable of making the best decision for themselves, then what do you replace that with? The fact is that most people know what their own preferences are better than anyone else. There isn't any better way for choices to be made.

Jon said...

I'm not saying public education should be compulsory and of course it isn't compulsory. Schooling is compulsory, but that can be home schooling. Schooling of some kind should be compulsory. That's my point. That's an example of good government regulation.

I'm also not saying that we should take these choices away from the UFC fighters. My point is just that I don't see the whole transaction as being ideally free market. There's manipulation of the mind and there's also non-free market things happening that limit fighter's options. So if we're going to deviate from a free market to the detriment of fighters, why not also deviate from the free market a little for the betterment of fighters?

So for instance, what if the UFC was obligated to pay the medical bills? Maybe they do this already. I can just imagine desperate kids foolishly thinking they're going to hit the big time with this big opportunity, Dana offers them $3K and they come out like Sean Gannon and get put in the hospital by some fighter you've never even heard of. Basically some protection for the non-elite fighters. Or even some of the elite fighters that are not quite champions.

HispanicPundit said...

Capitalism isn't just demand, there is also a supply side you are ignoring.

Another possible reason why some fighters get paid so little is that they can be so easily replaced. For every fighter out there, there are many who could replace him. It's only at the very top that it begins to be harder to replace.

This is more pertinent in your field. Yes, mechanical engineers productivity has been going up but the talents required to be a mechanical engineer has been going down. I would argue that a mechanical engineer of yesteryear would have to be alot smarter than a mechanical engineer of today. All these fancy tools that make mechanical engineers more productive also serve in making their job easier - and really, when factoring mechanical engineers pay, you should also factor in the amount these software companies get, after all, they are in a sense also replacements for mechanical engineers of yesteryear.

In other words, its not just the demand that affects pay, its the supply.

HispanicPundit said...

Btw, this is why I am not a libertarian - I am a Republican.

I believe the free market is the default, but in every decision I have to weigh trade-offs. I have to think. There are some instances where regulation is better. I am not a fundamentalist of any kind.

Jon said...

I was hoping you'd show up, HP.

Supply and demand does set the price of fighters, and I understand that the lower tier fighters are easier to replace. What I'm saying is there are certain non-free market forces that contribute to that situation. The supply of ignorant people willing to sacrifice their bodies for no payoff swells with smart marketing. The existence of other organizations that would make the UFC compete for fighters and pay them more is diminished by non-free market action, such as the UFC's ties to government.

The consequence of this is that people are acting unwisely and destroying themselves and probably regret it later. As I said above my solution is not to take these choices away from these people, but perhaps impose some regulation that protects these people when things go south. Regulation has done some good and is sometimes necessary. Take the elimination of lead in gas for instance.

Your point is valid with regards to engineers. Not that what you describe is correct, but it might be. But look at the chart I provided. It's not engineering income. It's median income across all disciplines. This is an important thing and I think reveals a problem with our current system.

HispanicPundit said...

I'd be careful how much credence you give to the power of marketing. History is replete with examples of the power of marketing being sharply less so than initially assumed. For a famous example, see here.

Also, the argument that humans are rational actors is not necessarily an argument that they know all necessary information to make informed decisions - is that ever the case with anybody? - it is more an argument on the limitation on government: they know more than the bureaucrats acting as central planners ever could.

With that said, regarding the chart above, I bet that alot of the change has to do with India and China. Its the same thing with NAFTA. Just as NAFTA was taking off, China and India were liberalizing and opening their markets. So now Mexico had to compete against cheaper and more abundant workers (not to mention the governments of India and China are much more market friendly, meaning that a semiconductor plant in China is less likely to be nationalized in 10 years in China than say Mexico - a huge advantage for companies deciding to invest billions into a plant) and so removed alot of the gains that were to go to Mexico.

The same general principle applies to the United States. For much of the twentieth century, the United States and some parts of Europe dominated the sciences. There really were no competitors. Since supply was limited, the prices rose accordingly. But all of that has changed. Thanks to capitalism, you now have the East Asian Tigers, Japan, India and China. The world is very different now and instead of a shortage of talented workers, we are starting to approach an abundance...with masters and Phd students from China and India willing to work in the United States at a small fraction of American workers.

This is all good news for the rest of the world but a challenge that will be difficult for the United States to overcome. I expect the problem to get more pronounced the more the years passby.

(another possible interpretation is that the chart does not take into account 401k's and healthcare costs: with the rise in healthcare costs, much of an employees wage gains have gone in the form of healthcare payments, not direct pay...a hidden but still income gain for the employee. See here and here for more. Which I suspect is the case, as the chart is produced by the arm of the unions, see here. )

Anonymous said...

I appreciate you thinking out loud - so similarly thinking out loud.

I consider myself a liberal. Particularly on the social side of things. I think perhaps the cliff note of my world view is that governments involvement in individual life ought to be minimized. I have no qualms with sensible regulation of industry.

For me the free market is nothing more than a means to an end. If the ends (whatever they may be) can be achieved via an alternate, more efficient or "better" means then the alternate means should be adopted. That could mean free market for most things and something else for other things. Or however, things would end up.

More importantly, for me, democracy trumps free market. Caveat, I think there is and there can be a symbiotic relationship between the two.

"if government regulation sometimes isn't as awful as is often portrayed"

Government is the tool. If (some of) the regulations are bad then ultimately the people have only themselves to blame.

For me I think it is imperative that the government regulate some industries - food, health, etc.

I don't think the government should have held hearings (and I don't know the specifics) about steroid abuse in baseball.

I hadn't heard about bum fights so I have nothing to say on it.

As for the UFC - I haven't given it much thought but I think some form of union could be the right solution. This may be less free market but so what? I think it could level the bargaining power of the fighters. I don't think the powers that be have any unalianable right to profit via the exploitation of the less powerful.

I am glossing over details for sure but my point is to give a general idea of my view. Certainly it is subject to change and would appreciate any feedback of any falsehoods, etc.


Anonymous said...

Thought I would throw in one more thing as an example of my view - perhaps kind of a tangent.

I think prostitution should be legal and regulated.

I hold, similar view narcotics. Though on this one perhaps I am a bit more iffy on, if that makes sense.


Jon said...

HP, it's fine to say that not every alleged claim regarding marketing is true. But to say that this multi-billion dollar industry doesn't succeed at it's intended goal (convincing people to engage in behavior that is profitable for the company even if that behavior is harmful to the person) seems impluasible to me.

Is the individual making a better decision than the central planners? Consider the up and coming fighter given a shot at the big time in the UFC. They'll give him $3K (and profit themselves maybe to the tune of $5 million). Is that wise? Is that what the central planner would advise?

But then it might be his big break. It might catapault him. True. That will happen with one out of every thousand and the fact is the kid is overly optimistic. There's a much better chance that he'll end up in a hospital with severe damage and enourmous bills. This is not to say he shouldn't have that choice. But I think the UFC is exploiting this false hope that so many young kids have, and is causing a lot of damage in their lives while they reap the rewards. So why not just demand a few protections for these kids. That's what I'm advocating. It's a move away from my liberterian principles. Perhaps I'm getting closer to you with this move.

You may be right that NAFTA is part of the problem, but it's not that it's making Mexico more rich. The expanding gulf between the rich and poor is exacerbated by NAFTA in Mexico like it does in the states. I'm afraid these economic deals that they call liberalism and free trade is really more about imposing the worst corporate cronyism on these poor countries, driving them out of business while the few lucky Mexican oligarch's reap the rewards. As I understand things (though I'm not an expert) I think NAFTA has been really hard on the average Mexican. Farmers are completely put out of business by U.S. susidized agri-business.

Listening to Chomsky it would seem that this pattern is repeated throughout the world. Whereas Honduras used to provide plenty of food for all of their citizens they now export snow peas and beef to the U.S. now that the land was confiscated from the farmers through corporate muscle. GDP is up. Profits are up. And suddenly people are starving. Being rich in the U.S. we don't suffer like they did, but that gap between the rich and poor is likewise being increased with corporate dominance.

HispanicPundit said...

Marketing has some power, I just dont think it has the overwhelming power you give it. Its power is more limited to spreading the information than manipulation. There are alot of people in this world, and alot of marketers trying to reach them. I bet the vast majority of marketing investment is in outcompeting the competitors for their attention. Not in all out manupulation (aside from some nudges).

Also, your economics isn't correct. The 3k a fight fighter is certainly not bringing in anywhere near $5 million in revenue. Most of the 3k fighters are tangential to the main event - easily replaceable without any real impact to the fight card. So its not as bad as it seems. Also, the vast majority of UFC fights do not end in hospitalization or anywhere near the tragic ending you ensue. Haven't you been to a UFC fight? They usually have after parties afterwards, with lots of drinking and partying after a fight.

With that said, I wouldnt be against small regulations that help the fighters vis-a-vis the owners. But we have to be careful with the trade-offs involved, because the more expensive you make it, the less fighters there will be. Which could result in an overall loss to a potential shinning star with little alternatives available.

Regarding NAFTA, I think you are wrong. Granted, it hasn't been the boom to Mexico that many expected, but even a casual drive through northern Mexico (area impacted more from NAFTA) vs southern Mexico shows the vast difference NAFTA makes. This is exactly why I distrust Chomsky. He just doesn't understand all of the intricacies involved. In fact, I would put Chomsky's views on NAFTA on the far end of the spectrum of all economists, whether liberal or conservative, whether United States natives or Mexican natives. All, while agreeing that NAFTA was not the overwhelming win, would say that it has been an overall net positive for the average Mexican.

But of course Chomsky doesnt deal with real world limitations, he deals with ideals and utopias. Under those circumstances NAFTA is a failure, but that's not the world we live in.

elenburg said...

I'm a UFC fan and libertarian, but not an expert on either topic. If I'm not mistaken, Dana White and the Fertitta brothers (Zuffa LLC) bought out Pride and the WEC and with the UFC have practically cornered the professional MMA marketplace. The fighters should unionize! Perhaps they'd get better deals with collective bargaining. With apologies to Sir Winston Churchill, "Capitalism is the worst form of economics, except all the others that have been tried." Redistribution is a poor way to fix the problems IMHO, but Obama is doing his best to show us how poor it really makes us all.

Anonymous said...

"The fighters should unionize! Perhaps they'd get better deals with collective bargaining."

I thought libertarians were, generally, opposed to unions.

elenburg said...

That was a flippant remark. Libertarians are opposed to labor unions in theory, but take a look at this discussion:

Maybe unions in professional sports entertainment aren't quite the same as the Teamsters or UAW, but then again they've messed up at least one pro baseball, hockey, and football season over the years, right?

Anonymous said...

"Maybe unions in professional sports entertainment aren't quite the same as the Teamsters or UAW,"

I don't know if they are the same or not. One possible distinction is that the sports provide the public at large with entertainment and people have admiration for the athletes. So our outlook towards the athletes (and perhaps by extension their union) may be different.

Another difference, within the examples provided, is that mass production sports remain highly profitable. Whereas the auto manufacturers, the American ones anyway, are not.

I think that in a tough economy unions should, in their best interest I think, give concessions. In a good environment then I think labor should also benefit.

"then again they've messed up at least one pro baseball, hockey, and football season over the years, right?"

My answer to this is one of indifference.