Is interventionism a conservative force?
An economics quandary
It wasn't the most common argument for supporting government intervention in the banking and automotive industries last year, but every once in awhile you heard somebody say that the government needed to step in because one company or another was "too big to fail."
Much of the time, this is actually wrapped up in a nativist, protectionist ideology — many people are deeply opposed to the emigration of industry from the United State, and have convinced themselves that we would be better off if everyone purchased cars, clothes, consumables, and consumer electronics that were "made in America."
Stripped down to its core, though, the notion that something is "too big to fail" represents the idea that the government, serving as an instrument for the welfare of its people, ought to intercede for them when it appears that the collapse of a company, or industry, would put many of them out of work — in other words, that this collapse is an inherent harm. We should note two things.
Firstly, this is not a new argument. This was essentially Ned Lud's position: widespread mechanisation threatened artisanal craftsman to a degree that compelled action, although the Luddites' response was of a destructive kind.
Secondly, it is largely blue collar in scope. That is, although entertainment is perhaps America's most significant export these days, nobody argues that the government needs to prop up film and recording studios in the face of piracy, competition from abroad, or the transference of the means of production into progressively smaller and smaller shops.
Regardless of its provenance, however, I've been thinking about this from an economics perspective (I know there are economists who read this sometimes). If one accepts the idea that a company can be too big to fail, does this imply an inherently conservative stance? That is, does this serve to limit innovation?
For instance, take the auto industry. Suppose, through the magic of self-replicating nanotechnology and rapid prototyping or what have you, I invent a means of assembling cars entirely autonomously. Really, really good cars, built to tolerances that improve their fuel efficiency, reliability, safety, comfort, the whole deal. All without anybody pulling a switch: give the nanobots a big pile of steel and petrochemicals, and they will do everything else. There's no need for any human intervention at all. The only employees I need are me, and maybe somebody to drive the cars onto a train.
This invention represents a paradigm shift in automobile construction, and because the machines are so well designed and built, they require fewer spare parts. There aren't machine tools to build or molds to cast. The existence of this production process implies that traditional automobile manufacturing, and the ecosystem that supports it, is completely obsolete. Furthermore, there's no way to compete on cost; because there is no labour or machine maintenance, I can sell cars effectively at the cost of materials. So a brand-new car maybe only costs a couple thousand dollars.
Does the government have the right to intervene? A responsibility, even? Rational economic decisions on the part of car-buyers will put the big three completely out of business (and squeeze Kia pretty hard too). Now, granted, there is also a tangible benefit, in the sense that more people will be getting higher-quality cars for less money. The air is cleaner, because my cars pollute less. Does that outweigh the sacrifice or the potential shock to the economy?
What if I decide that the fact that the cars are so much more reliable (and so I will be selling fewer replacements, in the long run), and so much better than the competition, means I should sell them at a comparable cost to a new Ford, or maybe even slightly more. I intend to make as much money as possible, so I sell the cars for ten or fifteen times what they're worth. Rational actors would still be advised to purchase my cars over Detroit's in the long run, but the price isn't so democratic anymore. Does that change the calculus in any way? What if I choose to focus on big trucks and SUVs that consume a lot of petrol, but sell them so cheaply that anyone can afford to buy them because the long-term operating cost is outweighed by the low initial sunk costs.
More pressingly, if there is a point at which rational actors as consumers and legitimate, equally rational businessmen delivering an innovation nonetheless converge on a point that, while rational, compels the government to step in, does this imply a limit on innovative technologies? If I have an idea to design and build self-replicating constructors that can make virtually anything cheaply and efficiently, but doing so collapses the centralised industrial system into a world of cottage industries and so the government will move to stop me, why would I act on my idea? What would I do?
Would I go to a corrupt but freer country where I could bribe a local warlord into letting me set up shop? Would I go to a fascist state that could simply embrace the technology and tell the newly-unemployed ex-factory workers to sit and spin? Would I just shrug and go back to my desk job?
And, more importantly, if there is a utilitarian bent to government, where is the best place for them to stop? Only when my invention would put 100,000 people out of work? If it's just 99,000, is that ok? How about just ten thousand? How about just ten?
The government, or at least the parts that are concerned with these affairs, values a single human life at around $7 million. Now, in the first world most people won't starve because they're out of work, so maybe the cost is lower. But does that imply that there is some dollar figure that I should be required to improve the general economy by for each person cast out into the cold by a new invention? $50,000 a year? $100,000?
What's the best role of the government? Only to intervene when there is no "better option" or immediate competitor? But what if the relative sickness of a company implies that its collapse will lead to better results in the long run as people step in to fill the void? Is that not good enough? What is the most effective calculus to determine that line?
Much of the time, this is actually wrapped up in a nativist, protectionist ideology — many people are deeply opposed to the emigration of industry from the United State, and have convinced themselves that we would be better off if everyone purchased cars, clothes, consumables, and consumer electronics that were "made in America."
Stripped down to its core, though, the notion that something is "too big to fail" represents the idea that the government, serving as an instrument for the welfare of its people, ought to intercede for them when it appears that the collapse of a company, or industry, would put many of them out of work — in other words, that this collapse is an inherent harm. We should note two things.
Firstly, this is not a new argument. This was essentially Ned Lud's position: widespread mechanisation threatened artisanal craftsman to a degree that compelled action, although the Luddites' response was of a destructive kind.
Secondly, it is largely blue collar in scope. That is, although entertainment is perhaps America's most significant export these days, nobody argues that the government needs to prop up film and recording studios in the face of piracy, competition from abroad, or the transference of the means of production into progressively smaller and smaller shops.
Regardless of its provenance, however, I've been thinking about this from an economics perspective (I know there are economists who read this sometimes). If one accepts the idea that a company can be too big to fail, does this imply an inherently conservative stance? That is, does this serve to limit innovation?
For instance, take the auto industry. Suppose, through the magic of self-replicating nanotechnology and rapid prototyping or what have you, I invent a means of assembling cars entirely autonomously. Really, really good cars, built to tolerances that improve their fuel efficiency, reliability, safety, comfort, the whole deal. All without anybody pulling a switch: give the nanobots a big pile of steel and petrochemicals, and they will do everything else. There's no need for any human intervention at all. The only employees I need are me, and maybe somebody to drive the cars onto a train.
This invention represents a paradigm shift in automobile construction, and because the machines are so well designed and built, they require fewer spare parts. There aren't machine tools to build or molds to cast. The existence of this production process implies that traditional automobile manufacturing, and the ecosystem that supports it, is completely obsolete. Furthermore, there's no way to compete on cost; because there is no labour or machine maintenance, I can sell cars effectively at the cost of materials. So a brand-new car maybe only costs a couple thousand dollars.
Does the government have the right to intervene? A responsibility, even? Rational economic decisions on the part of car-buyers will put the big three completely out of business (and squeeze Kia pretty hard too). Now, granted, there is also a tangible benefit, in the sense that more people will be getting higher-quality cars for less money. The air is cleaner, because my cars pollute less. Does that outweigh the sacrifice or the potential shock to the economy?
What if I decide that the fact that the cars are so much more reliable (and so I will be selling fewer replacements, in the long run), and so much better than the competition, means I should sell them at a comparable cost to a new Ford, or maybe even slightly more. I intend to make as much money as possible, so I sell the cars for ten or fifteen times what they're worth. Rational actors would still be advised to purchase my cars over Detroit's in the long run, but the price isn't so democratic anymore. Does that change the calculus in any way? What if I choose to focus on big trucks and SUVs that consume a lot of petrol, but sell them so cheaply that anyone can afford to buy them because the long-term operating cost is outweighed by the low initial sunk costs.
More pressingly, if there is a point at which rational actors as consumers and legitimate, equally rational businessmen delivering an innovation nonetheless converge on a point that, while rational, compels the government to step in, does this imply a limit on innovative technologies? If I have an idea to design and build self-replicating constructors that can make virtually anything cheaply and efficiently, but doing so collapses the centralised industrial system into a world of cottage industries and so the government will move to stop me, why would I act on my idea? What would I do?
Would I go to a corrupt but freer country where I could bribe a local warlord into letting me set up shop? Would I go to a fascist state that could simply embrace the technology and tell the newly-unemployed ex-factory workers to sit and spin? Would I just shrug and go back to my desk job?
And, more importantly, if there is a utilitarian bent to government, where is the best place for them to stop? Only when my invention would put 100,000 people out of work? If it's just 99,000, is that ok? How about just ten thousand? How about just ten?
The government, or at least the parts that are concerned with these affairs, values a single human life at around $7 million. Now, in the first world most people won't starve because they're out of work, so maybe the cost is lower. But does that imply that there is some dollar figure that I should be required to improve the general economy by for each person cast out into the cold by a new invention? $50,000 a year? $100,000?
What's the best role of the government? Only to intervene when there is no "better option" or immediate competitor? But what if the relative sickness of a company implies that its collapse will lead to better results in the long run as people step in to fill the void? Is that not good enough? What is the most effective calculus to determine that line?
| La Chevre! 27.05.2010 - 4h32 |
Speaking for myself, and trying to keep things reasonably brief: My general attitude towards "too big to fail" is that if it is true (and it sometimes is), then it must be ferociously enforced. In order for something to be too big to fail it must absolutely pose huge systemic risks to the economy as a whole. If one big bank's collapse triggers a meltdown of the banking industry then the economy as a whole contracts. Massively. We faced that in 2008 and 2009. Germany dithered and finally faced a similar situation with Greece. My guess is that nativists are actually highly suspicious of "too big to fail", and that they want all of their country's corporations to look out for their damn selves. As for your car example, here are the options I have come up with as a response: 1) Do nothing. 2) Make it illegal to use the technology. 3) Heavily subsidize the car industry. 4) Allow the car companies to fail but provide a massive safety net for the workers. 5) Heavily tax use of the technology. If I had to choose, I would definitely go with option 5. Option 1 would lead to a contractionary death-spiral. Option 2 would be stupid and overly Luddite. Options 3 and 4 create ridiculous distortions. Option 5 also creates distortions, but its are simple and straightforward. You still get some benefits from your technology even if you have to pay the government $40000 for every car you produce. The government can set the proceeds aside to help workers adjust gradually, or just lower taxes/increase services across the board. Technology and innovation are the lifeblood of humanity. If we had stopped every innovation that put people out of work we would all be much, much poorer than we are today. The key is that people need time to adjust. Your magical construction devices would be a great boon to the world, provided that they were developed in the gradual manner that productivity-enhancing technology usually comes along. Otherwise you would provide a massive shock that could very well destroy an economy. We people used to work ceaselessly. Now we work 8 hours a day (in theory). Who's to say that can't drop to 4? Or 2? Or 1? To nothing? But it takes time. As for the thresholds, I just can't answer that, especially in such a generic scenario. If a line can be drawn it has to be bright, even if it's arbitrary. Sometimes a line shouldn't be drawn. It's not like utilitarians always hold that the line exists somewhere between 0 and infinity. |
| Comrade Alex 27.05.2010 - 4h43 |
Simplified, then — and not to the end of trying to remove nuance, but to make sure we're on the same page — you would say that interventionism need not proscribe disruptive technologies, only ensure that they are smoothly integrated into the overall system? +ca |
| La Chevre! 27.05.2010 - 6h48 |
More or less. Though I'd say smooth integration is somewhat specific, and I wouldn't say that every disruptive technology should have the same kind or level of intervention--many would do best with none. The ultimate goal, of course, is to maximize utility. |
| Vulpecula 28.05.2010 - 12h47 |
I do not have the economics-based education of other, so this is more speaking from opinion than well-studied fact. But my intuition is to agree with La Chevre here. To deny the world your new technology entire would be stupid and harmful to us in the long run. But dismantling the entire auto industry overnight would destroy the economy as the millions of workers in it and its supporting industries all went out of work (not to mention that your same production would actually destroy pretty much all manufacturing, not just auto). But saying that collapsing the industry overnight would be disastrous does not imply that the likes of GM and such should be supported forever. If they run obsolete business models that produce inferior products at a higher cost, then they need to change their methods or get out of the business. But the key is to let them decline and fade out more gradually. This would lay off their workers on a few at a time over a few years. Give them time to find new jobs. Give suppliers time to either find new buyers, update their methods, or similarly fade out slowly. Give Michigan time to figure out what to do about it's steadily shrinking tax revenue and it's people to find new homes and new jobs in other states. Our economy is astoundingly resilient and highly adaptable. It can run and function under almost any set of rules and any situations. Capitalism will naturally find a way to make itself work no matter what you throw at it. But real people can't change their thoughts and opinions overnight, and it takes time to create all the new jobs that will be needed to employ those who leave the failing companies. So maybe tax your invention highly for a while, slowly decreasing it to make your products steadily more competative and dominant. Give the other companies time to try and find ways to compete with you if they can, and to slowly unwind themselves if they can't. So yes, I believe that sometimes, in extreme situations, companies can be "too big to fail". Or at least "too big to fail too quickly". No company should ever be too big to fail at all, but I believe that sometimes it's in both the short- and long-term interests of a society for the government to step in and slow things down to avoid the panicy irrational behavior that comes when entire industries collapse too quickly. |