President Obama, what is a "market based economy"?

From the press conference -


OBAMA: And so if you take a Bachelet or a Lula and the United States has a good working relationship with them, then I think that points the way for other countries that may be -- where the democratic tradition is not as deeply embedded as we'd like it to be, and we can make common cause in showing those countries that in fact democracy, respect for property rights, respect -- respect for market-based economies, rule of law -- that all those things can in fact lead to greater prosperity.


What is a market based economy? Let me think of some economies we've had in the past centuries -

Feudalism - people grow food, kick some up to the local lord in the Corvee, the lord goes out and buys stuff with that (armor, castles etc.) from market.

Slavery - Slaves grow cotton, sent to England to the industrial mills, slaves get food in return, slave owners get money in return from market.

USSR Socialism - worker builds commodities in factory, gets wages, goes to market to get food grown by peasants.

All of these market-based, so what would a non-market based economy be, hunter-gatherers still running around Australia's outback?

Market-based and free market are nonsensical terms used to mask what they really mean - that the difference is not in the market, which is the same as the USSRs, or the consumption and use, as everyone digests food purchased the same, everyone wears clothes purchased the same. The difference is at the point of production. In capitalism, production is owned by a capitalist, such as an heiress like Paris Hilton, who lives off the expropriated unpaid labor time of the employees who do all the work at Hilton hotels.

...of goods and services are determined in a free price system set by supply and demand.

Per wikipedia.

How can a price be determined by supply and demand? If I produce something, it costs me X amount of dollars. That is a sunk cost. Then I try to sell it. It either sells or does not sell. The market does not determine the price, I am already out that money, the only thing that happens at the market is it either sells or does not sell.

In fact that's what this recession is - lots of commodities produced that no one is buying. Boats are unloading new cars into massive car lots on West Coast ports that no one is buying. It's true eventually there may be a fire sale, but that would mean the original producer lost money, and is obviously no way to run a business. And those factories are all sunk costs, with employees getting salaries, producing even more cars when there are a ton of new cars already flooding the market.

And as far as the division of labor, the USSR had a division of labor as well. The engineers who put up Sputnik to the farmers growing the grain. They had markets as well, where the engineers bought their groceries (or peasants bought clothes etc.)

Lets say your sunk cost is X. You try to sell for X + 10.

What if no one wants to buy it? Rather than go out of business, you will lower the cost, to say, X + 5.

Still no one? How about X + 3.

Finally, people want to buy it. The market determined the price, which is X + 3.

What happens if no one wants to buy it at X? Then you go out of business, and another business takes over that can figure out how to produce it for something less than X. Or if that is not possible, then the product is not made anymore (which makes sense, because the cost to make the product in general would be greater than anyone is willing to pay for it).

That is what people mean by a price being determined by supply and demand.

Thats just a quick real world example off the top of my head.

It gets cheaper to make PS3s and Xboxs as time goes on.

This is quite obvious. It takes a long time to design a PS3. I have taken some Electrical Engineering courses, and am by no means an expert, but I know it can be complicated. You can run into some very tricky and baffling questions when you manufacture a device that works on the drawing board but does not work once you actually make it.

But anyhow - the costs for design, all the kinks to get out of the system in production, marketing, the initial costs to get to distributors are a lot. Once the commodity starts flowing out smoothly, the main costs are production (capital costs, wages and profit). There are more reasons production gets cheaper as time goes on but I mentioned the main ones.

"What happens if no one wants to buy it at X?"

You hire a lobbyist.

What you are talking about is the government affecting the initial cost X. Sure, that might happen, and sure, that can distort a market, but that doesn't change what the definition of supply/demand pricing is.

...implies that the market has choices. The USSR didn't give people real choices. Feudalism barely offered any choices. And slavery most certainly wasn't offering choices.

They certainly did have choices of what to buy. What do you think, they were given a bowl and alloted a portion of gruel once a month? Perhaps you have a little bit of a point when you say Stalinism but I said USSR socialism. Khrushchev prioritized consumer items over military expenditures and produced a lot of televisions and the like.

And Yugoslavia was even farther along the road to a socialism with more "choices" in terms of marketplace and production. Yugoslavia had a very interesting economy, and Tito was of course not part of the Eastern bloc.

Yugoslavia was of course never part of the "Soviet bloc" and had a very unique economy. It was state owned, but it definitely allowed as much consumer choice as in any capitalist country. The way the state owned production was run was interesting as well. How did Yugoslavia not offer choices? I don't see in what manner the Yugoslavian market did not offer choices, even production was very choice oriented.

The USSR's state run economy was a bit more bureaucratic than Yugoslavia (not that the US isn't bureaucratic - I've worked for local government in the US as well as multiple Fortune 500 companies, so don't tell me the US can't be bureaucratic), but after Stalin died, Khrushchev offered a lot more consumer choices than before. Some people probably remember Khrushchev's "kitchen debate" with Nixon - well that revolved around exhibits showing the Soviet (and American) consumer markets, and the real surprise was not how different they were but in many ways how similar (of course, the USA was a lot richer than Russia in 1959, but the USA was a lot richer than Russia in 1917, when Russia was still at the level of Brazil. I can assure you that Brazil was not shooting flags to the moon and dogs into space like Russia was in the 1950s).

Little or no choice of different producers of similar goods and services.

An old Soviet joke was that the most exciting thing about Soviet television was wondering when the television would explode. If you didn't like the poor (and dangerous) quality of those televisions, your choice was pretty much whether or not you owned a TV. Unless you bought a foreign-made TV on the black market (and I don't even know if any foreign-made TVs were compatible with Soviet TV broadcasts), you couldn't reward and encourage the quality of a competitor with the way you spent your money.

Because of a ridiculous system of measuring productivity by consumption of resource, a Soviet producer of camping supplies made metal cookware that was thick and heavy -- utterly unsuited for the purpose of the product. They'd never have survived in a capitalist economy thinking that way, and shouldn't.

This is not to say that capitalism produces perfect products, or that distortion of monopoly power in capitalism can't have similar effects. Capitalism, however, stands a much better change at producing higher quality goods and services at good prices.

that don't conveniently fit.

"What you are talking about is the government affecting the initial cost X. Sure, that might happen"

Might? No, not "might".

You really think every single good or service is subsidized by the government?

:rofl:

to the tune of trillions.

Your overly simplistic model is accurate in a vacuum; but not in the real world.

Sometimes the government has to step in and keep the boat from sinking. But in times when things are going generally good, the American people generally get to set the tone of success for products and services. It seems to me you are trying to pretend that Bza was offering some puritanical explanation of how our economy works just so you can argue about absolutely nothing.

"Sometimes the government has to step in and keep the boat from sinking. "

We're not talking about "sometimes". We're talking about the present.

"But in times when things are going generally good"

Yeah, well booze makes me feel really good--until I get a hangover. If I write a theory of boozing that makes no mention of hangovers, it would be phony and inaccurate. Just like the "free market" economic model presented above. :hi:

Reagan used to talk about how the problem was government, then he turned around and gave billions (trillions in his eight years) to military contractors. This Internet we are typing on? A government, or at least government subsidized project.

Since the New Deal, American capitalism has been on life support, meaning if we took away government support it would collapse. Imagine if every bank bailout, every military contractor, every military base, every soldier spending money at the local store in the military town, every R&D shop, Boeing, Martin Marietta etc. stopped getting money.

You are right that not every single good or service is subsidized by the government, but if the government did not massively subsidized a good portion of the economy, NO goods or services would be selling well, or even decently.

US big business needs and wants government intervention - something that was not so much the case before the New Deal.

I simply said that the government does not subsidize everything.

Of course the government does intervene in many sectors of the economy, and I fully agree with that. Even Republicans know that government intervention is required for certain sectors (though most Republicans would strongly disagree with both you and me as to the extent of appropriate government intervention). The only people that detest government intervention in all cases are Ron-Paul-style libertarians.

I have a small side business so I'll use that as an example for this.

I sell commodities which I buy from distributors. I buy six widgets and sell them one-by-one. I also pay for shipping (USPS/UPS/FedEx, box, tape, label, packing slip, packing material), credit card fees etc. So those are constant sunk costs. And I do sell for lets say X+3 still.

What is that $3? It is both wages and profit. Now since this is a small little business that $3 comes to me, but in a real business, you have to pay wages to get people to work for you. And there is a fixed rate for blue collar jobs - minimum wage plus the extra standard hourly rate for more skilled jobs. Then there is also a pretty standard rate of profit for all businesses, which some fluctuation due to monopoly and "riskiness" (riskiness itself being a gobbledygoo term). So the constant capital costs and market labor costs are sunk before you ship, they are not determined by the market. The only market determination is profit, which is determined by "riskiness". But that's already known somewhat prior to production anyhow. All costs are determined before getting to the market.

I should add that my view is shared by magazines such as the Monthly Review and so forth. I just want it noted that I did not come up with it myself.

In fact Adam Smith, David Ricardo, Malthus, JB Say and all the fathers of economics share my view as well. Although Ricardo is the one who really went into it and wrote very verbosely about all of this.

Dozens of items (the supply) go up for auction to be bidded on by a bunch of people holding numbered paddles (the market).

There is an asking price, a minimum bid, or opening bid.

Some items will sell for $100 (low market value or low demand if the original asking price was say $90), others maybe $100,000 (high market value/demand, if say the original opening price was $10,000). Other items won't have any bidders, and not sell (there's no market right now for it).

In each case, the market (the bidders) determine what sells and for how much.

If an item has a lot of bidders or bids on it, then there's a high demand for it.

So, eBay is also an example of a market economy in its own right.

I have sold thousands of dollars worth of stuff on eBay and have seen it up close. Especially interesting is how they are trying to kill off the smaller sellers and focus just on big corporate sellers, and if you want to here small sellers screaming about this go to http://www.powersellersunite.com

One thing I have noticed is prices do not really change on eBay. One item I sell a great deal of and have followed my and others prices from 2005 to now. In 2005 they were selling for $50 or so, and today they still sell for $50 or so. The most I ever got for it was $51.90. Sometimes my week long auction does not sell any.

The thing is this - I know I can get this item for say $48-49 (including all costs). I sell it on eBay for $50. So my sunk cost is say $49 and my wages and profit for my work is $1 for every sale. The *PRICE* is not determined by the market, only whether it will sell or not is. And if I didn't see it selling consistently at $50, I would have never sold it. The market does not determine the price, labor costs do. As I said in another post, all the earliest economists from Adam Smith to David Ricardo and on agreed that labor costs determined the price of a commodity. Although nowadays even the Democratic party will no longer accept this.

No one has mentioned bottle-necking, restricting availability-like diamonds & now oil-to raise the price.

Also, if no one wants the product they hire an ad agency (as well as a lobbyist).

Not mentioned is how the oil coprs. & others shut down trains in America, even though it was against market reality.

Shutting down competition hasn't been mentioned either, companies do this so they have a monopsony(a few corps.) or a monopoly, then they can set the prices however they want. Enron is another example of "free market" crap, & a warning to us all; why are other states privatizing their electrical companies after watching what happened in CA? They act like they are asleep.

The nature of capitalism seems to have changed over the years. I freely admit, that whatever you think of children working in coal mines and factories at dangerous jobs, that capitalism had a vitality in the nineteenth century. Over time it seems to tend towards monopoly - even in the late nineteenth century we saw the giant trusts, which even a Republican (Teddy Roosevelt) went after - to some extent. In fact, things seemed to be stalling back then until the government intervention in the early nineteenth century (like breaking up Standard Oil) and later in the New Deal. I don't dispute the historical progress that capitalism made back then, I just question it nowadays. I mean, I look at me the taxpayer bailing out the owners of AIG, the banks etc. and I don't see this as a minor bump on the road as they are trying to spin it but as a major thing.

Especially when I'm being told I am on the hook for borrowed money to bail out the owners of the banks and insurance companies, and when I get old I might not see Medicare or Social Security because capitalism has failed to do the job.

when we have a huge national debt. Well, hello, we wouldn't have that frickin' debt if we hadn't rescued those "market-based" banks and insurance companies and financial groups.

This was another sop to free-market economics by our President. It's the obligatory phrase that keeps the moonbats from going totally over the edge. Kinda like the way he refers to countries whose democratic traditions aren't as deep as ours, when anyone who's been paying attention to American politics for the last 60 years or so knows that we are no longer a democracy but a faux democracy of the same ilk as the "democracy" in theocratic Iran.

and decisions are made based on the competition for units of exchange.

so they can lend it back to you at credit card interest rates.

You big Silly!

"Market economy" does not mean "a market exists."

Feudalism is a political system, as is slavery (as it is fundamentally the denial of human rights to others). Neither are incompatible with a market economy. In the USSR, prices for goods, services, and labor were not freely set. Under feudalism as it existed in the Middle Ages, division of labor was incomplete, and prices were often not freely set.