Will the free market solve everything?

Crosby_M (CrosbyM@po1.cpi.bls.gov)
Wed, 26 Feb 1997 12:57:53 -0500

On Monday, February 24, 1997 6:18 PM, William Kitchen wrote:
<An op-amp circuit with strong positive feedback will tend not towards
balance, but to lockup in either an extreme positive or extreme
negative state. Ungoverned free market economies also have strong
positive feedback, and share this same characteristic. Imagine each
individual as an op-amp.>

This comparison is too simplistic: bionomics is a better model than
electronics for describing the economy because markets, corporations
and individuals are complex adaptive systems composed of intelligent

Bill adds:
<Those who are wealthy (positive) beyond a certain admittedly fuzzy
threshold will tend to become more wealthy (extraordinary stupidity
can change that, but I'm talking about a tendency, not an outcome
that is certain in every case), while those below that threshold will
tend to lose ground. The further you are from either side of that
threshold, the less likely it is that you can cross it by your
intelligence and effort alone (or lack thereof, in the case of
crossing the threshold in the negative direction).>

Economic analysis does not support this conclusion, at least not in
the relatively open markets of the U.S. Throughout most of last year,
the predominantly statist press in the U.S. had been crying about
rising income inequalities. Of course, as the presidential election
approached, the story shifted - things weren't really as bad as
everyone thought - so that Bill Clinton could claim major progress at
eliminating these 'inequities' during his first term.

In the 01/25/96 Wall Street Journal, Karl Zinsmeister of the American
Enterprise Institute wrote about this in an article called "Last
Hurrah For Class Warriors" and noted:
<... the figures on cash earnings that are regularly trumpeted by
economic declinists completely ignore the doubling since the early
1970s of worker compensation taken in the form of fringe benefits. The
increase in noncash income is even sharper on the governmental side,
where every year, hundreds of billions of dollars worth of health
care, food stamps and housing transfers - which didn't exist in 1970 -
are pumped into the economy, unacknowledged in the national income
statistics. Erroneous comparisons of demographic apples to oranges are
another common mistake of those who use weak official income figures
to grind their programmatic axes. When tracing median income over
time, you must be sure you are looking at the same kind of
household.... Families have become considerably smaller, for instance.
The average family had 12% fewer members in 1993 than in 1970. And a
smaller family with the same income is actually richer. When you
correct the income statistics for family make-up, you find that
average incomes are clearly up since the early 1970s, not down.>

Also from last year's Wall Street Journal, an editorial on 04/17/96
noted how liberal "anxiety scenarists present the U.S. as a static
caste society" but a new Dallas Federal Reserve Bank report by Michael
Cox & Richard Alm "looked at income mobility for Americans over 17
years" and found:
<By 1991, only 5% who had been in the bottom quintile 16 years before
were still there ... Of folks in the middle quintile in 1971, a full
80% were at the same level or higher 16 years later ... And what of
those at the ladder's bottom? Messrs. Cox & Alm looked at their
spending patterns over the century ... In 1920, the bottom quintile of
earners consumed 70% of their income on necessities such as food,
clothing and shelter. That fell to 57% by 1950, and 45% these days.>

I recall a number of other articles noting similar results; in
particular, longitudinal studies showing how easy it was for the
wealthy to lose their wealth and slip into lower income categories.
Of course there are *a few* ultra wealthy who would have to be
awfully generous or stupid to lose their wealth.

In short, this 'fuzzy threshold' you talk about is fuzzy only because
it is so huge and, at least in the U.S., is liquid enough to cover the
vast bulk of the population.

Mark Crosby

P.S. The problem with this thread is the assumption in the title that
it's possible for any system to "solve everything" and the even worse
assumption that the stagnation of 'balance' is desirable.