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Flexibility is an important trait in politics

Pragmatic policy considers the market dynamics and the desired societal outcomes


My economic and political philosophy in a couple of sentences is basically:


Left wing with people's needs and right wing with people's wants.

Tighter central control contingent on the importance of societal outcomes.


It isn't perfect but describes most of how I think about distribution and policy. It is a flexible philosophy in that it recognises that politics is much messier than just left and right. This article is going to talk about the political spectrum and how appropriate regulation and policy (or lack of) can differ depending on markets or desired outcomes. Of course the political spectrum has its limitations but it is easy to understand as a tool to think about policy positions. As always on this blog, the extreme ends on any political spectrum represent Crazy Town.



Market dynamics influence the mix of "left" and "right" necessary


In this section when I talk about the left wing I am referring to systems characterised by more government aiming for greater equality. The right wing refers to a more decentralised market system.


Let's look at needs and wants. It's difficult to know where to draw the line when we are talking about necessities, but typically that means products or services like food, shelter, energy, transport and healthcare. I would suggest some technologies such as internet or communication tools also fit in this category but I appreciate that is subjective. Markets are actually quite effective at providing many necessities where there is competition and barriers to entry are low.


However, trusting purely in free markets to provide access to necessities may not work where the products are price insensitive and the barriers to entry are high. What this suggests is that the nature of the market we are talking about should influence how we think about central planning.


Healthcare is a classic example of a service which is price insensitive with high barriers to entry. Demand is high with life on the line. If there is a chance we will die we are willing to pay no matter the cost. There is a risk that companies exploit this price insensitivity, particularly in markets where there is limited competition. You may recall 'pharma bro' Martin Shkreli, Turing Pharmaceuticals and the price hikes on daraprim. The cost of medical technology, building a hospital and employing staff and is high creating a substantial barrier to get into the healthcare business, limiting competition. In these types of markets greater government involvement makes sense for equitable access to a necessity at fair prices - hence why public health systems are a good idea.


But what about a product like a Ferrari? Ferraris are a luxury product competing in the luxury market. There are many substitute products. You can catch the bus and get broadly the same outcome of getting from A to B. It wouldn't be as comfortable, or as fast, and the person next to you may smell bad, but it fulfills the basic purpose. There is also considerable competition for luxury cars - Porsche, Lexus, Audi and Mercedes to name a few. Not to mention Ferrari isn't even just competing against cars, but bikes, buses, trains and walking - all which are reasonable substitutes. In markets like this demand/supply pricing is more acceptable with limited government control. Simply put, not everyone can have a Ferrari.


I have made this very easy on myself so far by choosing examples that are clearly needs or wants. Let's talk about a trickier example.


Latest name-brand cancer treatments probably don't fit in the category of a necessity. Yes, the product is price inelastic and people need it to survive. The patent on these products also means the companies hold a monopoly on it and often the price is high. However there are cheaper chemotherapy substitutes that may not work as well but are still an effective treatment. Also the cost of producing these treatments is massive and companies need a mechanism to recoup costs. But more pragmatically, if we pay for them in large quantities we may not have sufficient budget for other treatments that are more cost effective and can be provided equitably. On this basis the latest cancer treatment would be a "want" and chemotherapy the "need".


Greater control is important when the stakes are high


On the Y-axis we have the level of control. Libertarianism talks about upholding individual liberty and choice, where authoritarianism is about obeying a central authority. When I refer to authoritarian vs libertarian I am not thinking of a dictatorship vs complete unfettered freedom with no laws but more about the level of regulation.


Where the stakes are really high, as in the case of climate change, governments are the right entities to step in and set rules to ensure societal outcomes (eg reduced emissions) are achieved. Relying purely on the free market is foolish considering the loose enforcement mechanisms and considerable costs of failure. We simply can't trust the free market alone to deal with climate change given the lack of short-term incentive to reduce emissions. COVID-19 is another highly relevant recent example where the stakes are high and governments are the right entity to step in. However, if the issue at stake is small, the level of central involvement can be much smaller or non-existent.


Market initiatives, like an emissions trading scheme (ETS), can create a trading system to support regulation. Though ETS' are legislated reflecting the importance of government involvement.


On the opposite side of the spectrum there are domains where limited or no government involvement is important to uphold freedoms. Family life for instance. Eating out at a restaurant. Relationships. Some news media. The government doesn't need to be deeply involved in every facet of the economy or be the entity trying to solve every social issue. There is a risk in relying to heavily on a central entity to solve every problem reflecting that individuals are the agents through which change ultimately needs to happen in a free society. The government is not a parent.


There are issues which challenge the legitimacy with which government can act with authority. Corruption is important to consider here. If governments are corrupt it is difficult to voluntarily cede power or decision making to them. Inefficiency also fits in this bucket. If governments are seen as incompetent or bad with money it can challenge the willingness of the population to obey and pay taxes. Any central entity must be held to a high standard.


Policy options are more about what works than ideology


Ideology can be rigid. Policy may borrow from numerous sources in order to find what works. That is the ultimate test of effective governments. Free markets are great at doing some things, and governments are great at doing others. The mix of control and economic freedom exercised should be tailored to reflect the desired societal outcomes and the mechanism that works best.



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A New Zealand based politics and economics blog

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