April 27, 2005

Capitalism By Halves

Boudreaux and Roberts at Cafe Hayek have both blogged on the issue of call centers being forced to disclose their location. The intent is obvious: discourage call center companies from using Indian and other foreign locations and employees. Why would so many Democrats back this sort of law, which they might otherwise consider xenophobic or even racist?

It's a simple idea, something I tend to think of as capitalism by halves (or socialism by halves). Because of political and (less importantly) economic considerations, Democrats can't just advocate out and out socialism. Republicans can't just advocate out and out laissez-faire capitalism. This is assuming that they wanted to, of course. Since nobody gets the full system, political economy consists largely of perfecting an imperfect balance of socialism and capitalism, regulation and freedom, prosperity and equity.

The result, all too often, is a deeply flawed system. Take the recent flu vaccine problem. There weren't enough flu vaccines to meet demand. Why is this so? Because the price was controlled such that it was difficult or impossible for a company to turn a profit, and the flu vaccines would be useless for the next season when the vaccine mutated. So companies exercised free market prerogatives to avoid an over-regulated market. But in exercising the free market powers, they showed the gaping flaw laws had left: now nobody was going to make the vaccines available.

By leaving the system half-regulated, the government had run out any interest in the market without securing any non-market way to meet demand. By leaving the system half-free, the government had ensured that the product demand would not likely be met. Whole capitalism would have responded by raising prices to a point where the companies could return a profit. Whole socialism would have responded by forcing companies to stock the vaccine regardless of cost or ability to return a profit. Either way would have brought about the product, and would have met demand. Now, the capitalist system would have been far more likely (more or less certainly) better at allocating its resources effectively, but either whole socialism or whole capitalism would have 'worked' in the sense of getting products to meet demand.

Another example: California power brown-outs. California "deregulated" its energy services some time under Gov. Wilson. Unfortunately, "deregulated" was still pretty regulated. In effect, prices were deregulated and energy sellers could charge whatever the market would bear. But it was a truly boneheaded construction that effectively limited who could enter the market. New plants could not be built due to environmental legislation (which is funny, because newer plants tend to be cleaner and more efficient - par for the course, then). The ultimate effect of the regulated half was that it was difficult to get energy into the market, but quite easy to charge any price.

Under capitalism by halves, you had a government-mandated oligopoly, where a few sellers were protected from competition yet allowed to sell for any price. Under whole socialism (before the deregulation of Wilson) you would have had prices controlled. Under whole capitalism you would have had newer power plants built or energy from outside the state moved in by whatever means available. Either of these would have met demand, though of course capitalism would almost certainly have been more efficient and effective at the allocation.

Now, when I say 'halves' and 'wholes' I don't mean exactly half, nor do I necessarily mean a system where every law and practice is either socialist or capitalist. What I mean by half is that two substantive portions of a market are handled oppositely, resulting in a skewed effect. What I mean by 'whole' is that most of the relevant portions follow the same socialist or capitalist theme, and that the non-socialist or non-capitalist parts are either mundane or fairly irrelevant to the narrow issue at hand.

The theory generally applies whenever a system of sloppy half-regulation causes a problem in the market operation, but I prefer to point out the times when this causes the half-market to fail to meet demand.

So how do the call centers come in? Well, this example of capitalism by halves is a minor one and doesn't really involve a problem in meeting demand. The anti-free traders don't like outsourcing so they want measures to stop or slow it. The "full disclosure" nonsense is just a minor example of this. By forcing call centers to disclose they hope to deter them from using foreign nationals. Of course, I doubt it would work very well since most consumers a) already can tell the foreigners by accent and b) just want to fix their problem and get off the phone anyway.

But it's part of the larger problem of outsourcing. If the US had somewhat more competitive laws on corporate income taxation (we have one of the highest corporate income tax rates in the OECD) then maybe we would see fewer US companies leaving and more foreign companies coming. Moreover, if we allowed more visas for immigrants to come and work here, and coupled it with the right to work for below minimum wage, then we'd definitely see US companies preferring to stay here.

On the other side, whole socialism, they could just ban going overseas. The blunt sword of socialism could just stop it wholesale, and though this would probably be circumvented or avoided wherever possible, it would achieve the end goal better.

Capitalism by halves in outsourcing policy is that we continue to keep the cost of labor high and keep inexpensive laborers out, yet allow companies to go overseas to get them. It's a truly boneheaded combination of policies, because we try to keep inexpensive labor illegal and outside this country, yet we allow companies to leave the country to pursue it. If we simply allowed whole capitalism in this area, then we'd see companies staying here to capitalize on inexpensive domestic labor. And with whole socialism we'd see the companies staying here (though this would require a great deal of statutory protections because eventually the US would have to compete with foreign companies that did capitalize on cheap foreign labor).

And that's capitalism by halves: unwilling to embrace an efficient and fair distribution of goods, unwilling to embrace an authoritative command-and-control distribution of goods, politicians battle to plug the leaks and meet the flaws of our half-regulated system rather than addressing the root problem. There's ultimately very little room for fence-sitting in economics.

UPDATE: This is now an editorial amidst the issue articles.


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