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Water Markets

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Aug. 9th, 2005 | 12:42 pm

A few days ago I saw a copy of a book arguing how markets could solve the worlds water crises, my first reaction was "silly libertarian".

But then I thought a bit harder... One of the examples used by the pro-capitalism people is the agricultural water markets in California, for the farmers the water is being provided at a significant subsidy, which results in them not needing to install any water conservation devices. That doesn't seem good, there's a finite amount of water and we need to try to conserve wherever we can.

However the anti-capitalists use the example of Bechtel and the water privatization in Cochabamba, Bolivia. In that case an urban water system which was working, suddenly experienced a tripling a water rates once the corporation owned it. To add insult to industry they apparently also tried preventing competition by demanding payment for rain water. search through the wikipedia article for cochambamba.

It occurred to me that in both of these cases the problems were caused by distortions of the costs of providing the services--for california it is a government subsidy, for cochambamba it was the excessive profits that can be extracted by a monopoly.

I wonder how effective divorcing markets from for-profit corporations would be, for example modern china and cuba, and even the soviet special economic period all used limited markets. I wonder how efficient a market based socialist system where the economic units forwarded their excess profit back to the government which could then use profits to like venture capitalists.

To me it seems like much of the practical experience suggests that ideological pure economic systems don't work as well as hybrid systems. Sweden, with its high tax rate providing for a large swath of government support services is currently highly competitive in the global economy, and is also a nice place to live. While modern America, early 1900s america, and early 1800s britan, all instances of trying to be pure free market were wretched places to live (if you weren't really wealthy).

Perhaps the result of this is markets are effective tools as long as you have some system to limit the abuses caused by greedy people who are sliding toward the sociopathic personality type.

As an aside I do think that many, if not all, of the complaints raised by the anti-corporate protesters are the result of centralization of power in the hands of an ever shrinking set of corporations who are also using their power to put their officers into government positions. (Sometimes it seems like the entire Bush administration is comprised of the people who were the directories of various large military-industrial complex corporations)

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Comments {9}

Josh

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from: irilyth
date: Aug. 9th, 2005 09:07 pm (UTC)
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Once you accept that markets are both an effective and moral way to price goods and services, you're halfway to being a libertarian yourself. :^)

The main difference between a for-profit market and a socialized market is incentives: In a for-profit market, I have an incentive to make as much money for myself as I can; whereas in a socialized market, it's not clear what my incentive is to make as much money for my government as I can. I suspect that it'd work fine on a small scale -- it already does, on the scale of families for example, where spouses and children typically socialize their wealth -- but that it'd break down as the scale gets larger, the population gets more diverse, and the distance between participants and decision-makers grow.

More specifically, why would a big government be more likely than a big corporation to use profits in a way that you personally would support? What if the government took the profits from the market and used them to wage war against neighboring countries, or promote fundamentalist Christianity, or any number of other odious things?

The reason I "trust" big corporations more than big government -- which I do only a little, but I do a little -- is that big corporations are inherently more fragile, and become even more so as you make the market more free. Their success depends on their following the rules of the free market in direct proportion to how much they're bound by the rules of the free market... This is why subsidizing corporations is almost always a bad idea (I'd say "always" but I'm not 100% sure that there isn't a counter-example): It breaks the rules of the free market, and to the extent that you actually believe that the free market is a moral and effective way to set prices, any time you break those rules you're doing something ineffective and immoral.

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Josh

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from: irilyth
date: Aug. 9th, 2005 09:09 pm (UTC)
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I sort of drifted from the fragility thing there. The point is that even a huge and powerful corporation will utterly fail if it doesn't have something to sell that people want to buy. This is more true the more the market is free; and it's a huge check on the power of a corporation, because as soon as the corporation starts spending its resources on things other than selling something that people want to buy, it becomes less powerful.

This is not, needless to say, true of governments.

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Diane Trout

part 1

from: alienghic
date: Aug. 11th, 2005 08:49 pm (UTC)
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So actually governments are fragile as well. All governments exist by popular consesnus for a simple reason, you can coerce a few people through force but you can't coerce your entire population.

An interesting example of the interplay of coercion and popularity was the communist revolution in russia. (As described in the unconquerable world). The coup in moscow was actually rather bloodless as they had actually built a large base of support in moscow. When the czar's ordered them captured they solders merely defected and supported the communists.

However they didn't share the same support outside of the capital and so once they'd solidified control over the army the bolshiveks finalized their control over the rest of the country with the army.

However there are limits to how effective armies are at controlling a region. For instance the current debacles in Iraq and Afghanistan, show how a fairly strong military power can show up with the ability to kill anyone in the country with impunity and still are utterly unable to govern those countries.

Both corporations and governments are social institutions created by humans to organize human relations, and thus both classes of things exist at our convenience.

The reason I will never be a libertarian is that I believe that markets suffer from a number of weaknesses that need non-market forces to correct.

One example described in Krugman's "The great unravelling" describes a situation where markets cannot work. The example is insurance for health care for old people, there's a bimodal distribution of older people--healthy and sick. The health care costs are dramatically higher for the sick than the healthy and so those costs have to be amortized over a large portion of the population. However these premiums are actually higher than the healthcare costs for the healthiest elderly, so they have no reason to continue to pay those premiums. Once they leave a the expenses have to be spread over a smaller chunk of the population increasing costs, which drive out the slightly less healthy, and the process continues until the insurance policy collapses.

You actually need to use a mandatory health insurance system to make the costs affordable.

Another flaw with pure markets is the ever popular business cycle, for many decades prior to the new deal US businesses drifted between growth and recession, eventually culminating in the great depression. Markets flop back and forth between growth and decline in a way that makes peoples lives rather unstable and so the various government policies like the federal reserve help to try and smooth out these oscillations to increase personal stability.

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Diane Trout

Re: part 2

from: alienghic
date: Aug. 11th, 2005 08:50 pm (UTC)
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(there's a limit to comment length? I never knew?)

Although less provable I do believe that market systems that lack some form of income redistribution is also a highly undemocratic organizational system. In a market if you have more wealth you are at a competitive advantage to make more wealth, there are various forms of market power you can exercise to lower your costs for instance. Eventually, without some form of government intervention you can an end up with monopolies, and if these monopolies control some essential service you are basically completely at that corporations mercy.

For instance if a company owned all the water in a particular region and they owned all the water sources, and then they started raising their price for water, how much would a person be willing to pay to continue to drink? Also is there any way for a market to recover from that situation?

One last market failure is the difficulty in pricing intangibles or common goods. What is the market price for old growth forests that provide oxygen, whats the market price for greenhouse gas emissions? Both of these are tragedy of the commons type situations, which are exacerbated by an individualistic growth based culture. If you had a more community focused culture (aka if more people thought like me) negotiating a limit would be far simpler.

(Although I'll admit that once a limit is chosen emissions trading does actually seem to be an effective way of optimizing emissions, however markets are highly ineffective at coming up with that limit.)

As a result I personally believe that a pure market system would be a rather horrific place to live (I personally immediately flash to all of the worst excesses of cyberpunk literature), what one needs is some society that attempts to find some balance between businesses, the state, and for most current societies religion.

When all three classes of institutions start working together you end up with highly authoritarian oppressive societies.

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Josh

Re: part 2

from: irilyth
date: Aug. 11th, 2005 09:13 pm (UTC)
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What you're mostly opposed to here is coercive power, and the solution is to minimize the amount of coercive power anyone has over anyone else.

Say a single person holds all the water rights in a region -- say, Pasadena -- and demands an exorbitant price for them. What will happen?

What will not happen is "thousands of people will die of thirst".

Instead, people will import water from other regions, competitors will create new distribution systems, and as a last resort, people will move away.

Even in an actual monopoly, the monopoly holder can't set whatever price they want, because there are always alternatives, except in very artificial situations (like the guy who has a monopoly on oxygen on the Space Shuttle or something). A monopoly holder wants to maximize profits just like everyone else, and that means selling what they have at a price that people are willing to pay. That price only becomes infinite when the demand is infinite, and nothing has infinite demand.

The market recovers from monopolies when new entrants find new ways to supply the monopoly product and compete with the monopolist. The only way monopolist can hold on to their monopoly indefinitely is through some sort of coercive power, whether it's physically attacking their competitors, or having the government forbid competition in their industry, or whatever.

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Josh

Re: part 1

from: irilyth
date: Aug. 11th, 2005 09:03 pm (UTC)
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The vast majority of human history is filled with governments that lack popular support. Even today, there are still plenty of dicatorships around the world. Or do you think that the people in Iran, North Korea, Zimbabwe, etc, are actually in favor of their governments?

The US has been unable to exercise military control over Iraq because our army isn't large or ruthless enough. Saddam Hussein exercised military control over Iraq for decades, because he had many more troops and was happy to kidnap, torture, murder, and otherwise brutally silence dissent. Unpopular governments don't stay in power by promoting democracy and human rights, they stay in power by killing and terrorizing their opposition.

Unpopular corporations don't have that option.

The health insurance example starts from a faulty premise: That the sick elderly must receiver health care, regardless of who pays for it or how much it cost. This is simply not true: There are many things that are more important to spend money on than health care for the elderly. Everyone believes this, whether they admit it or not; or at least everyone who isn't willing to sell their house and move their family into a one-room apartment in order to keep grandma alive.

I'm not an expert in business cycles, but I've definitely read that they're as much caused by government intervention as prevented by them. Keep in mind that the pre-New-Deal US was not a libertarian paradise. Government meddling in the economy was common -- it was just being done on behalf of politicians and corporations instead of politicians and ordinary citizens.

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Bolowolf

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from: bolowolf
date: Aug. 9th, 2005 10:50 pm (UTC)
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I think this is an important issue in figuring out what would make anarchy work (which is a related interest of mine). How do smaller groups (which seems to be the scale at which an anarchist society would work best) interact with each other when they don't necessarily trust each other's motives? Or what would build trust? How do needs get met when there aren't larger organizations (govts or corps) aren't providing centralized access?


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Diane Trout

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from: alienghic
date: Aug. 11th, 2005 08:58 pm (UTC)
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All I've ever come up with for anarchistic societies is if you can get self-reproducing factories working then you don't really need to depend on each other.

Many of Neil Stephenson's books seem to be set in a fairly anarchistic society, though they do seem to have a strong market bent. The BBC also had a section one of the failed states, and what life with no government was like.

The sad thing was one of the indicators of how stable people were feeling was what the street price of an AK-47 was.

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secretslip

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from: secretslip
date: Aug. 10th, 2005 06:03 pm (UTC)
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Lol, charging for rainwater. How much?

I don't think that I would enjoy running the water company. Probably the government would step in and have special rules for giving water to poor people for free. And then all the fun would go out of trying to be profitable.

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