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Posts Tagged ‘Wealth’

California is collapsing.  The Guardian has an outsider’s perspective on the downfall of the world’s eighth largest economy.  The Golden State is fading.

California has a special place in the American psyche. It is the Golden State: a playground of the rich and famous with perfect weather. It symbolises a lifestyle of sunshine, swimming pools and the Hollywood dream factory.

But the state that was once held up as the epitome of the boundless opportunities of America has collapsed. From its politics to its economy to its environment and way of life, California is like a patient on life support. At the start of summer the state government was so deeply in debt that it began to issue IOUs instead of wages. Its unemployment rate has soared to more than 12%, the highest figure in 70 years. Desperate to pay off a crippling budget deficit, California is slashing spending in education and healthcare, laying off vast numbers of workers and forcing others to take unpaid leave. In a state made up of sprawling suburbs the collapse of the housing bubble has impoverished millions and kicked tens of thousands of families out of their homes. Its political system is locked in paralysis and the two-term rule of former movie star Arnold Schwarzenegger is seen as a disaster – his approval ratings having sunk to levels that would make George W Bush blush. The crisis is so deep that Professor Kevin Starr, who has written an acclaimed history of the state, recently declared: “California is on the verge of becoming the first failed state in America.”

California is screwed.  It’s a disaster, and it’s easy to point to a few reasons why.  The legislature has been staunchly Democratic since 1970, with one brief interlude of Republican control.  The state is the absolute paragon of liberalism, the fullest flower of the public-service/welfare state apparatus.  Republicans are a minority in every single voting district in the entire state, at all levels of government.

But you wouldn’t know that if you read some of the left’s critical analysis of California’s plight.

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Once a friend claimed to me that a free market was ultimately unsustainable because in the long run, all wealth would be channeled to one person.  The implication here is that the government provides a necessary check to prevent such injustice.  The claim is one that addresses complex social and economic features of how humans behave, one that seems intuitively correct to people that, so it survives as a factoid that’s passed around without much question.  The richest in society are richer now than they ever have been, because they’re withholding resources from the lower classes, right?  This is not the way economists think about the world.

Economists see trade as a positive-sum game, which means that when two parties make a voluntary exchange, both are better off.  Have you’ve ever thanked someone at a cash register and heard them thank you in response?  In a free market, wealth doesn’t accumulate to the richest by exploitation; it is produced from the bottom up.

Evolution has left us with an unfortunate bias to think in zero-sum terms.  Our ancestors functioned in a zero-sum environment, which means that one party benefited at the expense of another.  If two warring tribes were competing over resources, then inequality between the them was a signal of injustice.  In contrast, today’s economic institution, a free market, functions contrary to our evolved intuitions.  Zero-sum thinking is quite pernicious because it is so psychologically ingrained, and as such, it strongly motivates people to advocate for protectionism and all sorts of policies that decrease human welfare.

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