Sunday, March 13, 2011

Notes of the Free Market

I will risk annoying Stangeland and detour from my recent funny blogging to make one of my know-it-all econ posts.

For the record, I think capitalism works pretty well and that the free market usually does a good job. The sad reality is that most people (and by this I mean Republican officials, Ayn Rand worshippers and Tea Partiers) who run around talking about how great the market don't actually understand the Free Market or really mean "a system that allows me to direct money to my friends".

So, as a public service, I would like to point out that the current situation in Japan, in which a publically traded company ran a nuclear reactor in a high risk location, did not have a back-up system that could prevent a melt down after a major disaster is a predictable free market outcome.

After all, large companies are not people (contra Citizens United) and function as a collection of specialized individuals who contribute in compartmentalized roles that mitigate any actual moral evaluation of actions. Decisions are then made based on the silo'd business analysis* that aggregates up into action.

In this case, a cost / benefit analysis of investment in infrastructure to prevent a meltdown in a extreme and inevitable disaster such as a Tsunami is going to find that, if a disaster occurs of such a magnitude that it disables the initial back-up systems then regardless of whether additional back-ups exist and a meltdown is prevented then there is likely to be a considerable demand to shut the reactor down. This will lead to lost profit which is, for a corporation, a very bad thing. So the optimal decision is to forgo additional back-up systems.

I am not clear why so many people fail to grasp this. Well, actually I do. It's that most Republican Leaders, Randians and Tea Partiers do grasp this. They just don't care unless it impacts them directly... services for me and but not for thee.

*now, many companies don't really do very good business analysis. but the point is, when you start hearing about mismanagement.. well this isn't mismanagement. that's the point. it was a sensible business decision. it just wasn't the right decision.

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