The fairy tale land called Equilibria

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Source: — Authors: – business
March 14, 2011.   By Jim Stanford, Ottawa Citizen

Citizen columnist John Robson poked great fun at me recently with his “Economic children’s story” (March 5): a humorous fairy tale about a land where unions kill the goose that laid the golden egg, until taxpaying denizens (starting in Wisconsin) throw off the yoke imposed by overpaid teachers and garbage collectors.

Of course, if workers were really paid in golden eggs, unions would never have been invented. Instead, unions were born in a less pastelhued world where workers fought even for the basics of survival. Employers and their think tanks have been complaining ever since: always promising that if only unions stopped messing with the market, we could finally achieve high productivity, low taxes, and a flood of trickle-down prosperity.

Here’s another fairy tale I learned long ago -in first-year university economics -it takes place in a faraway land called Equilibria, a happy place where supply always equals demand, and self-starting folks live to truck and trade.

They produce a rich variety of goods and services reflecting the natural comparative advantage of each producer. Some Equilibrians flip burgers and collect garbage, while others manage private equity placements and devise structured credit instruments. While some are much better off than others (due to randomly uneven endowments of economic luck), everyone is better off going to the flea market than just staying home.

Best of all, the whole process is overseen by a giant, omnipresent hand, which ensures that everyone works to the best of their (randomly endowed) abilities.

No one has ever seen this hand (it is invisible, apparently). But everyone knows it exists, thanks to the teachings of a caste of high priests called Economists.

Eventually, however, in a kind of economic original sin, the burgerflippers and garbage-collectors became envious, and decided they wanted more out of life than the invisible hand was allowing them. They got together and began to agitate. They formed unions that won a better deal at the flea market for many (but not all) of the riff raff. And they pressured their king and queen to provide certain things that weren’t even available at the flea market (like free education and health care).

The private equity and structured debt specialists did not like this turn of events. They longed for an earlier era when the richest one per cent of Equilibrians took home 25 per cent of all the stuff from the flea market (instead of merely 15 per cent or a measly 10 per cent).

In one part of Equilibria (the part that spoke English), a new dynasty came to power, led by King Gipper and Queen Iron Lady, determined to restore proper decorum to the flea market. They promised everyone would be richer if unions and free public services were eliminated. They even argued the flea market didn’t need any adult supervision at all (apart from some well-armed knights to protect the fanciest stuff on display).

After 30 years, the burger-flippers and garbage-collectors were still no better off. But the richest one per cent once again took home 25 per cent of the flea market’s wares. Strangely, though, the English-speaking flea markets were not working as well as those where other languages were spoken (especially Chinese). This must have been because unions weren’t yet quite weak enough, nor taxes yet quite low enough, so the dynasty kept trying.

They tried a new idea: they built some higher floors at the flea market, held up not by concrete, but by enormous stacks of fancy paper. This made the flea market look very busy for a while -until the upper floors collapsed and many tables were ruined. Indeed, if it weren’t for trillions of special gold coins (called Stimuli) supplied by the king and queen, the whole flea market would have disintegrated in chaos.

Garbage-collectors didn’t cause the flea market to collapse. And they weren’t given many Stimuli in the aftermath. But the dynasty wanted someone to blame, and the garbage-collectors were a convenient target. After all, they made more than the burger-flippers. And they were rather malodorous, to boot. So the dynasty sent the town crier out to complain loudly how unfair it was that garbage-collectors made more than burger-flippers, and for a while they began to fight among themselves.

What happened next? That part of the story hasn’t been written yet. But one thing is certain: there is still some very expensive stuff on display in the private equity and structured credit areas of the flea market. It’s hard to believe it will go unnoticed forever.

All this is just a fairy tale, of course. But as I retell it to my daughter at bedtime, I can’t help thinking it’s more informative than the competing fable.

You know, the one about how unions, weaker than at any time in at least 30 years, somehow caused an economic conflagration that enveloped the world -and how they killed a golden goose that never actually existed.

Jim Stanford is an economist with the Canadian Auto Workers union.

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