Tyranny of the Market

A week ago, Mike Hutchison, lectured about third-world economics based on his experiences in El Salvador. Many of the points Hutch made during his slide show was how the market unequally distributes goods and services. Why are some nations rich and some nations like El Salvador poor?

El Salvador is affectionately called "The Tom Thumb" of the Americas since the country is about the size of New Jersey. With a population of 6.5 million, every profitable opportunity is exploited. For pictures of the political climate and views of geography not available on a map, you can join the 143,000 visitors by clicking here.

One theory why countries are rich comes at the expense of those who are poor. This is what Thomas Sowell calls the zero-sum fallacy. That is, one countries gain is another's loss. So when the US trades with El Salvador, US gains and El Salvador loses. If this was true, then why would anyone trade? El Salvador would be better keeping their coffee and sugar instead of trading. I don't buy this theory as it is contrary to the theory of comparative advantage. Also, simple logic will prove my point. At one time China and India were poor. As these countries expanded trade, both became posperous. Think of the millions who died under Mao's communism who would have been helped by open markets. countries trade because they mutually benefit.

Some social scientists theorize that some countries are poor because of Dependency Theory. In this theory, resources flow from the poor to the rich like a vaccuum. This is another spin on the zero-sum fallacy, but is a serious criticism of trade. Suppose that the US wants to expand its market to achieve economies of scale. Natually, the US will expand to those countries that have the lowest marginal cost or the poor countries. I don't buy this theory either because proponents point to anecdotal evidence that suggests that decreases in the wealth coincided with increases in wealth of rich nations. I believe that this commits the Post Hoc Ergo Propter Hoc Fallacy. Productivity increases wealth since more can be produced sometimes at a lower cost.

El Salvador produces coffee and sugar. Both ag products are subject to natural disasters and competitive forces which reduce the price received by producers.

The market is not the best system for distributing goods, but it's better than communism. It's ironic to me that the choices people make act like a tyrant when dictating who gets what and how much. Perhaps the next evolution of macroeconomics will be a social theory that enriches everyone in world not just those who own the factors of production.