Tag Archives: political economy

Monopoly!

My friend Mark Safranski leads a dual life online, running the fantastic honest-broker site Zenpundit that focuses on military-security issues, and critiquing education reform on twitter from the perspective of a labor activist. Recently on twitter Mark made the following comment [edited to account for twitter’s telegraphic character limit):

There will be no evaluation of test quality, barring a PR disaster. Education publishers are dividing the market – i.e. forming a cartel – not competing.

I think the general principle behind this comment is that any organization in a monopoly position is unconcerned with quality. This viewpoint is generally held, and wrong.

Monopolies differ from other competitors in three primary ways:

1. They are able to exploit massive economies of scale
2. They are able to extract an “economic profit” from their business
3. They are regulated by the political-economic system, rather than just by its subset, the economic system

“Economy of scale” refers to the decreasing per-unit costs experienced when a given fixed cost is split over a larger production run. This is a well known concept, and I won’t talk more about it here.

“Economic profit” refers to the difference between the revenues of the firm and the total costs (including opportunity costs) of a firm. Under perfect competition in settled markets, economic profit is impossible, because the presence of economic profits would simply drive more competitors to enter a market until the economic profit returned to zero. That is, if it is worthwhile to be in a market, someone will jump in, making it no longer worthwhile. Because monopolies create barriers to entry into a market, they are able to earn an economic profit in the long-term.

The third point is the most important here. All firms can fail by lack of understanding — that is, thru the economic system — whether they are monopolies or not. Both GM (a monopoly) and Wang Laboratories (not a monopoly) saw their position decline because of terrible product and marketing decisions. While monopolies have a greater buffer and farther to fall (because of their economies of scale and economic profits), sustained stupidity can still do the monopoly in.

Monopolies, however face an additional risk. They can fail by lack of empathy. A monopoly that fails to flatter sources of political power can be broken through political means, regardless of economic realities. The Bell Systems, for example, flouted the ideal of unregulated competition (thus alienating a radicalized political right) at the same time they were a major supporter of hard sciences research and engineering (thus alienating a radicalized political left). Even though AT&T consistently understood the market’s desire for a reliable, predictable, and always-on communication layer undergirding business, AT&T’s monopoly was destroyed due to their lack of empathy.

In the education sector, the monopoly held by teachers front organizations. By failing to provide the services they were supposed to provide — educating the young  — the teachers drove parents into debt, employers into the immigration debate, and States into powerlessness over education policy, teachers displayed a lack of empathy. This unconcern for the well-being of other stakeholders has consequences.

Publishers are as self-interested and greedy as teachers. They also, like teachers, aspire to monopoly bargaining power. But this does not mean that publishers won’t create tests, evaluate tests, or even improve tests.

Ultimately, the correct way to view the publishers v. teachers debate is structural. Teachers are focused primarily in protecting the interests of the teaching labor force, and as such are hostile to techniques that would cause some teachers to lose their jobs or miss out on pay increases. Publishers are focused primarily in protecting the interests of shareholders and management, and are thus indifferent to the quality of teachers or tests.

I’ll take indifferent over hostility any day.

The Political Economy of Education Reform

To understand the education reform in the United States, keep one thing in mind

We judge ourselves by our intentions, and everyone else by their actions

With this truism, you can see past the anguish and propaganda, and see the education reform debate clearly for the first time.


People see their successes, and they see the good they do. More than this, they see the good they intend to do, if it were not thwarted by others, or by political necessity, or the pressures of the moment. The major forces relevant to education reform, and the good they intend to do, are as follows

  • Teachers forgo higher paying careers to nurture young. It is unfair, of course, to expect teachers to willingly teach at bad schools, so teachers try their best to teach at good schools. Publishers intend to give the young a well-rounded education, to often save them from bad environments, and to teach them how to learn on their own. Their intentions can be thwarted by nonsensical regulations, overbearing administrators, and social factors. It is only fair that teachers have due process, tenure comfortable salaries, substantial time off, respect as professionals, and so on.
  • Publishers are in the business of transmitting knowledge on the written (and now electronic!) page at scale, a spirit-liberating calling that has been celebrated since Gutenberg. It is unfair, of course, to expect publishers to lose money in their calling, so they naturally tend towards profitable sectors. Teachers intend to give the young a well-rounded education, to often save them from bad environments, and to teach them how to learn on their own. Their intentions can be thwarted by nonsensical regulations, overbearing publishers, and social factors. It is only fair that publishers have healthy margins, growth business opportunities, the ability to lock-in long-term contracts, and so on.
  • States are the essence of American democracy. It is unfair, of course, to expect States to surrender the powers they retain to people who have never won elections. States intend to give the young a well-rounded education, to often save them from bad environments, and to teach them how to learn on their own. Their intentions can be thwarted by nonsensical federal regulations, overbearing voters, and social factors. It is only fair that States be immune for their actions, maintain independence from the federal government, and to be able to control the legally-created ‘creatures’ (local elected bodies and incorporated businesses) within their borders.
  • Large-scale Consumers of Educated Workers are the future of the American economy. It is unfair, of course, to expect these Consumers publishers to lose money in their calling, so they naturally tend toward hiering workers educated at public expense. Large-scale Consumers intend to revolutionize business-processes around the world through creating the careers of the future. Their intentions can be thwarted by nonsensical regulations, incompetent suppliers, and social factors. It is only fair that Large-Scale Consumers be able to inexpensively higher workers in order to provide high Return on Capital with regards to labor, however that return is measured.
  • The Federal-Academic Complex provides the largest mass of individuals who are professionally bound to consider systematic reasons for the success and failure of American education in the country. It is unfair, of course, to expect the Complex to operate without the ability to influence the practice of education. The Complex intends to use the latest scientific techniques to understand what a good education is, and how education quality in general can increase. Their intentions can be thwarted by nonsensical regulations, overbearing pre-existing stakeholders, and social factors. It is only fair that those in the Complex have due process, tenure comfortable salaries, substantial time off, respect as professionals, and so on.

Almost everything you read about education reform comes from one of these communities. Therefore, almost everything you read expresses the interests of one of these community. Members of each community judge themselves by their intentions, and each other by their actions.

Note that “Parents” aren’t in this list of stake-holders. The view education as a transient cost and risk center, not an essential part of life. As such, while Publishers, States, Large-Scale Consumers of Educated Workers, and the Federal-Academic Complex care deeply about education, High- and middle-income parents in general are happy with “good school” districts with small numbers of poor people and non-Asian minorities. Low-income parents are politically powerless anyway, and are irrelevant to a discussion of important stakeholders.

International Political Economy

Cold War IPE
3 Functions of Breton Woods Systems
– reduce trade barriers
– control capital mobility
– maintain system of fixed (mutual pegged) exchange rates
The Trilemma (“choose 2 of the following 3)”
– exchange rate stability
– domestic autonomy
– capital mobility
Breton Woods system threw out capital mobility, in order to maximize exchange rate stability and domestic autonomy
The Failure of the Breton Woods System in the 1970s
– 1973 Oil Crisis
– stagflation
– high rates of international capital movements began to undermine the dollar
“closing of the gold window” as coup de grace…
… and opened the door to competing political outlooks for IPE
Gilpen: “every economic system rests on a political foundation”
“embedded liberalism” – have methods to deal with displacement costs of economic liberalism
Prof: “Breton Woods System (IMF/EBRD-WB/GATT-WTO) were a “solution to the nightmare of the 1930s.”
– Breton Woods preperations began months after Pearl Harbor
– becaues there never was structural capital mobility, and exchange rate stability was gone, only “domestic autonomy” remained of the trilemma
– eventually, capital mobility supplanted the old exchange rate stability

Second Great Age of Capitalism
– symbolized by Reagan and Thatcher (Carter also important — tdaxp)
– extensive freeing of market forces
– importance of air traffic controller strike breaking
– triumph of economic liberalism / individualism / democracy /growth
– (but trade-off with stability)
– corresponds with information technology revolution
– clustering: technological change not randomly distributed in time or space
– capita flows dwarf ($1500 tril/day to $25 bil/day) goods-services flows

European Integration
– goal of political integration with economic integration as mechanism
European Coal and Steel Community (Franco-German in 1951)
Treaty of Rome
– 1957
– started European Economic Community / Common Market
– France, FDR, Italy, Netherlands, Belgium, Luxembourg
Single Europe Act (1986: goal that by 1992 to have one common market)
Madrid Meeting – 1989, laid grown-work for…
Maastricht Treaty
– 1991
– switch from slow to fast union
– pushed by France-Germany
– failed to establish Federal System, but strived to …
— common economic and monetary union
— try to form common foreign policy
— harmonize domestic policies in immigration, &c
1994: European Monetary Institution guides government to adopt Europ in future
– European Central Bank
– 1998
– established, takes responsibilities for monetary issues in ’99
– Germans wanted strong Euro, France wanted weak Euro
1999: Adoption of Euros, but no bills until January 1, 2002
4 Convergence Criterea for Euro
– maintain price stability (inflation)
– no gov deficit over 3%
– stable economy
– stable exchange rates
Benefits of the Euro
– maintain monetary stability
– lowering transaction costs
– encourages political integration (?)
– ecourages growth of large firms (economies of scale)
– economic growth through economic integration
Criticisms of the Euro
– focus on convergence criterea may short-change other issues (unemployment, etc)
– may be wasteful
– perhaps Euroland “not optimal currency areas,” so perhaps hurting national economies
is Euro a “symbol of European sovereignty” ?
Prof: American support for European regional integration not always in American economic interests, but supported by Washingto to help fight Communism

East Asian Integration
focus on asian/pacific integration
– but region is very diverse politically, economically, agenda, etc
– no regional hegemon or hegemonic team (such as France/Germany)
– three major powers are USA/Japan/PRC
– backlash of American efforts, some desire of “native” free trade area? (esp by Malaysia – “caucus without caucasians”)
– Japanese efforts to outsource production of goods to Pacific-Asia to Pacific-Asia (“Japan as brain, Asia-Pacific as brawn”; “japan as lead goose”)
– Japanese ambitions challenges by emergence of China
— but 3/4 of “Chinese” quarters are by international firms in China
– China joined WTO in 2001; more internationally integrated
– unlike Europe, Pacific-Asian integration entirely through economics without political union [alternative model than Europe -esp with TPMB’s “inevitable” aborption of Taiwan by China? — tdaxp]
but, would 1997 economic crisis been mitigated by regional supernational governance?
– Japan did propose Asian Monetary Fund, but shot down by US and IMF (see earlier notes)
– Prof: emphasis on Japanese agricultural protection during Uruguay Round sabotaged Japanese leadershp & economic growth
– Prof: APEC essentially abandoned as driving vehicle because Japan-USA joint opposition to reforms, different priorities, &c
– Prof: yet another problem: European physical contiguity, culturaly, politically similarity greater than in East Asian;
– Prof: Japanese firms “notoriously” less likely to share technology with international partner firms

American Economic Response
a new trilemma in American Politics?
1. Military Spending
2. Tax Cuts
3. Budget Discipline
US tired ot Japan’s “infant industry” / Europe’s “regional integration” as Europe, Japan “grew up”
In 1990s, US began “multi-track” policy which added unlitearlism, bilateralism, regionalism to multilateralism
– US switch to “results-oriented policy” whether than traditional liberal “rules-oriented policy”
– US-Canada lumber dispute, with conflicted NAFTA and WTO rulings, raises question of how to deal with overlapping trade associations

World Trade Organization
(rather biased presentation, arguable points at about 3/minute)
“killing of animals are not taken seriously” – but then how US dominated?”
human rights helped by banning?
non-democratic representation… so this discourages slow-growth strategies
“surplus capital” … but PRC is biggest destination for foreign direct investment
“richer get richer” … but, the poorest countries are those that aren’t trading
“north/south tech transfer” — but see earlier comments re PRC

Various Problems with the System
adjustment problem – (does US debtor status portent problems)
liquidity problems – there have to be cash reserves to meet deficits in the balance of payments (imagine problems if every state had own currency)
confidence problem – belief that the currency is meaningless, leads to loss of signorage
signorage = the benefits of a currency being the dominate international currency

Possible Solutions to the System
a world central bank?
monetary hegemony (Dollar-Euro-Yen trifecta?)
political-economic coordination of individual currencies / monetary policies