On the Soapbox

"We need revolutions [...] Changes do not come gradually in France; they happen in jolts" Those were the comments (at least, as best as I could remember) that a French interviewee had to offer today to NPR's The World in regards to the protests over the French labor law. One of the most memorable passages that I remember from McKay, Hill, and Buckler's A History of Western Society* was a quote in reference to 1848 by a Briton that was to the effect that the British reform while the French throw up the barricades. With the violent riots of last fall, the recent 1968-esque massive street protests and strikes in response to the labor law, and the general tendency towards mass protests and strikes in France, it seems that this observation is, sadly (and amusingly), applicable to the 21st century.

It seems odd to me that French university students would be so interested in a law that generally does not affect them; for the most part, the labor situation is such that these people would be past the age limit by the time they enter the workforce. Perhaps they were put off by de Villepin's strong-arming the bill through parliament. Or perhaps they see this as a step down the slippery slope of the dismantlement of the French labor system. Whatever the case, whether or not the French are willing to admit it, their labor system is in need of reform: this is a country where the vast majority of young people aspire to hold government jobs for a career. In today's fast-moving economy, an inflexible and protectionist labor market is a dangerous anchor for a country to be attached to.

However, this is not to say that the left's social and moral concerns about the human condition need to be necessarily tossed aside in the name of free markets. Socialists are often quick to point out the problem of externalities in economics. While most people generally think of externalities as someone polluting the air, the externalities that the left is eager to point out are the more subtle ones that affect every economic transaction. For example, by manufacturing automated checkout machines, a company decreases the economic value of a cashier's labor. Those who are familiar with trade theory will recognize this as another way of describing the winners-and-losers effect of trade. The French problem revolves around how one should deal with these externalities. One solution would be to restrict and regulate activity by instating labor protection laws, adopting protectionist trade policies, or enforcing strict rules on factory emissions. This sort of mandate-and-regulate solution is what France has adopted. The other solution would be to harness the power of the market by "fixing" the externality problem through pricing of the externality. The use of high gasoline taxes in lieu of fuel efficiency standards, the adoption of the sort of carbon trading intended for use with Kyoto are clear-cut examples of the externality pricing approach in environmental policy, but what about labor and trade? Transfers. Since trade (which can actually describe all normal economic activity) is a positive-sum game, it means that it is possible to take enough from the "winners" to compensate the "losers" to achieve Pareto optimality without depleting all the gains. Of course, while this sounds nice on paper, is very difficult to implement because the winners and losers are hard to identify and their gains and losses are hard to quantify. The income tax and welfare system is a reasonable approximation of this sort of externality pricing at play. It's not perfect, but it is certainly better than the alternative of dealing with the problem by destroying market forces by creating an inflexible labor market. On that note, perhaps the French should look north towards Scandanavia, where a combination of free and flexible labor markets with lavish social welfare guarantees shows that it is possible to pursue leftist social goals while maintaining a market economy. Unfortunately, if even the well-educated university students in France are unable to see beyond the labor dogma, then perhaps France is indeed in need of a "jolt"... in the other direction.

Afterthought: The opposition to transfers in the United States is based not on the principles of free markets, but instead on deeply-ingrained libertarian ideals. Is it possible to be a libertarian and still believe in transfers? I certainly hope so, as that is what pragmatic economics would seem to dictate. After all, there does need to be a distinction between libertarianism and anarchy (one that the Libertarian Party seems to forget about).

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* Given how bad my memory generally is, it surprises me that I was able to correctly recall off the top of my head both the title and authors of a textbook from eight years ago. Well, it was a good book...