Monday, December 03, 2007

The long and the short of it

Thank the heavens (or the people of Venezuela) Chavez's radical socialistic agenda has been voted out. Even after all the ills of Socialism have come to light it is saddening to see that people still demand socialistic policies. Of course, who doesn't like free money at the expense of a others! It is easy to concentrate only on the short term benefits and ignore lifetime costs. In countries with strong socialistic tendencies what people notice are only the low prices, they do not take account of the long queues, and shortages. The value of time increases when you have greater productive opportunities; however, when productive opportunities are limited there is only so much time that can be spent on work. There are not too many goods in socialist countries, and high end consumer goods are usually luxury goods. Thus people are willing to wait in line for hours to get the small quantity of highly subsidized food or whatever item it is that they are purchasing.

Whether individuals care about the long term or the short term is revealed by the implicit interest rates or relative prices in the economy. It is easy to understand behaviour once we identify that there are always implicit prices involved. Now you may ask, how can you put a price on emotions and such. Sure, I cannot give you a money value, but I can certainly say what kind of behaviour is more expensive to individuals.

Here's an example from my culture shocked self. Promiscuity, especially among young people in the West, used to bother me a lot. I could not fathom why young adults would indulge in such highly risky behaviour. My first reaction was to blame it on culture. However, there is a stronger economic argument to this. Promiscuity is higher because social approbation towards such behaviour is lower. In addition contraceptives have dramatically reduced the chance of pregnancy (which is a huge cost of promiscuity). Since the price of indulging in such behaviour has gone down, the demand for it has increased. Thus the relative price is skewed more in favour of the present than the future.

The question I do not have an answer to is after so many years of suffering under socialist rule, and seeing prosperity in rich countries, why do people still vote socialist? I can say ideological preference, but that is not a convincing answer. Socialism appeals cause it promises free stuff. Ok, that appeals to emotions. But what is the economic rationale? Is it because it is cheaper for them to vote socialist?

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