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Myth 5: The Economy Has Superior Efficiency

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America's Free Market Myths

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Abstract

Myth: America has a highly efficient economy mainly because of government’s comparatively small role. People earn according to their productivity. Firms are subject to the discipline of the market. The economy is marked by dynamism, openness to technological and organizational change induced by the pro-market changes of recent decades.

Reality: The American economy is characterized by giant corporations. Economic studies fail to find evidence of either economies of scale in production or in R&D to justify large size in specific industries. Inventiveness characterizes Silicon Valley but in many other industries market power and rent seeking abound. The US lost its lead in labor productivity possibly due to informational and coordination problems and worker dissatisfaction. The threat of corporate takeovers is insufficient as a monitoring mechanism.

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Notes

  1. 1.

    Fiscal policy is the use of government spending and taxation to help the economy.

  2. 2.

    Monetary policy is conducted by the central bank (Federal Reserve Bank) and involves changing the money supply to influence the economy.

  3. 3.

    Scherer (1980).

  4. 4.

    Waldman and Jensen (1998).

  5. 5.

    Reynolds (2007) and Shane (2008).

  6. 6.

    Shane (2008).

  7. 7.

    See Nelson and Wright (1992).

  8. 8.

    Broadway and O’Mahony (2007) based on data from Angus Maddison.

  9. 9.

    Total factor productivity – the part of total output growth not attributable to capital and labor growth.

  10. 10.

    Nelson and Wright (1992).

  11. 11.

    Thurow (1999).

  12. 12.

    Chang (2011).

  13. 13.

    Acs and Gerlowski (1996), Kuttner (2007), and Perelman (2007).

  14. 14.

    Piore and Sabel (1984).

  15. 15.

    Piore and Sabel (1984).

  16. 16.

    Thurow (1999).

  17. 17.

    Marris and Mueller (1980).

  18. 18.

    Taylorist Management – scientific management focused on improving efficiency.

  19. 19.

    See Acs and Gerlowski (1996).

  20. 20.

    Putterman, Roemer and Silvestre (1998).

  21. 21.

    Leveraged buyout – buying a company with borrowed money.

  22. 22.

    Kuttner (2007).

  23. 23.

    Shaanan (2010).

  24. 24.

    Shaanan (2010).

  25. 25.

    Acs and Gerlowski (1996).

  26. 26.

    Madrick (2011); see also Krugman (2012b).

  27. 27.

    Perelman (2007).

  28. 28.

    Madrick (2009).

  29. 29.

    Kuttner (2007).

  30. 30.

    Johnson & Kwak (2010).

  31. 31.

    Austerity – usually involves cuts in government spending during an economic crisis.

  32. 32.

    Stiglitz (2012).

  33. 33.

    Phillips (2002).

  34. 34.

    See Brown (2005).

  35. 35.

    Krugman (2003).

  36. 36.

    Madrick (2009).

  37. 37.

    Trickle-down economics – the idea that tax cuts for the rich and the resulting increases in income and wealth would eventually flow down the food chain.

  38. 38.

    Frank (1999) and Quiggin (2012).

  39. 39.

    Stiglitz (2012).

  40. 40.

    Madrick (2009).

  41. 41.

    Stiglitz (2012).

  42. 42.

    The above is based on Quiggin (2012).

  43. 43.

    Stiglitz (2010).

  44. 44.

    Externality – Side effects from an economic activity affecting people not involved in that particular activity that markets do not account for.

  45. 45.

    Stiglitz (2010).

  46. 46.

    Stiglitz (2010).

  47. 47.

    Madrick (2009).

  48. 48.

    Reinsdorf (2007).

  49. 49.

    Shaanan (2010).

  50. 50.

    See Brinkbaumer et al. (2010).

  51. 51.

    Kuttner (2007) and Stiglitz (2010).

  52. 52.

    Karger (2005).

  53. 53.

    Securitized – the practice of pooling financial assets and turning them into securities.

  54. 54.

    Madrick (2009).

  55. 55.

    Kuttner (2007).

  56. 56.

    Kuttner (2007).

  57. 57.

    Y. Smith (2010).

  58. 58.

    Stiglitz (2012).

  59. 59.

    Johnson and Kwak (2010).

  60. 60.

    Y. Smith (2010).

  61. 61.

    Stiglitz (2010).

  62. 62.

    Moral Hazard – people may take greater risks when they do not suffer the consequences of their actions.

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Authors and Affiliations

  1. Bryant University, Smithfield, Rhode Island, USA

    Joseph Shaanan

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Shaanan, J. (2017). Myth 5: The Economy Has Superior Efficiency. In: America's Free Market Myths. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-50636-4_6

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  • DOI: https://doi.org/10.1007/978-3-319-50636-4_6

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