Thursday, December 23, 2004

Market Limitations

WARNING: Long post ahead. Read at your own peril!

This post, by University of Michigan Law Professor Don Herzog, at the Left2right blog got me thinking about good arguments about the limits of the free market. Contrary to what far-right ideologues like to say, there are plenty of goods in our society which cannot be justly distributed by market forces. Let's start with Herzog's thoughts:
Now there's a huge literature debating when or whether markets fail -- will they provide public goods? and because of network effects and the like, will they create monopolies not disciplined by the threat of entry? And then there are questions about whether the state can improve on even failed markets. Leave that stuff aside. The real question, I think, is: what are the proper boundaries to the market? What do we want to buy and sell, and what do we want to allocate in other ways?

Once we bought and sold people. Slavery is one way to have a market in labor, and we rejected it. Now employers can purchase your labor, but not you. Richard Posner has proposed buying and selling babies, or "parental rights," to get rid of those noxious queues at adoption agencies: most of us flinch, even though he's got to be basically right about the queues. The state assigns each adult citizen the nontransferable right to cast one vote. We could have a market in votes: the state could assign initial property rights by mailing you a coupon that says, "bearer has the right to cast one vote." You could "consume" your property by casting the vote yourself; you could donate the coupon to the political charity of your choice; you could sell it to Ross Perot. But we reject any such market, and we don't budge when an economist observes that prohibiting free transfer generates deadweight loss. Citizenship itself isn't for sale. The usual way to get it is by being born here, which has nothing to do with merit or accomplishment or hard work or consumer demand. Fans of the Boston Red Sox had to wait for their team to win the right games at the right times to win the World Series; they couldn't pool together and raise enough money to buy the title from the Yankees.

The list of nonmarket goods is awfully long and wonderfully diverse. A liberal society isn't just a free market underwritten by a night-watchman state. It has lots of different institutions -- churches, universities, clubs, you name it. Market fundamentalists, as I'll cheerfully dub them, want to envision all of society in the market's image. There are other kinds of fundamentalists out there. A certain kind of participatory democrat wants all of society to be run democratically: she'll demand, why don't workers get to make decisions at firms? And why should the Roman Catholic Church be so hierarchical? Christians have occasionally suggested that all of society should run on an ethic of brotherly love. And so on.

We should reject all these fundamentalisms, and instead respect the idea of boundaries between different social settings. (That's not the same as maintaining whatever the current boundaries are. When the state ditches slavery or makes sexual harassment actionable, it redraws the boundaries of the market.) And we should reject the view that whatever the state does is coercive, and whatever society or the market does is voluntary. The state can write rules that expand our options, and no, not by grabbing and redistributing things that others are entitled to. The legal rules for writing a will let you do something magical and bestow your property after you're dead. And social relations can be coercive...
Notice the right-wing complaint that crazed political correctness is silencing people on campuses and elsewhere, even costing them their jobs. True or false, it sure does depend on the view that you can find coercion outside the state. Your action isn't voluntary if you had no reasonable alternatives, and it doesn't take a law to deprive you of such alternatives. Once we wrest free of market fundamentalism, we can see problems with state action and possibilities for it that have nothing to do with market failure, economic inefficiency, regulatory capture, and the like. And we can see a host of political problems -- controversies over the legitimacy of authority in farflung social domains -- that have nothing to do with the state.

A specific area in which markets fail is on environmentalism and distributional justice. Lester Milbrath, Professor Emeritus of Political Science and Sociology at SUNY-Buffalo, LEARNING TO THINK ENVIRONMENTALLY, 1996, p. 87-88.
Markets work quite effectively to allocate resources, but they can’t look ahead to foresee such possibilities as overshoot and dieback, or global warming and climate change. A society that wants to become sustainable must foresee possible scarcities and system disturbances and then use its political system to limit throughput at sustainable levels. Markets also can’t distinguish what’s morally correct from what’s morally reprehensible. They’ll respond to the demands for luxury goods by the rich while ignoring the needs of the poor for bare subsistence. For example, land in the tropics that used to grow food for the poor may be diverted to grow flowers for rich Americans who want flowers in the winter. The free movement of capital and goods in a capitalistic world market has another harmful effect—that of encouraging the location of production facilities in countries with the lowest wages and the lowest levels of environmental protection. Markets encourage, even require, firms to externalize their pollution costs in order to be competitive. The costs then have to borne by the public and the ecosystem.

Markets don't fill every niche, they fill the most profitable niches. These niches (growing flowers for the rich instead of food for the poor) aren't necessarily in line with our moral obligations to humanity. At the same time, the reason market regulation still works (from an economic standpoint) is that "pro-poor" economic activity still can be done profitably, just less so. John Dernbach, Prof. of Law at Widener University, "Symposium On Bjorn Lomborg's The Skeptical Environmentalist: Sustainable Versus Unsustainable Propositions." CASE WESTERN RESERVE UNIVERSITY. (Winter 2002). 53 Case W. Res. 449
...access to drinking water is not just about the environment; improving access to drinking water in developing countries would reduce the incidence of waterrelated disease and death as well as increase economic productivity. [n121] That's why the nations of the world agreed in Johannesburg to "halve, by the year 2015, the proportion of people who are unable to reach or to afford safe drinking water" and sanitation. [n122] The point of such measures is to improve environmental quality, social wellbeing, and economic growth at the same time.

Let's take a hypothetical example. Let's say one could allocate resources to Dernbach's water purification project, which would give us a profit of $1000 (I'm drawing these numbers out of thin air). Or, we could spend it on generic "other" economic activity that is relatively exploitative (say, a mining operation) at a profit of $4000. The point is that in a free market, "other" will win out every time. But if we regulated the market to FORCE someone to do a water purification project, the world wouldn't collapse. Indeed, the businessman would still make a decent profit. That's the warrant for limited, intelligent governmental regulation of the market.

Rightwing economists might respond that eventually one will saturate the market for "other," and then the $1000 in untapped profit one could get from the water project would look good. Unfortunately, I'm not convinced we'll ever hit the crossover point. There are limited resources in the world, for one, so not every project can be tackled, even worthwhile ones. More importantly though, is that economic growth creates its own demand for more products. It isn't as if people hit some level of consumption and stop there in contentment, freeing up other resources to bring the bottom up. Rather, the dynamics of the wealthy lie in conspicuous consumption: they want to consume even more than they need, and they want to show it off. Thus, they'll continue to demand even more, new products, and they have the resources to attract the new production. This perpetuates a cycle: the market feeds the rich, who get richer and create a demand for even more goods. The market never switches its resources to aid the poor, even in profitable manners, because it can always make more money supplying the rich.

The environmental issue is particular important to this debate, because a free market, if left alone, is INHERENTLY destructive to the environment. Barbara Adam Professor of Social Science at Cardiff university. "Time and Environmental Change" ESRC Global Environmental Change Programme. accessible here
"Environmental pollution, contamination, and degradation are inescapably linked to industrial societies’ approach to time, where time is linked to money, speed to efficiency, and the 24-hour society to progress. Industrial time conflicts with the times of the natural environment: it clashes with cycles of life and death, growth and decay, with seasons and rhythms, the variable intensity of change, sustainabilty, and cycles of re-generation." The impact of these temporal perceptions is inescapable degradation of the environment. Adam continues "Industrial societies' economic...time-space is out of synchronisation with the system-specific timescales of socio-environmental change: resources that took millions of years to develop are degraded and/or depleted within a few hundred years: locally-caused hazards have consequences that extend across the entire earth."

Insofar as more production is always better (or at least, the constraint on demand is utterly unrelated to the constraints imposed by sustainable environmental practices), it is unreasonable to expect corporations operating in a free market system to act in environmentally responsible manner. This is the classic "tragedy of the commons," somewhat adapted. Since it is in every corporations to produce a little bit more, they all will, because the get all of the profit from doing so and bear only a portion of the eventual cost (environmental collapse). Furthermore, they'll bear the cost just the same whether or not they partake in the additional production, so they are literally forced to act destructively, even if they are aware of the consequences and even if they are aware that it would be more beneficial to all, in the long term, to scale back production. Governmental regulation that acts to mitigate THIS problem actually increases the net economic gain, since it knocks out the "common costs" for which a free market cannot account for.

Those are the basics on why a free market can't solve everything. The moral compulsions of a just society demand that we take some steps to curb the excesses of the market in order to bring about a fair chance for all (not to mention stopping environmental collapse). Thoughts and comments are welcome.


Anonymous said...

First in regards to the Smith quotes on lefttoright. And I must say I was impressed by the author's mention of Hayek, Rothbard, and Mises, but let's examine your points considering what Mises, Hayek, and Rothbard consider capitalism and how your arguments do not apply to that situation.

First and foremost, your quote from Lester Milbrath refers to the present situation rather than an actual capitalist world. To recap what capitalism actually is, it is essentially the protection of property rights. Therefore, similarly any pollution on the free market would necessarily be a violation of property rights and the parties involved would have to compensate each other for the damages. Of course, the analysis you provide does represent the crony capitalism we have today, it nevertheless could not be applied to real capitalism that does provide a mechanism for aggression (whether you're like Mises and think that a coercive government only exists in a court system and police system/national defense as well or you're Rothbard and think that free market institutions can provide it we're pretty much talking about the same thing). As they said the tragedy of the commons is that there is a commons.

I could also go into how for like a hundred years it was thought that only the government could provide lighthouses, but Coase proved that wrong long enough ago that you should be familiar with it. And I think he argued convincingly against your problems as well.

Really most of your post is lets set up a straw man of the free market and knock it down. So if you thought I'd disagree with it Dave you were right.

PS Markets satisfy demand, not just rich people's demand, but all demand. in fact, the richest capitalists make their money from serving the common man. I think you drastically need to improve your knowledge about the market before you critique it...

Randomscrub said...

One thing I'd like to point out is that your assumption that the $4000 profit by exploitative means would beat the $1000 profit in the pursuit of the public good. You assume that the market is amoral. The people _are_ the market. To assume that anyone would go for the larger profit redardless of morality is a mistake. This does not account for the power of personal ethics in the investor's decision making process. The question is, if YOU or I were approached with such a choice, which would we invest in? If either of us answer the water purification project, your contention that it is necessary to "FORCE" people into investing in it falls apart.

Your main point that some things cannot be bought and sold stands, but this particular argument for the necessity of market regulation, in my opinion, falls flat.