Tuesday, May 24, 2011

Conversation about free markets and the good society

I believe that most people are kind-hearted, and do not enjoy the suffering of others. So let's take as a starting point that we all have the same sort of goals for our society:
  • It should always be possible for those who desire it and would benefit from it to get an education.
  • Even the poorest among us should be able to attain the essentials of food, shelter and medical care.
  • Even the poorest among us should be able to attain sanitary living conditions, without living in filth and stench.
  • We should protect the earth, so that our children, grandchildren and great-grandchildren can continue to enjoy its beauty and its resources.
  • The norm should be that we are not sickened by the food we eat and the water than we drink, are not poisoned by the medicines we take.
  • Innovation, creativity and talent should thrive.
  • It should be possible for a bright, hardworking individual to succeed, regardless of the circumstances of his/her birth. Not everyone will succeed, not even all those who are talented and work hard at it, but it is important that there not be a permanent underclass from which there is no hope of escape.
Before I go further, I have to consider that there could already be a certain divergence of opinion about these goals. Perhaps some believe that the threat of being reduced to a life of misery is necessary to motivate some people to exert any effort toward improving their lives. But I think there is substantial agreement that we don't want people to lack for any of the basics described above; we certainly don't want those who are willing to work hard and play by the rules to suffer.

Now, the question I have for conservatives & libertarians is this: What basis is there for believing that the free market alone will insure *ANY* of those goals? I don't think it will.

What economic theory tells us is that free markets evolve towards improved efficiency at producing goods and services. What it doesn't tell us is that the improved efficiency will benefit the population as a whole. One of the ways that goods and services can be produced more efficiently is by not "wasting" so much money on the workers producing them. Cutting salaries, cutting workforce, getting the workers to work harder, longer hours for less money are ways to improve the bottom line and become more efficient. Those techniques benefit the consumers, who can get their products at lower cost, but it doesn't benefit the workers who lose their jobs or who suffer salary losses.

Now, in an egalitarian society, the consumers and the workers are the same people. So there is no tradeoff between making consumers happy and making workers happy. But there is nothing in the economic laws of the free market that guarantee this happy outcome. As far as the free market is concerned, there is nothing (as far as I know) that prevents the outcome in which there is a tiny minority that owns everything, that gains the benefits from all innovation and all improvements to efficiency, while all others lead lives of misery, making just enough to survive and no more.

I will go further; it's not just that the free market allows such an unhappy outcome, it seems to me that free market forces tend to that outcome, if there are no counterbalancing forces. From the point of view of a business, if a worker is paid more than it takes to survive, that reflects an inefficiency. The existence of a middle class, people who are not wealthy, who do not own the businesses that employ them, but who enjoy the benefits of society beyond mere survival, reflects an inefficiency in the marketplace. And the "miracle of the marketplace" works to eliminate inefficiency.

There is no reason, as far as I can see, to believe that market forces will eliminate poverty. Those forces may greatly expand the total wealth of society, but there is no reason to believe that the expansion will necessarily "trickle down" to those who need it the most. And if there are large numbers of the poor, there is no reason to believe that market forces will provide education, shelter, sanitation and medical care for those poor. Markets go where there is money to be made, and there is no money to be made catering to the poor. As for the other items on my list of desirable goals for society, I do not see any reason to believe that market forces will see to any of them. There is no market incentive for keeping the Earth livable and unpolluted, there is no market incentive for keeping resources intact for future generations. So what basis is there for believing that market forces will accomplish the goals that I began this essay with?

Now, I do know that even the most gung-ho free marketers believe that there are forces besides market forces. In particular, there is charity. People don't want for others to suffer, and so those who have so much will want to use their wealth to alleviate the suffering of others, through charitable giving, founding public institutions, scholarships for the poor to go to school, etc.

I do not at all want to minimize the power of generosity or the principle of charity. Many great things have been done by rich philanthropists, and the world is a better place because of them. However, I do not believe that relying on generosity of the fortunate is sufficient to address the problems that I see with free markets. For one thing, wealthy people tend not to hang out with the poor; even if they are inclined to be empathetic, they have no reliable means of knowing the problems facing the poor. For another, there is always a "I gave at the office" limitation to charitable impulses; people decide that they have "done enough" based on how much they have given already, rather than on the actual needs.

The final obstacle to the use of charity to alleviate the failures of the market is that inclinations toward charity is actively discouraged by sound business practice. At the level of a wealthy corporation, the decision to divert corporate wealth toward good causes is "selected against" by competition. Except when it can be justified as a form of advertising, as an investment in public goodwill that will pay off monetarily in the future in terms of increased business, charitable giving is a waste of money that could better be spent in improving efficiency or acquiring more property. It's even possible that the CEO who gives away too much could be sued by the company stock-holders, since their profits are his/her first obligation.

So, for those who are committed to "free market solutions" to a country's problems, I ask sincerely, not as a rhetorical question: How do you think that the free market is compatible with the goals of a just society that I listed at the top? I can imagine three types of answers:

  1. Through some mechanism that I have missed, or misunderstood, the free market will take care of the poor, the environment, the Earth's resources.
  2. There are voluntary, non-market forces that will address these concerns.
  3. The goals I listed might sound nice, but they are a fantasy, they are incompatible with freedom.


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