Markets as a tool for resource allocation

Markets do good things. We don't want to eliminate markets because of the value that they bring in terms of determining how to allocate resources. We don't want to hinder the operation of markets in ways that keep the markets from setting good prices.

So, for example, we don't want to set up situations where a more efficient producer is elbowed out by one of less efficiency because of undue regulation--for example, we don't want some sort of tariff on Acme widgets, just because Acme's competitor is friends with the King (or whatever the government--Adam Smith, from whom the notion of free markets being best is generally derived, was writing about free markets in opposition to monopolies granted by the English government). We would not, in a free market, want to favor some firms because of political connections.

On the other hand, if we are counting on the market to do a good job of allocating resources, we have to have regulations that make sure that resources are being allocated effectively. Perhaps most importantly, we need to be sure that a producer is not able to sell cheaply by avoiding some costs, or by transferring some costs to others. Pollution is a good example: if Acme widgets dumps toxic waste and someone else has to pay for safe disposal, then the market is not correctly valuing the product, and resources are being allocated inefficiently.

Let's talk through an example, imagine that the cost to make up a widget is one dollar--seventy cents of the cost is parts and labor, and the other thirty cents is cleaning up the toxic waste. If Acme widget is actually paying the costs of making the widget, then it cannot stay in business selling for less than one dollar. If they can't stay in business selling widgets for more than a dollar, paying the full costs, then, according to the theory of free markets--the theory of unregulated markets as efficient allocators of resources--, they shouldn't stay in business. If Acme doesn't pay the cleanup costs, however, they can make a profit at a lower cost, and the resources necessary for cleanup do not get factored into the market, and so the market doesn't lead to the desirable outcome.

In short, if you want markets to give good guidance on resource allocation, then it is necessary to have regulations that prevent inefficiency of resource allocation, and it is necessary to eliminate regulations that create inefficiency.

Anyway, despite all the cries for free markets during elections and during debates on legislature to which they are opposed, most of those who have called for free markets have also supported legislation that destroyed the efficiency of market allocation.

Wouldn't it be great if markets did a better job of helping allocate resources?

Markets don't exist with out rules and regulations

If I'm going to talk something called "Fair Market Theory", I want to start with at least some sort of discussion of what a market is. This is important, because of how often we hear calls that regulation will ruin some industry and lead to worse because it will damage the operation of the market.

A market is a place where goods and services are bought and sold. This basic definition has in it some implications that are crucial. What is it, after all, to buy and sell something? The market is a market only if people follow basic rules and regulations about how buying and selling work.

Crucial among these things--though sometimes overlooked by free-market proponents--is that what goes on in the market is actually buying and selling, not cheating, lying and stealing.

If people can seize goods by force, that's not a market.
If people can sell sawdust as flour, that's not a market.

This kind of regulation is crucial for a market to be a market. It's also a crucial, though unstated, presumption of basic explanations of why free markets are supposed to lead to good outcomes. Markets are supposed to lead to optimal social outcomes by supporting efficient use of resources and innovation. Free market theory doesn't claim that free markets are good because they allow people to get rich selling sawdust as food.

And we can see that free market theorists generally will not object to regulations in areas like truth in advertising laws (or will object less).

But if a market needs some regulation to achieve its optimal goal, how much regulation is enough and how much is too much? The question is not whether we can create a market without any regulation at all--without any regulation at all, there is no market, there is only the strong and ruthless preying on the weak and honest. A market only becomes a market when the buyers and sellers can believe that their goods and persons will be safe, and that generally they will receive money for what they sell, and they will receive the goods or services that they pay for.

There is no such thing as a market without regulation, and there can be no such thing as long as people are willing to cheat, lie, steal, and kill for their own gain.

Wouldn't it be great if people didn't cheat, lie, steal, and kill?
Wouldn't it be great if markets were set up to protect market participants from such threats? Wouldn't it be great if there were market regulations that made lying, cheating and killing into crimes?

Fair Market Theory

For a long time, I've thought about what I call "Fair market theory" as an alternative to Free Market Theory. I decided that I wanted to put it down in writing...or at least try, so in the next few days/weeks/who knows how long, I'm maybe going to write about what I think fair market theory could do for the world.

I did a google search for "fair market theory" and didn't find hardly anything at all...but it does look like, perhaps, the economist Paul Krugman has used the term in a way like I'm thinking of it.

Why do I care? I think free market theory--which has taken such a hold on the American and international consciousness--is a flawed theory, and that the flaws are both theoretical and empirical.

Not that I think that anyone will actually read what I have to say, but just in case there's someone out there who finds this blog and is interested in non-politicized reasons that free market theory is flawed.

I want to be clear that "free market theory" is not a form of government. Questioning whether "free market theory" should guide governments--especially a democracy--is not an unreasonable pass time for a person living in a democracy who is interested in the the best preservation of the freedoms of living in a constitutional democracy that protects the civil rights and liberties of its citizens.

Wouldn't it be great to live in a country where the rights guaranteed by the Bill of Rights were also guaranteed by the government?

The Death of Morality

Don't get me wrong: I'm no angel.
But I grew up believing in truth, justice and the American way (too much Superman on TV). The level at which truth and justice seem to be completely divorced from the common American consciousness astounds me.

Admittedly, I'm judging largely based on what I find on the internet and mass media, but truth is just far, far gone.

Lies and deception are the order of the day in politics--at least when it comes to anything distasteful to the political elite.

----

I started this post months ago, and don't quite know what I was responding to, nor where I was headed. But, as I look at the little stub, and see that I like the link about Superman, and see that at one time Superman fought for "truth, tolerance, and justice," I think that I have to at least publish it. Not that any one is looking.

The American way used to be about being morally superior. Reagan got away with that city on a hill crap, as if we were some shining beacon of purity. But we weren't the worst of the worst then.

Wouldn't it be great if the American way once again was in search of truth and justice?

The Problem of Multi-Culturalism

On Sunday, Angela Merkel, Chancellor of Germany, declared that multiculturalism--"multikuti"--has been a total failure:

We kidded ourselves a while. We said: 'They won't stay, [after some time] they will be gone,' but this isn't reality. And of course, the approach [to build] a multicultural [society] and to live side by side and to enjoy each other ... has failed, utterly failed.

(from the Christian Science Monitor)

Merkel is a right-wing Christian, so my political agenda is rather different from hers. But in this, I think that she reveals what is a common problem with the idea of multiculturalism.

The thing is, essentially, that multiclturalism is an ideal that expresses a value system; it expresses tolerance and respect for others. Make no mistake: I am completely in favor of tolerance and respect. But there is a limit. And this, ultimately, is the problem with multiculturalism. The problem with multiculturalism is a practical one.

The problem is that, in order to work, multiculturalism must cultivate a unified culture of values in which multiculturalism itself is held to be important. In order for multiculturalism to work, everybody must believe in multiculturalism.

What happens when there is a group that does not believe in multiculturalism? That group acts to create barriers to multiculturalism. And if there is a group that hates another group? That may lead to various kinds of violence. And that leads to various kinds of legislation that may violate or discriminate against one particular culture. Consider for example laws against hate crimes: these laws can be seen as discriminating against people with certain beliefs. Consider what it means to be Muslim or Christian in some of the fundamentalist forms, where those who are outside the religion are damned and should be treated in ways that modern secular legal systems would not allow.
Or consider what it means to be part of a secular government where many elected officials are followers of a religious faith, and that shapes all that they desire to do or are willing to do?

Practically speaking, in order to have multiculturalism working, one needs everybody to agree to the basic tenets of multiculturalism--but that is forcing a sort of monoculture--at least with respect to certain values.

For my part, I go with what John Lennon said: "love is the answer, and you know that, for sure." But to realize that, it makes certain ways of looking at the world repugnant. I want to respect everybody; I want to let everybody have their own beliefs. But if I want to live in a world where everybody does that, then something needs to be done about all the people who don't.

It's a practical problem: in order for a culture to practice tolerance, it needs to be intolerant of intolerance.

For me, I think that the answer, ultimately, is one where some value systems are acceptable, and some are not.

Wouldn't it be great if people were motivated by love and respect rather than by hate? Wouldn't it be great if everybody agreed with me about that?

The Free Market and the Tragedy of the Commons

Last post I commented on how the theory of the free market demands that people act without compassion.

Now I want to discuss another failure of the free market. This is a failure that does not require the free market to operate in any way at odds with the descriptions given by free market theorists.

It is a failure that should concern people, however, because the tragedy of the commons affects all.

The basic formulation of the tragedy of the commons is in the same terms as the free market. Here's how it's described in Wikipedia:

The tragedy of the commons refers to a dilemma described in an influential article by that name written by Garrett Hardin and first published in the journal Science in 1968.[1] The article describes a situation in which multiple individuals, acting independently, and solely and rationally consulting their own self-interest, will ultimately destroy a shared limited resource even when it is clear that it is not in anyone's long-term interest for this to happen.[2]

To repeat: "Multiple individuals acting independently,...consulting their own self-interest." This is the basic formulation of free market behavior, and is what is touted by free market proponents as what will solve all our problems by increasing wealth.

The tragedy of the commons becomes much more significant when we realize that all our most important resources are ultimately limited. There may be vast reservoirs, but no matter how vast the reserve, exponential growth will rapidly exhaust the resources.

The air is a common resource. Water is a common resource. The free market will destroy these.

One way out, implicit in the formulation of the tragedy of the commons, is that we take shared resources and give them into possession of an individual entity. Of course this is a way of avoiding the tragedy of the commons that would appeal immensely to someone who has the resources to feel confident that they will be able to possess their own share.

We can see again how the loss of compassion will play a role in this free market dynamic: loss of compassion drives people to act in selfish interest rather than common interest, and thus the resource is destroyed. If compassion drove people, then the resource would not be exhausted.

Of course there are times when a limited resource is so limited that there is not enough for everybody. This is, of course, a difficult solution.

But, first of all, it is abundantly clear that individuals acting out of compassion and concern for the group welfare will sacrifice their own needs and desires for the greater good. We honor such people as wartime heroes or as peacetime saints. But they're scorned by free market theory (Adam Smith himself comments that people acting for the public good do little, showing his scorn). While self-sacrifice is not necessarily a palatable option, it is one that tends towards a communally sustainable path.

Secondly, it is worth remembering that, at least at the present, large problems of accumulation of wealth and resources exist. So at least for the moment, it is not as much an issue of overall scarcity, but rather localized or individualized scarcity. The commons are currently sufficient, provided a good distribution.

In any event, the next time someone says that the free market will solve our problems, keep in mind the tragedy of the commons.

Wouldn't it be great if people actually associated the tragedy of the commons with the free market, and with what they're voting for?

The Free Market and the Death of Compassion.

George W. Bush called himself a compassionate conservative. Which suggests that compassion is a virtue. And is recognized as such even by the most conservative of voters.

I believe in compassion myself. I think the world would be a better place if people were more compassionate.

What is compassion?
1. sympathetic pity and concern for the sufferings or misfortunes of others. (Oxford American Dictionary)
2. The deep feeling of sharing the suffering of another in the inclination to give aid or support, or to show mercy. (American Heritage Dictionary)

Anyway, the Republicans value compassion (or say they do); the Democrats value compassion (or say they do).

I have compassion. And that's one reason the American condition--the U.S. condition--sickens me: I feel concern for the sufferings of others. There are many suffering, and the dominant discourse is not a discourse of compassion at all. It is a discourse in which "the free market" dominates.

The free market is looked upon as an inevitable force of nature: as long as we let the market alone, it will drive innovation, and thus improve the lot of all. This, at least, is the crude version.

Or here's how it was represented to me by a friend of a friend in a little Facebook debate:

Free Market. I know those on the left think the free market is evil but the free market has produced tremendous benefit for the US and thus for mankind. Is it perfect? Of course not and it's a common trick of the left to wheel out examples of the disadvantaged or downtrodded as evidence that the entire system needs to be dismantled. But, this is absolute nonsense in that it ignores the overwhelming good that comes from the free market. Where in your examples is anything approaching the innovation of the US and it increasingly threatened free market system?

Note the belief in an "overwhelming good that comes from the free market."
And actually, you can see in the long quote exactly the pathology that I want to discuss: notice how the author dismisses the difficulties of the disadvantaged and downtrodden. Their individual concerns are nothing in the face of the "overwhelming good."

Let us assume for a moment that the free market does in fact lead to such innovation that it produces overwhelming good. My objections to that facile claim are numerous, but let's ignore them for a moment and accept that the free market does produce overwhelming good.

I want to focus on the relationship between the free market and compassion. Let's look at Adam Smith's own words, where he invokes the famed invisible hand, in the passage that describes how the free market will lead to improvement of the social good:

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security ; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

-- Wealth of Nations, Book IV, chapter II

We can see repeated through this passage the notion that "he" (whose role is not entirely defined here, but has been defined variously by Smith and other economic theorists) is selfish. He is not thinking about the public good. He is thinking about his own gain his own situation. Smith says that concern for the public good is not common among merchants, and he suggests that this is not a problem because it promotes the overall good.

So this notion that that overall good is promoted matches the earlier claim that the free market leads to "overwhelming good."

Let us assume that all this is true. Where is compassion in this? Does not Smith explicitly say that people should act in their self-interest without concern for the social good? Does, in fact, the system not depend on people acting without compassion?

We can certainly see that this is a reasonable conclusion--one drawn by the great economist John Maynard Keynes: "foul is useful and fair is not; avarice and usury and precaution must be our gods" (quoted in E.F. Schumacher, Small is Beautiful).

So what we have here is a description of society where the social good is maximized when everyone acts in their selfish interest and without concern for the social good. In otherwords, a society without compassion. Read what Keynes says again: "avarice and usury... must be our gods"! It's all very well for Keynes to say it, but then he was an agnostic. How does that sit with a Bible-reading Christian?

No man can serve two masters: for either he will hate the one and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon.

-- Matthew 6:24

What kind of society would be best: one where everyone is wealth, but all compassion, all interest in the difficulties of others has been banished? Or one where wealth is less, but all tried to help the other?

The notion that one cannot serve two gods is not just a biblical injunction--in many cases it is logical imperative. Economic theory--including all free market theory--relies on the notion of opportunity cost, which is essentially the same concept: either one can put your money into the bank to earn interest, or one can invest it in another project. But one cannot do both. Similarly, one cannot make the free market work without abandoning compassion.

And so, in the name of the greater good, apparently we will leave those less able by the wayside to die. The free market insists on it. And the free market is going to serve our ovewhelming good.

Thus the death of compassion.

Wouldn't it be great if people thought that a society with less wealth and more compassion would be better? Wouldn't it be great if people worked together to solve our problems?

I don't have time for it now, but a discussion of how free market attitudes lead to the tragedy of the commons is a worthy effort, too.