A functioning market does not require large corporations,
only efficient mechanisms of exchange. Economies of scale matter and the word
‘large’ requires definition, but just as governments can stymie efficiency in a
market, so too can these concentrated economic interests. The question I keep
coming back to, even though my own sail tacks to a free market wind is this:
can a purely free market stay that way, or does it inadvertently incentivize
conditions that lead to its own collapse?
As founder of a team-sports apparel company with operations
in the Philippines,
I have seen basic market mechanisms in play up close over the past decade. One
argument that seems to have traction goes something like this: by importing
sports apparel from the Philippines,
I increase the demand for labor, which theoretically puts upward pressure on
wages and the standard of living – ultimately in theory toward parity with
developed countries like the US.
But at the macro level, it still seems slower that one might expect. And governments
are not the only entities to blame.
I know of instances for example in which corporations large
and small suppress wages at artificially low levels by threatening to move
their business elsewhere intra- or extra-country if wages are raised as market ‘appropriate’
levels. This wage “stickiness” is promulgated by the enormity or cunning of
some key corporate players who are able to exercise monopsonistic power. This
example of imperfect competition can lead to systemic failure. And while
governments are certainly complicit in creating some mind-boggling
inefficiencies, this incentive to undermine the “freeness” of the market exists
within the market itself when companies become large or influential enough to
exercise this sort of price-setting power,
This one example appears a good proxy to consider other
intra-market pressures and ”natural” efficiency killers: monopolies,
informational asymmetries, externalities, irrationality, and hoarding to name a
few. These cancers may make a truly free market – a great idea in the abstract –
somewhat chimerical in practice. And if they do, then this question is one
worth considering: would you opt for the proverbial devil – centralizing
economic decision making into the hands of the few rather than the many – or
the deep-blue sea, a collapsing “free” market?
They may not provide specific answers to this question, but
the now famous YouTube rap battles between Keynes and Hayek did lend 21st
century mainstream swagger to this genre of economic debate. And though not as
popular as the clip of David Hasselhof drunkenly choking down a cheeseburger,
these mustaches arguing dueling economic philosophies did nab the attention of
10 million eyes. To intervene or not to intervene: that may no longer be the
question. Instead, we may need to ask this: if purely free markets are prone to
implosion – in part because of financial incentives to undermine the market itself
– and hence a less reliable long-term resource allocator than usually thought, is
the problem perhaps more intrinsic than it is structural?
Nice kick-off Rob. I share your free market vs. interventionist angst, but at this early stage I'm going to take the interventionist hard line.
ReplyDeleteOn the one hand, government failure leads to inefficiency and market distortions. These distortions can damage an economy and the corporations therein, and at their most extreme, they can lead to bankruptcies and the collapse of entire industries. This ultimately undermines the very purpose of these interventions in the first place, i.e. to improve quality of life among workers/citizens. Think auto manufacturing in the US, and the tens of thousands of unemployed that suffered when that massively wage-distorted sector collapsed.
On the other hand, as hinted in the point above, failures of the free market lead directly to the detriment of the employed and society as a whole. As you pointed out Rob, think externalities (like pollution), or what we'd now call criminal employment practices, for example child labor.
If you look at who holds the potential to wield more market power, and on the flip side who needs more protection, it seems clear that some form of interventionism on behalf of workers is inevitably necessary. Moreover, if you look at the stakes and what goods may be lost depending on which side, free market or interventionist, takes the cake, I’d side with the environment and social justice over marginally increased corporate profits any day.
Thanks Jon for the quick post. I appreciate what you point. I have a few questions particularly about your last paragraph -- I guess I’m not all that clear about why some form of interventionism on behalf of workers is inevitably necessary.
ReplyDelete1. Why is it inevitably necessary?
2. Who should intervene? Government?
3. What forms could these interventions take, e.g. you mentioned child labor, but would things like minimum wages, work-hour restrictions, mandatory healthcare, etc… fall under this umbrella?
4 If this intervention is necessary, to what ends, e.g. a healthier economy, a happier people, etc…? What would the macro goal be?
I understand that answers involve value judgments, but just for argument sake, do you think that government intervention, particularly at the federal level in setting minimum wages, requiring healthcare for employees, or even (more controversially) establishing child labor restrictions in ubiquitous context is a efficiency or even utility maximizing proposition?
To your last point, and I’m challenging for my own clarification, is that really the choice: environment and social justice in the government/interventionist corner versus marginally increased corporate profits on the free-market side? I don’t know man. It almost seems like a more interventionist centralized plan like you mention may concentrate greater power in the relative few, which would be more prone to abuse by creating greater financial and political incentives to pick market winners and losers not based on merit (efficiency, quality, customer service, and all of the fundamentals of business), but based instead some of financial or political quid pro quo. This scenario would also represent collapse in an efficient market for the exchange of goods and services, which would carry with it real consequence, e.g. greater unemployment (or lower pay), higher prices goods/services (food, gas, etc…). The net effect of this is a functional tax, potentially regressive, on the very workers the interventionist policy is purporting to help.
I think that the things that undermine a purely free-market (a propensity toward unprincipled self interest) exists in any form of economy: market, command, hybrid, anarchic, etc… I don’t think that ‘more’ intervention (depending on how we define more) is necessarily a net social good (obviously with qualifiers). Perhaps the best or most effective system would come in the form of a competitive structure, which, while imperfect has done historically well on the governmental side. Maybe rather than the competing interests being legislative/executive/judicial, a tripartite economy could be something like government, corporations, and population with more systematic checks that help corral overreaching by any one of the three stool legs if you will.
This is a lot of info for what was intended to be a quick reply.
Back to my life and Abraham Lincoln Vampire Hunter…
The problem doesn't lie in the Corporations having power. The problem lies in the use of their economic power to coax governments (those vested with the authority to use force to resolve differences) to advance their own interests rather than the interests of the government's own constituents.
ReplyDeleteIn short, it's not a failure of the free market, which naturally limits power of corporations through the mechanisms of competition and economic choice (Rob- if moving your production to the Philippines doesn't raise the standard of living for those working at the factory, why did the workers take the new jobs making your gear in the first place?); employment is itself a contract acknowledging mutual benefit from the arrangement; the failures foisted on the market are without exception tied back to interventionism at some level.
Show me a failure of the free market and I will demonstrate how it was ultimately caused by an artificial limiting of competition or economic choice.
I have a longer post on this and the fallacy of monopolies and monopsonies as "failures of the free market," but I'm going to save that for my first post.
The new old adage goes like this: "Big Government is in bed with Big Business. (This makes sense.) Therefore, the solution is to make Government even bigger. (This makes no sense.)"
I look forward to your rebuttal(s).
I really like what you said. I think you jump right to a root structural problem in any type of economy – no market is an island to crudely paraphrase John Dunne.
ReplyDeleteI agree that free markets most effectively limit corporate power, BUT only until they are no longer free. Governments create distortions that unspool markets, but so too can corporations acting within a free market (provided there is a government at all). My explanation is kind of a maladroit application of game theory. So let’s assume a dynamic in which a unitary government exists and a unitary economy exists (let’s even call it a truly free one), and each entity (government and economy) has their own circumscribed roles in society. Now, because each entity is made up of people – the same people as it turns out --, there is an incentive to cheat where it proves either financially or politically lucrative as it inevitably will because of overlapping interests. I think this in effect may undermine a premise that I perceived in what you wrote: that government and the economy can, in practice, be cleaved. Can they?
I agree there is a fundamental conflict of interest when government (vested with decision making power by citizens) grants to non-electorally accountable ‘influential’ corporations statutory authority. But I’m curious to get your take on this: One of your premises seems to be that a free market (I assume you mean a truly free market with perfect competition at supply/demand equilibrium, full employment, etc…) is the natural state. And that intervention – of any kind – is what distorts that natural order. The implication then is that only a non-market force can distort. Do you think it’s possible that a free market may create the incentives that undermine its own freeness? One example, mentioned by Jon externalities. So, the factory upstream polluting the river, causes a great diminution in the fisherman’s catch downstream. The prices of the factory’s goods when they are sold do NOT reflect the actual cost to bring them to market, which is a market distortion that can come about even starting from a truly free market. There are mechanisms to correct this sort of distortion, which tend to be interventionist (though some options less interventionist than others, e.g. creating a new market to buy polluting credits, etc…), but in a truly free market, there is not necessarily incentive to correct this sort of distortion – certainly not for the factory owner. Short of the fisherman charging the factory walls with his fishing pole and gutting knife, without 'intervention' (or appeal to courts, etc… which would require laws, the existence of which would arguably reflect a form of intervention anyway), what ‘pure’ market redress would there be?
One last thought: you asked me to show you a failure of the free market. But let me ask you to show me a free market? Then let me follow up: why did you answer as you did? In practice, it almost seems that removing governments from markets requires removing people from government AND markets. The answer then, to shamelessly butcher a Shakespeare, lies not in the stars of the markets (which are perfect in theory), but in ourselves.
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ReplyDeleteAha. Excellent...
ReplyDeleteSo first, let me make a distinction between minarchy and anarchy: I don't advocate no government, but rather the restriction of government to specific roles; namely, enforcement of laws and contracts, prosecution of fraud, thievery, robbery, assault, murder, rape, etc., along with defense against external force, and probably some minor things like weights and measures. The quintessential Night-Watchman State.
Now, given that there is (in my perfect world) an explicit prohibition of government to intervene in, well, pretty much anything, the incentive of corporations to lobby the government to implement regulations that hinder competition is economically untenable. Do you buy off the policeman to put your competitors out of business? Not if he doesn't claim the power to do so.
As far as the natural state of things, almost everything in life is markets. At its root, a market is a system of voluntary exchange. Do we have distorted markets? Sure, but ultimately markets wouldn't exist as they do if they were not the natural state of things. Look at drugs, as an example, or prohibition. If there is a demand, someone will take a risk in order to serve a market need and to profit from the risk. The higher the risk, the higher the potential reward, or no one will take the risk and the market remains unserved or underserved.
As far as the big question- does the market creeate the incentive to undermine itself? Yes, of course it does. However, keeping the free market honest today is all about freedom of information, which is primarily restricted by... governments!!! If you have any doubt, look at what Obama is doing to the leaks. Or watch Jon Stewart's latest video about the "outrage" over the Presidential Kill List leak.
Finally, if you want to see what a perfectly free market looks like, look no further. If you're reading this you are staring at one (through one). The internet is (for the time being), the closest thing to an economy free from government intervention that I can dream up. Also, it's notable that the interweb is one of the only sectors of our economy where we continue to drive innovation and growth. It is full of thriving entrepreneurial spirit, innovation, and a ruthless sink or swim culture. Don't try to sell crap on the internet, or you'll follow your short period of success by being relegated to having your junk mail delivered along with the Cialis knockoffs and Nigerian scams.
First, I have to say I love it! Your wrap up was awesome. I admit it's tough to come up with a direct rebuttal to the internet. I’ll just offer a tangential thought on that toward the end. I admit this response is a little weak overall :)
ReplyDeleteIn this limited government, who makes the rules, enforces the rules, and adjudicates conflicts limiting the government? Would it be the government itself? If so, I guess it seems possible that there would be a clear conflict of interest with a possible net incentive to ‘cheat.’
Those ‘overseeing’ the government (presumably citizens or another branch of gov’t) would be same people who comprise the government, make up the market, and consume. Would this not lead to the same genre of conflict and hence corruptibility that exists presently between markets and governments. Only in this case, rather than governments and markets at the base level of the conflict, maybe that initial strife would be between those attempting to circumscribe government’s power and the government itself.
One potential catch I see with the policeman example is this: if policemen exist (I’m assuming they would in some capacity) they will be delegated some sort of authority. And once they have ANY authority, wouldn’t they have some opportunity to abuse it? It may not be to put your competitor out of business per se, but if police have the power to prosecute robbery, couldn’t they arrest the president of your competitor on alleged robbery or fraud charges? And couldn’t you pay them to do this?
I agree markets are a natural state of things, but wonder if purely free-markets are? If government exists then it seems there will always be an incentive within a free market for ‘cheating’ or collusion which eventually mean the market (now or in the future) will become less free (either because of natural intramarket pressures of financial or political reward for cheating, pusillanimous intervention, or possible magnanimous intervention).
Looking at the market as a unitary (meaning apart from any government), global structure the free-market superstructure seems damn consistent and reasonable (disregarding for a moment all of those ‘natural’ pressures). The problems in practice I think again arise from the overlapping interests between those in the economy/government/citizenry. The very presence (even if it does nothing) of any form of government (even ultra limited) creates distortionary pressure for the market. So, I’m not sure that it is possible to maintain a truly free market ‘in the long run’ while any form of government is needed (even contract enforcement can be prone to abuse).
I find myself in the strange position of defending/justifying the construction of our Republic and its Constitution. The tracks were laid well.
ReplyDeleteFirst, you identified neatly the fundamental moral hazards of concentration of centralized power. If you read "The Federalist Papers" you can infer that these moral hazards were well understood by the founders.
The forces needed to contain these hazards are decentralization of power (subsidiarity); intra-governmental checks and balances (trias politica); economic mobility ; strict enforcement of laws, property rights, and contracts; the ability of people to spread information quickly; and a representative system of government so that the many can keep the few accountable.
Again, it is rarely wise to deal in absolutes, so I never do (see what I did there?). Thus a purely free market can never exist in practice.
My point is that starting with an assumption of zero government and filling in the spaces where government is absolutely necessary is morally and pragmatically superior to starting from an existing paradigm based on interventionism and market manipulation (the fatal conceit of the "managed economy") which are, at their core, failures to execute a superior blueprint properly (that of free markets and limited government).
I still am tucking away that analogy of an ultra-free market in my back pocket. It's very interesting.
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ReplyDeleteA lot of interesting points. For the sake of brevity (and relevance, given that your flow has already gone in its own direction, and I don't want to hijack that), I'm going to bob and weave around a few major bullets from the above.
ReplyDelete1) The primary problem with talking about free markets is that they don't exist. Never have and never will, most fundamentally because even a free market that we theorize in a vacuum and then let loose will trend itself toward un-freedom in very short order. As someone mentioned earlier, market actors have an undeniable interest to seek ways to increase their individual market power through existing channels (be they public or private). Markets on paper and in our theoretical setting might behave well, but to my knowledge there is no empirical evidence that a market will regulate itself. All actual evidence suggests that markets head toward monopoly (and have only been halted by government intervention). To Joe's example of the internet as a free market, I'd like to introduce our friend and host, Google.
2) On the topic of the internet as an example of a free market, this is a quirky and cool analogy to some extent, but to a greater extent I don't think it makes sense. The internet doesn't suffer from spatial constraints (IPv6 is right around the corner), it doesn't involve actors scrambling for scarce resources, and for the most part it doesn't feature billions of people protecting their individual livelihoods.
3) Joe, my interest is piqued by your moral and pragmatic preference to assume zero government and fill in the spaces. Is it more pragmatic to start from an assumption which has never before existed in written history, or to start from real world conditions? As for morality, I'm brought back to a fundamental question from my days as a social philosophy major: What's your primary value? Is it freedom, that paramount libertarian virtue? Or is it well-being (which is a vague idea, but can be captured in the idea of 'minimum decency levels' ala Rawls, or perhaps simply 'survival')? For us middle and upper class Americans, freedom sure looks compelling. I know I don't like being told what to do. But for someone in a more poverty stricken, resource-constrained setting, it's almost certainly going to be well-being.
4) For the record, I don't think a managed economy works either...I've lived in one that failed. And to be clear, I don't think intervention is necessary at most levels, and it's definitely more harmful then helpful when implemented past a certain extent. At the same time, too many core human values are threatened by unregulated or under-regulated market actors. The most important of these values (for me, anyway) is sustainability. If making sure that we can exist on this planet for as long as possible means losing a bit of market freedom along the way, I'm totally cool with that.
Thanks for the follow up, Jon. I'm extremely thankful that you brought these points up because they help crystallize my perspective.
DeleteBy saying that free markets don't exist in reality, you are describing macroeconomic markets as generally monolithic, isotropic sort of blobs that exist primarily in a static condition with minor changes that occur gradually over time. In such an environment, when viewed from the 10,000 foot tower and under the assumption that these economies are largely static, you would be correct that free markets do not exist.
I propose another view of macroeconomic markets entirely: that of a fractured kaleidoscope of (mostly) voluntary, spontaneous, and extremely short-lived interactions that, when taken as a whole, form a broad web with an extremely diverse composition, a dynamic nature, and a sort of innate intelligence of its own.
As a first example, let's think of a market as a boiling pot of water; this analogy works well for a couple reasons. First, you know that the water is boiling, you can see it boiling, you can draw use from its boiling... yet without extremely expensive lab equipment, you cannot force a single drop of water to boil yourself. That is, you cannot control which water boils and which does not. You probably can't even control exactly when it boils. The boiling is a spontaneous reaction that only occurs when you produce the conditions that facilitate the reaction- yet you don't create the reaction, it is a natural response. The role of government in facilitating free market exchanges is very similar. The government cannot create wealth or economic action; economic exchanges are by nature voluntary, and government uses force or threat of force to accomplish its mission. However, government can serve its purpose to provide a fair and level field where the interactions can take place.
Additionally, the water offers a good analogy thanks to the unpredictable nature of boiling. Capturing steam in a boiling reaction is as difficult as pinning down a truly free market for any measurable period of time. Essentially the market (for a good or service) only exists as long as the shingle is up, as long as the buyer is buying, and the seller is selling- and once the purchasing decision (or other economic choice) is made, the market closes forever (I'm defining repeat purchasing decisions as merely repeated and nearly identical images of the original, and not as the same actual decision- a thin distinction but relevant).
This doesn't mean that we can't speak intelligently about macroeconomic markets, however. It just means that when we discuss them, we need to acknowledge that they are heterogeneous, multifaceted arrays of constantly shifting decisions made in real time, which requires careful qualification of generalities that we draw. It also means that we can speak in terms of the principles and natural laws that guide the interactions much more easily than we can speak of the "nature" of a particular market. Markets may develop characteristics when viewed as a whole, but the characteristics are representative of the sum of the parts rather than as innate and unchanging properties that remain valid on a macroscopic scale.
I'm diverging from some of the points that I'd like to come back to, namely:
1) monopolies (are they always bad?)
2) is the expandability of the internet unique?
3) limited government (has it existed or am I cracked?)
4) are freedom and well-being naturally conflicting principles?
5) is there a free market answer for sustainability/environmentalism?
Let's come back to those in a bit...
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ReplyDeleteThis comment has been removed by the author.
ReplyDeleteJust a short post with a few parting thoughts:
ReplyDeleteI appreciate your distinction between macro and micro-level markets. I also like how you zoom-in to the ultra micro level, i.e. to individual exchanges, as being the purest example of free market forces at work. I wouldn’t argue with that, and in my own worldview (and field of work), I can’t help but have a deep appreciation for the power and beauty of market forces.
The only nuance I’d add to your picture is that government doesn’t only use force or threat, but also incentives, to guide market actors. That’s the primary thrust of industrial policy, as per the semi-cliché East Asian model, and the underwriting tenet of government spawned markets, like the one for greenhouse gas emissions rights.
On that note, it seems our viewpoints diverge around how to categorize (and optimize) the macro-level picture. Not necessarily in contrast to your depiction of macroeconomic markets as “fractured kaleidoscopes” of free market interactions, but perhaps even in agreement with it, I see the macro picture as being a framework structure, largely built by governments, within which market actors and free market forces are allowed to play and do what they do best: work their way toward static efficiency. Every so often government or its constituents will determine that some key bulwark, brick, or bolt is missing from that framework (anything from anti-trust laws in the 1880’s to the spotlight on insufficient capital market regulation today), which government will put in place to make sure the whole framework doesn’t come crashing down around our heads.
Whatever the case, I think we may be honing in on something here, and I sense that at some point we may wind up saying largely the same thing while bumping up against a chicken-or-the-egg impasse and a denominational difference of self-identifying as libertarian vs. social capitalist, free marketist vs. necessary interventionist, etc.
I look forward to hashing out each of the questions you raised in your conclusion soon!
I think that we've drawn out the fundamental question from this repartee...
ReplyDeleteGovernment involvement in economics: is it primarily economic infrastructure, necessary protection from externalities, or is it an externality itself?
Only James Pierce may know the answer..
ReplyDelete