The stubborn appeal of the libertarian idea persists, despite mountains of evidence that the free market is neither efficient, nor fair, nor free from periodic catastrophe. In an Adam Smith world, the interplay of supply and demand yields a price that signals producers what to make and investors where to put their capital. The more that government interferes with this sublime discipline, the more bureaucrats deflect the market from its true path.
But in the world where we actually live, markets do not produce the “right” price. There are many small examples of this failure, but also three immense ones that should have discredited the libertarian premise by now. Global climate change is the most momentous. The price of carbon-based energy is “correct”—it reflects what consumers will pay and what producers can supply—if you leave out the fact that carbon is destroying a livable planet. Markets are not competent to price this problem. Only governments can do that. In formal economics, this anomaly is described by the bloodless word “externality”—meaning costs (or benefits) external to the immediate transaction. Libertarian economists treat externalities as minor exceptions.
The other great catastrophe of our time is the financial collapse. Supposedly self-regulating markets could not discern that the securities created by financial engineers were toxic. Markets were not competent to adjust prices accordingly. The details of the bonds were opaque; they were designed to enrich middlemen; the securities were subject to investor herd-instincts; and their prices were prone to crash once a wave of panic-selling hit. Only government could provide regulations against fraudulent or deceptive financial products, as it did to good effect until the regulatory process became corrupted beginning in the 1970s. Deregulation arguably created small efficiencies by steering capital to suitable uses—but any such gains were obliterated many times over by the more than $10 trillion of GDP lost in the 2008 crash.
A third grotesque case of market failure is the income distribution. In the period between about 1935 and 1980, America became steadily more equal. This just happened to be the period of our most sustained economic growth. In that era, more than two-thirds of all the income gains were captured by the bottom 90 percent, and the bottom half actually gained income at a slightly higher rate than the top half. By contrast, in the period between 1997 and 2012, the top 10 percent captured more than 100 percent of all the income gains. The bottom 90 percent lost an average of nearly $3,000 per household. The reason for this drastic disjuncture is that in the earlier period, public policy anchored in a solid popular politics kept the market in check. Strong labor institutions made sure working families captured their share of productivity gains. Regulations limited monopolies. Government played a far more direct role in the economy via public investment, which in turn stimulated innovation. The financial part of the economy was well controlled. All of this meant more income for the middle and the bottom and less rapacity at the top.
Clearly, a more equal economy performed better than a more unequal one. Families with decent incomes could recycle that purchasing power back into the economy. Well-regulated financial institutions could do their job of supplying investment capital to the real economy rather than enriching their own executives with speculative schemes—ones that left the rest of the society to take the loss when the wise guys were long gone. In the case of labor, there was not a single, “accurate,” market-determined wage for each job, but a wide range of possible wages and social bargains that would attract competent workers and steadily increase the economy’s productivity.
The free market doesn’t live up to its
billing because of several contradictions between what libertarians
contend and the way the real world actually works.
The
free market doesn’t live up to its billing because of several
contradictions between what libertarians contend and the way the real
world actually works. Fundamentally, the free-market model
assumes away inconvenient facts. Libertarians presume no disparities of
information between buyer and seller, no serious externalities, no
public goods that markets can’t properly price (Joan Fitzgerald’s piece in our special report in the Winter 2015 issue of The American Prospect
magazine discusses one—water), and above all no disparities of power.
But in today’s substantially deregulated economy, bankers have far more
knowledge and power than bank customers (witness the subprime
deception); corporations have far more power than employees; insurers
have more power than citizens seeking health insurance. Labor markets
can’t compensate for disparities of power. The health insurance
“markets” created by the Affordable Care Act can’t fully address the
deeper problem of misplaced resources and excessive costs in our medical
system.The conditions of the idealized market model do describe ordinary retail markets, where there are plenty of restaurants, supermarkets, dry cleaners, and hardware stores, and consumers are competent to shop around for price and quality. They don’t accurately characterize the markets in health, education, labor, finance, or technological innovation, to name just five. (What is efficient about a hedge -und mogul taking home $2 billion, or a life-saving pill that retails for $5,000 a dose?)
To produce an economy that is more equitable as well as more efficient, government uses a variety of tools. It regulates to counteract market failure. It taxes to provide revenues to pay for public goods that markets under-provide at affordable prices—everything from education to health to research and development. Sometimes government passes laws to sustain other elements of a social contract, such as the laws protecting workers’ rights to form unions and to collectively bargain.
Advertisement
Government can invent things that markets never would have imagined.
Apple has created wonders, but it has piggybacked on government
investment in advanced semiconductors and the Internet. America’s
biotech industry’s success was reliant on massive government investment
in the Human Genome Project and other basic research. Later in the
special report in the magazine's Winter issue, Fred Block’s piece
describes the indispensable government role in innovation. Commercial
broadcasters were disinvesting in radio as a serious medium of news,
public affairs, culture, and humor, when along came public radio, partly
underwritten by government and partly by listener-subscribers. NPR
demonstrated that ingenious and high-quality noncommercial programming
could attract an audience that for-profit companies did not know was
there.
There is another, more fundamental point ignored by libertarians: The market itself is a creature of government.
There is another, more fundamental point ignored by libertarians: The market itself is a creature of government. As Karl Polanyi famously wrote in a seeming oxymoron, “laissez-faire
was planned.” Markets could not exist without states defining the terms
of property ownership and commerce, creating money, enforcing
contracts, protecting patents and trademarks, and providing basic public
institutions. A Robinson Crusoe world never existed. So the real issue
is not whether government “intrudes” on the market—the capitalist system
is impossible without government. The practical question is whose
interests the state serves.So the core libertarian claim that markets are efficient stands demolished by historical evidence. However, libertarians make a second claim: Free markets are the sublime expression of human liberty. This second contention gives libertarian ideology much of its persuasive power. In the resurrection of free-market theory after its first burial in the wake of the Great Depression, a remnant of libertarian economists led by Friedrich Hayek engaged in a technical duel with John Maynard Keynes about whether markets were self-correcting after all. Hayek won few converts. But in the 1940s, Hayek hit pay dirt with his argument that markets epitomized freedom. This claim was taken a step further by Milton Friedman a generation later.
In the idealized libertarian world, individuals are “free to choose”—never mind that some are born with far more resources with which to choose than others. In the Hayek-Friedman world, government, except for its minimal role of keeping the peace and protecting property values, is the enemy of freedom. Hayek went so far as to write a book in 1944, The Road to Serfdom, contending that democratic forms of planning were destined to lead down the same road to totalitarianism that ended with Stalin and Hitler. Hayek remained a revered figure to libertarians—he even won a Nobel Prize—despite the fact that there is not a single case where democratic planning led to dictatorship, but countless instances where market turbulence led displaced citizens to turn to anti-democratic strongmen. Adding insult to injury, the Hayek-Friedman remedy for when markets don’t work is: We need even more market. We saw how well that worked in the financial collapse.
Beyond assuming away inherited disparities, the Hayek-Friedman equation of markets and freedom leaves out the role of government in promoting affirmative liberties. A young person from a poor family who does not need to incur crippling debt to attend university is a freer person. A low-income mother who cannot afford to pay the doctor attains a new degree of freedom when she and her children are covered by Medicaid. A worker who might be compelled to choose between his job and his physical safety becomes freer if government health and safety regulations are enforced. The employee of a big-box store who can take paid family leave when a child gets sick is freer than one whose entire life is at the whim of the boss; likewise a worker with a union contract that provides protection from arbitrary dismissal or theft of wages. An elderly person saved from destitution by a government-organized Social Security pension has a lot more liberty than one bagging groceries at age 80 to make ends meet, or one choosing between supper and filling a prescription. An aspiring homeowner who doesn’t need to spend countless hours making sure that the mortgage won’t explode is freer to spend leisure time on other activities if government is certifying which financial products are sound and is prohibiting other kinds.
Clearly, there will never be enough
charity, benign employer paternalism, or self-correction on the part of
markets to solve these problems.
I could go on, but you get the
idea. These are not arcane examples, written in the algebraic idiom of
formal economics. They are common-sense experiences familiar to us
all—and fruits of government spending or regulation. Clearly,
there will never be enough charity, benign employer paternalism, or
self-correction on the part of markets to solve these problems.
Lately, as markets have gained ground at the expense of social
counterweights, more of us find ourselves at the mercy of market forces,
as played by bosses, insurers, and financial engineers.
No comments:
Post a Comment