The Myth of Free Markets (or Why Capitalism Gets a Bad Rap)
Free markets are a tool for efficient distribution of resources. In many circumstances they supply the most goods at the lowest price. Think of the profusion of goods on offer at the local supermarket, the hundreds of models of automobile on the roads, even the colleges and universities scattered around the country. In each case, the prospective consumer assesses the desirability, the quality, and the price of the item, usually from several sources. The consumer finds what is best for him or her at that time. Sure, we'd all like to shop at Whole Foods, drive a Porsche, and have a degree from MIT, but is life so bad shopping at Food Lion, driving a Toyota, and holding a degree from a major state university? No, it's not so bad at all, and free markets that deliver products at a range of prices are why this is so.
Like any tool, there is an appropriate time and place for its use. Choice and transparency are the key conditions that need to be evaluated to determine the suitability of a free market. Choice can take several forms: choice of provider, choice of quality/price tradeoff, or availability of a functionally similar alternative. Transparency means that the consumer has to know what they're getting and how much they are going to be paying for it. Goods like automobiles and computers clearly meet these tests. The markets in food, gasoline and universities are less free than they appear; while to call healthcare a "market" is almost laughable. A free market is marked by a convergence of interests among all participating parties. An unfree market is marked by conflicts of interest.
When I purchase an computer, I research the available technology. I decide what processor and video card I want. I figure out how much RAM and hard drive space I want. I decide what sort of case to put it in- neon lights or beige box? Then I find out who can build that machine or something close and for what price. The machine that I eventually buy is the result of a voluntary transaction on my part and on the builder's part. I get what I expected and the builder (and the builder's shareholders) get paid. There is full choice and transparency.
When I go to the grocery store, I pay too much for some items and perhaps too little for others. In addition, I am also invisibly paying for food that I don't eat.* How is paying too little a problem? Some products such as corn and rice are supported by direct subsidies, allowing domestic producers to sell for less than their cost of production. The price I pay for these subsidized goods at the store is lower than it should be, but it's not a deal. I'm paying the difference plus the administrative costs in my taxes. Other goods such as sugar and milk are indirectly subsidized by price supports and import tariffs. Don't even get me started on the subject of gasoline. If the cost of subsidies, oil-related military actions, environmental, and social costs are added up and applied to the price at the pump, gas could cost up to $15 per gallon. Admittedly, the valuation and selection of the various costs is somewhat subjective, but the point is that there are large hidden costs that we pay in taxes, time, or health. So you ask why are subsidies bad? I don't want to pay six hundred dollars to fill up my Suburban (40 gallons x $15/gallon = squeeeal like a pig). The reason is that subsidies encourage the misallocation of resources. If the price of gas had been much freer over the past 60 years or so, we would have made different choices. We would have less sprawl. We would not have ripped up the streetcar tracks in LA and other cities. We would still have automobiles (they're much too useful), but most families wouldn't need more than one, and they probably wouldn't use internal-combustion engines. Our long-term subsidies have taken us far, far down the wrong path; getting back is going to be politically and economically painful. Fortunately the situation on food subsidies is not nearly so dire. They could be phased out in fairly short order, as tobacco subsidies have been. The largest disruption would be to a small number of farmers and a handful of large agribusinesses.
Now we come to the commodities in which the market exists in name only. The worst example of market failure that I can think of is healthcare/health insurance. First of all, pricing is opaque. The only posted medical prices that I have seen are for elective procedures not usually covered by insurance: breast enlargement, hair removal, LASIK, and the like. Why? Because the nature of healthcare is that there is no meaningful choice. If I am in horrific pain, I want it taken care of. Now. I don't have time to shop around, and it may not be in my best interest to do so; faster diagnosis and treatment typically has a better outcome than delayed treatment. So we buy insurance. But how much should we buy? Most of us don't know. Unless you are sure that you're a genetic time-bomb, you can only estimate a probable future healthcare need. You may buy too much, and waste resources, or too little and be a burden to other productive people. Furthermore, there is a huge conflict of interest built in to the structure of the industry. An insurance company makes more money the less it pays out. One way to minimize payout is to aggressively fight claims. Therefore, you can never be sure that you are truly covered since you cannot predict whether your claim will be paid. I think that this is one area in which free markets do not serve us well, at least not at the consumer level. I do not think that doctors and nurses should be government employees as in the British NHS, but I do think that a government-backed health insurance "corporation" should provide medical coverage for all US residents. There would be other less tangible benefits to this policy as well. People would be able to change jobs more freely since they are not tied to a benefits package. Corporations' labor costs would decrease, and they would be tied more closely to wages rather than to medical costs; as a result, either the cost of hiring a new worker goes down, leading to more employment, or workers can be paid more at the same or lower cost. The accounting becomes simpler as well: the cost of healthcare could be measured in a line in the Federal budget.
So, we have defined three categories of markets: free, protected/subsidized, and unfree. What is and what should be the role of government in these market classes? A light touch for the free markets: consistent, rational regulation with maximum transparency - set the rules and don't change them without thought and discussion. It should enforce contracts, provide the means for resolving disputes, and provide or enable the market's infrastructure (banking, communications, transport, etc). Most of the markets in the second category should be free markets, but they have been captured by various political interests, usually for the enrichment of a small group of favored individuals or corporations. Political will, a commodity in vanishingly short supply, is necessary to remove the parasites from these markets. The third category contains markets for commodities that may be best handled collectively (healthcare, defense, pure research). Pseudomarkets have developed in some of these areas to the detriment of the great majority of us (those of us that do not own an insurance company, a "battlefield services contractor", or a patent troll). Political will again is needed to stand up and say that these are collective costs with collective benefits, and then to design and implement a system that incorporates this concept without falling into the trap of bloated government bureaucracy (I recommend maximally transparent auditing coupled with well-designed performance incentives within the organization (free markets do have a place here too)).
Capitalism gets a bad rap for the most part because many markets touted as being free are not. When these distorted markets do not deliver the performance that people want, free markets are blamed, ironically. In addition, there are a few highly visible unfree markets in which the market concept is misapplied. Again blame is misplaced: one does not get angry with a screwdriver for doing a poor job digging a hole, it is simply the wrong tool for the job.
*At least $30 billion in ag payola on the books in '05
http://www.usda.gov/agency/obpa/Budget-Summary/2005/FYbudsum.pdf
$22 bn commodity programs
$3.8 bn loans & grants
$4.5 bn export subsidies
Free markets are a tool for efficient distribution of resources. In many circumstances they supply the most goods at the lowest price. Think of the profusion of goods on offer at the local supermarket, the hundreds of models of automobile on the roads, even the colleges and universities scattered around the country. In each case, the prospective consumer assesses the desirability, the quality, and the price of the item, usually from several sources. The consumer finds what is best for him or her at that time. Sure, we'd all like to shop at Whole Foods, drive a Porsche, and have a degree from MIT, but is life so bad shopping at Food Lion, driving a Toyota, and holding a degree from a major state university? No, it's not so bad at all, and free markets that deliver products at a range of prices are why this is so.
Like any tool, there is an appropriate time and place for its use. Choice and transparency are the key conditions that need to be evaluated to determine the suitability of a free market. Choice can take several forms: choice of provider, choice of quality/price tradeoff, or availability of a functionally similar alternative. Transparency means that the consumer has to know what they're getting and how much they are going to be paying for it. Goods like automobiles and computers clearly meet these tests. The markets in food, gasoline and universities are less free than they appear; while to call healthcare a "market" is almost laughable. A free market is marked by a convergence of interests among all participating parties. An unfree market is marked by conflicts of interest.
When I purchase an computer, I research the available technology. I decide what processor and video card I want. I figure out how much RAM and hard drive space I want. I decide what sort of case to put it in- neon lights or beige box? Then I find out who can build that machine or something close and for what price. The machine that I eventually buy is the result of a voluntary transaction on my part and on the builder's part. I get what I expected and the builder (and the builder's shareholders) get paid. There is full choice and transparency.
When I go to the grocery store, I pay too much for some items and perhaps too little for others. In addition, I am also invisibly paying for food that I don't eat.* How is paying too little a problem? Some products such as corn and rice are supported by direct subsidies, allowing domestic producers to sell for less than their cost of production. The price I pay for these subsidized goods at the store is lower than it should be, but it's not a deal. I'm paying the difference plus the administrative costs in my taxes. Other goods such as sugar and milk are indirectly subsidized by price supports and import tariffs. Don't even get me started on the subject of gasoline. If the cost of subsidies, oil-related military actions, environmental, and social costs are added up and applied to the price at the pump, gas could cost up to $15 per gallon. Admittedly, the valuation and selection of the various costs is somewhat subjective, but the point is that there are large hidden costs that we pay in taxes, time, or health. So you ask why are subsidies bad? I don't want to pay six hundred dollars to fill up my Suburban (40 gallons x $15/gallon = squeeeal like a pig). The reason is that subsidies encourage the misallocation of resources. If the price of gas had been much freer over the past 60 years or so, we would have made different choices. We would have less sprawl. We would not have ripped up the streetcar tracks in LA and other cities. We would still have automobiles (they're much too useful), but most families wouldn't need more than one, and they probably wouldn't use internal-combustion engines. Our long-term subsidies have taken us far, far down the wrong path; getting back is going to be politically and economically painful. Fortunately the situation on food subsidies is not nearly so dire. They could be phased out in fairly short order, as tobacco subsidies have been. The largest disruption would be to a small number of farmers and a handful of large agribusinesses.
Now we come to the commodities in which the market exists in name only. The worst example of market failure that I can think of is healthcare/health insurance. First of all, pricing is opaque. The only posted medical prices that I have seen are for elective procedures not usually covered by insurance: breast enlargement, hair removal, LASIK, and the like. Why? Because the nature of healthcare is that there is no meaningful choice. If I am in horrific pain, I want it taken care of. Now. I don't have time to shop around, and it may not be in my best interest to do so; faster diagnosis and treatment typically has a better outcome than delayed treatment. So we buy insurance. But how much should we buy? Most of us don't know. Unless you are sure that you're a genetic time-bomb, you can only estimate a probable future healthcare need. You may buy too much, and waste resources, or too little and be a burden to other productive people. Furthermore, there is a huge conflict of interest built in to the structure of the industry. An insurance company makes more money the less it pays out. One way to minimize payout is to aggressively fight claims. Therefore, you can never be sure that you are truly covered since you cannot predict whether your claim will be paid. I think that this is one area in which free markets do not serve us well, at least not at the consumer level. I do not think that doctors and nurses should be government employees as in the British NHS, but I do think that a government-backed health insurance "corporation" should provide medical coverage for all US residents. There would be other less tangible benefits to this policy as well. People would be able to change jobs more freely since they are not tied to a benefits package. Corporations' labor costs would decrease, and they would be tied more closely to wages rather than to medical costs; as a result, either the cost of hiring a new worker goes down, leading to more employment, or workers can be paid more at the same or lower cost. The accounting becomes simpler as well: the cost of healthcare could be measured in a line in the Federal budget.
So, we have defined three categories of markets: free, protected/subsidized, and unfree. What is and what should be the role of government in these market classes? A light touch for the free markets: consistent, rational regulation with maximum transparency - set the rules and don't change them without thought and discussion. It should enforce contracts, provide the means for resolving disputes, and provide or enable the market's infrastructure (banking, communications, transport, etc). Most of the markets in the second category should be free markets, but they have been captured by various political interests, usually for the enrichment of a small group of favored individuals or corporations. Political will, a commodity in vanishingly short supply, is necessary to remove the parasites from these markets. The third category contains markets for commodities that may be best handled collectively (healthcare, defense, pure research). Pseudomarkets have developed in some of these areas to the detriment of the great majority of us (those of us that do not own an insurance company, a "battlefield services contractor", or a patent troll). Political will again is needed to stand up and say that these are collective costs with collective benefits, and then to design and implement a system that incorporates this concept without falling into the trap of bloated government bureaucracy (I recommend maximally transparent auditing coupled with well-designed performance incentives within the organization (free markets do have a place here too)).
Capitalism gets a bad rap for the most part because many markets touted as being free are not. When these distorted markets do not deliver the performance that people want, free markets are blamed, ironically. In addition, there are a few highly visible unfree markets in which the market concept is misapplied. Again blame is misplaced: one does not get angry with a screwdriver for doing a poor job digging a hole, it is simply the wrong tool for the job.
*At least $30 billion in ag payola on the books in '05
http://www.usda.gov/agency/obpa/Budget-Summary/2005/FYbudsum.pdf
$22 bn commodity programs
$3.8 bn loans & grants
$4.5 bn export subsidies
posted by Stochastic Eclectica at
7:05 PM
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