Tom Stratton argues that the left shouldn’t demonize markets. I fear he needs all the help he can get here, so let‘s make two distinctions:
1. Markets vs. ownership. In many ways, what look like ways in which markets fail the poor are in fact merely ways in which a lack of assets fail the poor.
To take the case of microfinance which Tom addresses, the problem is that the poor lack assets and so can’t post collateral. Similar lack of assets can cause the poor to drop out of education, not get health insurance, or engage in desperate trades, be it selling kidneys, prostitution, or working for low wages.
In these ways, markets will magnify inequalities. But they don’t create them. If the background distribution of assets were more equal, markets wouldn’t have such catastrophic effects.
2. Proper markets vs. actually-existing imperfect ones. Many of the most objectionable inequalities arise not from the operation of free markets, but of market failure.
People are much angrier about Fred Goodwin’s pension than about, say, the wages paid to Cristiano Ronaldo, even though the latter is an oily little ponce. This is because Goodwin’s money comes from market failures - the existence of monopoly profits which he managed to extract for himself, and the ability of banks to privatize gains and socialize losses. It’s capitalism that made Goodwin rich. It’s a free market than made Ronaldo rich.
Many other market failures hit the poor: the failure to price external costs such as pollution or common assets such as rainforests; the asymmetric information which makes it hard for them to raise finance; and of course unemployment is some kind of market failure.
I suspect that it is the failure to make these distinctions that lies behind much of the left’s hostility to markets.
Just try a little thought experiment. Imagine an economy in which there was a “fair” distribution of background assets - say, a citizens income and widespread worker ownership and control, or any other such arrangements you like. And imagine too that market failures - monopoly, externalities and the like - were eliminated as far as possible. How then might markets increase inequality?
Yes, some people would just be unlucky. But with adequate insurance mechanisms (be it a welfare state or insurance markets) would this really be a problem?
And a few entertainers or sports stars would make lots of money, as in Robert Nozick’s Wilt Chamberlain story. So too would genuine entrepreneurs. But are these inequalities really a high priority?
So what would be the problem? One possibility is that the poor are poor - and will stay poor even in my thought-experiment society - because they lack the cognitive skills to participate in a market economy. But is this true, except for a tiny minority? Or is such a lack merely a contingent fact, resulting from inadequate schools? Or is it instead a fiction perpetuated by rightists to justify inequality, and by statists to justify their meddling?
1. Markets vs. ownership. In many ways, what look like ways in which markets fail the poor are in fact merely ways in which a lack of assets fail the poor.
To take the case of microfinance which Tom addresses, the problem is that the poor lack assets and so can’t post collateral. Similar lack of assets can cause the poor to drop out of education, not get health insurance, or engage in desperate trades, be it selling kidneys, prostitution, or working for low wages.
In these ways, markets will magnify inequalities. But they don’t create them. If the background distribution of assets were more equal, markets wouldn’t have such catastrophic effects.
2. Proper markets vs. actually-existing imperfect ones. Many of the most objectionable inequalities arise not from the operation of free markets, but of market failure.
People are much angrier about Fred Goodwin’s pension than about, say, the wages paid to Cristiano Ronaldo, even though the latter is an oily little ponce. This is because Goodwin’s money comes from market failures - the existence of monopoly profits which he managed to extract for himself, and the ability of banks to privatize gains and socialize losses. It’s capitalism that made Goodwin rich. It’s a free market than made Ronaldo rich.
Many other market failures hit the poor: the failure to price external costs such as pollution or common assets such as rainforests; the asymmetric information which makes it hard for them to raise finance; and of course unemployment is some kind of market failure.
I suspect that it is the failure to make these distinctions that lies behind much of the left’s hostility to markets.
Just try a little thought experiment. Imagine an economy in which there was a “fair” distribution of background assets - say, a citizens income and widespread worker ownership and control, or any other such arrangements you like. And imagine too that market failures - monopoly, externalities and the like - were eliminated as far as possible. How then might markets increase inequality?
Yes, some people would just be unlucky. But with adequate insurance mechanisms (be it a welfare state or insurance markets) would this really be a problem?
And a few entertainers or sports stars would make lots of money, as in Robert Nozick’s Wilt Chamberlain story. So too would genuine entrepreneurs. But are these inequalities really a high priority?
So what would be the problem? One possibility is that the poor are poor - and will stay poor even in my thought-experiment society - because they lack the cognitive skills to participate in a market economy. But is this true, except for a tiny minority? Or is such a lack merely a contingent fact, resulting from inadequate schools? Or is it instead a fiction perpetuated by rightists to justify inequality, and by statists to justify their meddling?
"the failure to make these distinctions ...": you are suggesting that The Left is stupid. You took your time.
Posted by: dearieme | May 01, 2009 at 04:47 PM
Market failure is a key part of a well functioning market. What isn't good is a false boon encouraged by government directed investment.
Posted by: RobW | May 01, 2009 at 05:16 PM
I think RobW misunderstands the precise meaning of "Market Failure" - it's where any one of a number of factors breaks the assumptions behind the theory that a competitive market is efficient at allocating resources. It doesn't mean simply that sometimes, businesses or markets for a particular good "fail".
In terms of assets - have you considered the patented Frank Owen's Paintbrush "National Land Share scheme"? http://frankowenspaintbrush.wordpress.com/2009/04/25/land-the-last-economic-taboo/
Posted by: Frank Owen and his Paint Brush | May 01, 2009 at 05:53 PM
I agree with your core point - markets are not intrinsically inequitable. Unfortunately however, you may have hit on the problem with your final question; have a read of Tim Harford's article today which purports to answer it.
http://blogs.ft.com/undercover/2009/05/what-smart-truckers-tell-us-about-the-road-to-success/
Posted by: Leigh Caldwell | May 02, 2009 at 04:23 AM
Isn't one of the problems with current ownership practices that they allow too great a role for markets? It is the tradeability of companies and capital that allows ownership to become centralised to the extent that it does. If you want to make dispersal of assets stick, you need to somehow entrench them as use value not exchange value.
Equally, it is the belief that Fred Goodwins are only accountable to stock markets that gives them the freedom to behave as they do (the fact that this accountability utterly failed shareholders in Goodwin's case is another matter altogether).
Posted by: Will Davies | May 02, 2009 at 12:17 PM
I think what you say is true, but that markets also have an inherent tendency to magnify inequalities - though not necessarily more so than private ownership in general.
My thinking is that in any competitive private-property system, that property serves both as a major goal of people's striving, and as a major tool by which they seek it. This double role sets up a sort of positive feedback which will increase inequalities, because the more wealth someone has, the more able they will be to increase that wealth.
This involves a lot of different things. More money means more leisure time to select good opportunities, better grooming and turning out, better educational opportunities, better health, healthcare focused on prevention rather than cure, more ability to bribe, more ability to travel to strategic meetings, more ability to invest for the future, more comfort to enable calmer and more considered decisions, and, as you point out, more ability to get credit.
As you say, this is all ways that inequalities can be magnified, not created, but some small inequalities will always be presented, due to luck or connections or asymmetric knowledge or personal talent or anything else, and in a market they might well be prone to self-reinforce over time.
Posted by: Alderson Warm-Fork | May 02, 2009 at 08:46 PM
Hi Chris; like your Blog.
You seem very hostile to "The Left" who ever they may be?
Surely the simple point about Markets is they work via greed!
The Bible and the Pope say the love of money is the root of all evil; and K Marx may say he does not buy this Religion Bag, but we all know he really agrees that the Love of money is the root of all evil.
The Market God is based on the idea that self Love produces a public good by an "invisible hand" but where is the proof of that?
Surely a Socialist state must overide self interest, ( greed to ordinary folk ) and no allocation based on mere private gain can be a final arbiter. So if Sir fred or Ronaldo are getting too much money/ have too much power, a Socialist State must overpower them to promote the Public good.
The problem with "New Labour" to my mind is they are far too friendly to the Rich rather than opposing their Class interests.
PS. You may not like Ronaldo but he does not oppress any one!
Posted by: Keith | May 03, 2009 at 01:37 AM
You leave crime out of this. surely this is worthy of consideration in its own right. It has a goodly turnover , fullfills market demands , pay little or no tax and justifies the police.
And merit is its own reward quite often.
Posted by: john cramer | May 03, 2009 at 07:27 AM
"The poor will always be with us" is a realistic working assumption for our lifetimes and beyond. The joy of economic growth powered by markets is that the poor are now of the order of 9% of our society when they used to be 90%; and our poor of today are very much better off than the poor of two or three centuries ago.
For the future, it is evident and sufficient that the marginal poor person need not stay poor. I shall be content (if I should experience an after-life in which I am interested in economic welfare) if our political process constrains and enables markets to work well enough to reduce poverty below 1% a century from now in Britain, and into single figure percentages for the world as a whole.
Is there any plausible way of getting that result without worldwide vigorous markets?
Posted by: Diversity | May 03, 2009 at 08:13 PM