Free markets need equality

These are dark times for free marketeers. Voters are only lukewarm about the virtues of capitalism; the Grenfell disaster is widely regarded as showing the case for greater regulation; and, as Sam Bowman says, even the Tories “have totally failed to make a broad-brush case for free markets.”

I share some of their disquiet. Flawed as they are, markets have virtues as selection and information-aggregation mechanisms.

What, then, can be done to strengthen the case for markets?

There’s one thing that’s crucial – equality of power. For free markets to have public acceptance, the worst-off must have bargaining power. Without this, “free” markets merely become a device for exploitation.

Imagine, for example, that we had overfull employment and/or high out-of-work benefits. Workers would then be able to reject low wages and bad working conditions. Market forces would then deliver higher wages and good, safer, conditions simply because employers that didn’t offer these wouldn’t have any workers. Equally – though it’s harder to imagine – if we had an abundance of housing, landlords who offered shoddy or dangerous accommodation would either have to refurbish their property to acceptable standards or suffer a lack of tenants.

We wouldn’t, therefore need “red tape.” The market would raise working and living standards.

We don’t need thought experiments to see this. We have empirical evidence too.

Philippe Aghion and colleagues have shown that there’s a negative correlation across countries between unions density and minimum wage laws. Countries with strong unions have less stringent minimum wage laws – because greater bargaining power reduces the need for such laws. Remember that the UK adopted minimum wages in the 1990s, when unions had been emasculated. In the 60s and 70s, when unions were strong, the market raised wages.

Also, there is a negative correlation across developed countries between inequality (as measured, imperfectly, by Gini coefficients) and business freedom. Egalitarian Denmark and Sweden, for example, score better on the Heritage Foundation’s index of freedom than the unequal US. There’s a simple reason for this. Working people want what they regard as a fair deal. If they can’t get it through bargaining in free markets, they’ll seek it through politics and regulation.

The inference here is, for me, obvious. If you are serious about wanting free markets you must put in place the conditions which are necessary for them – namely, greater bargaining power for tenants, customers and workers. This requires not just strong anti-monopoly policies but also policies such as a high citizens income, full employment and mass housebuilding.

In short, free markets require egalitarian policies. Free marketeers who don’t support these are not the friends of freedom at all, but are merely shills for exploiters.

Comments

[e]

“able to reject low wages and bad working conditions”.. not going to happen while our DWP runs a platform (universal credit in action) which marries jobless and underemployed to any employer of any description; when DWP assistance is conditional on engaging positively with platform's program (as arbitrarily proscribed by Work Coach, aka as civil servant); and when sanction risk equals risk of sliding into destitution. Market selection and information-aggregation mechanisms are never going to positively enable timely decisions: so on safety, overall harm to society?
Yet I too believe markets have virtue.... just don't think they can be allowed to replace or continue to overshadow our State, indeed us. Very hopeful realistic free marketeers will be rejecting today's Tories at the free ballot box.

[MJW]

I agree with this post. I think the problem is that the definition of "free markets" routinely, and often deliberately, includes markets that just aren't very "free".

I've noticed that a consistent and systematic flaw in the ASI's beating the drum for "free markets" is selective blindness to power relations in what it labels "free markets". It's almost as if every analyst at the ASI has been told that their patrons don't view it in their interests to dwell on how grossly unequal power relations lead to abusive markets. And that "free markets" with such characteristics are not "free" at all. It's the ASI's 'Elephant in the Room'.

I have other gripes with the ASI, like a rather lax attitude to externalities, which is probably related to its patrons prerogatives. But the power relations issue means just about every conclusion it ever reaches needs a level of adjustment for the flaw.

[Brian]

Excellent piece. We rarely here the argument that globalization has substantially undermined the bargaining power of the poorly-skilled. No wonder they're hacked off.

[C Adams]

I agree with your points here and would add that equality of power = democracy without bias towards particular interest groups.

Also I would not read much into the Heritage Foundation's freedom index as it gives a higher spend and tax score to the small state of say Afghanistan than the better organised larger state of the countries like Sweden.

[Blissex]

«What, then, can be done to strengthen the case for markets? There’s one thing that’s crucial – equality of power.»

Aahahah our blogger slavishly repeats that "free market" mantra of the far-right social darwinists here, where the outcome of transactions in "free markets" is determined by power alone, as free markets have no rules other than "might makes right".

That is not the conservative and libertarian and "neoclassical" case for markets: that case is based not on *free* markets, but *perfectly competitive* markets, where all market participants have no power at all, and they are all price takers.

Perfectly competitive markets can only be completely unfree, as differences in might among market participants need to be ruthlessly suppressed by the state. And only perfectly competitive markets deliver all the benefits that neoclassicals, libertarians, conservatives claim for them, anything less and the "theorem of second best" applies.

«For free markets to have public acceptance, the worst-off must have bargaining power.»

Admittedly much of the public is social-darwinist, but only partially so; while many property owners want to take advantage as much as possible of the need to find an abode of their renters, or of the next person looking to buy their poroperty, they also want to have some more bargaining power with the professionals who otherwise would take advantage of their need for health care, or legal services, or banking, etc.

But what much of the public wants is not for the “worst off” to have their bargaining power boosted by the power of the state, they want *their own* to be; as they cannot conceive falling among the “worst off”, nor conceive of the situation where pervasive government intervention succeeds in removing everybody's market power.

[Blissex]

«ASI's beating the drum for "free markets" is selective blindness to power relations in what it labels "free markets". It's almost as if every analyst at the ASI has been told that their patrons don't view it in their interests to dwell on how grossly unequal power relations lead to abusive markets.»

But those, from a social darwinist point of view, are free markets, in which might freely expresses itself as an advantage in bargaining: many people will tell you that it is simply stupid to refrain using any advantage one has in getting a better bargain in a free market, there is nothing abusive in doing so, and what is abusive is government interference to make markets more competitive by suppressing differences in power in bargaining. At least when such differences work well for them.

[Oakchair]

All one has to do is look at Venezuala to realize how bad equality and stuff is.

[Lewis Carroll]

>

This is true, and might indicate that the folks at ASI haven't actually read Adam Smith:

"[11] What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

[12] It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

[13] We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of."

--Bk 1, Ch 8, WoN

[dojuma]

I completely agree with this interesting post quality yes quality.

[Blissex]

«able to reject low wages and bad working conditions»
«the conservative and libertarian and "neoclassical" case for markets: that case is based not on *free* markets, but *perfectly competitive* markets, where all market participants have no power at all, and they are all price takers.»

Put another way the social darwinist propaganda that talks about free market talks about markets where there are big/mighty and small/weak participants, and each is free to make use of whatever advantage they have, including might, free from government regulation to enforce competition.

The neoclassical/conservative case is based on the idyllic view of a market made of individuals, each of them with property that makes them self-sufficient, and who bring their small surpluses for trading to a market square, none of them capable of moving prices, all of them able to refuse in practice (being self-sufficient) as well as in theory any deal they don't like, none of them capable of combining in groups that evade those conditions, thus the market square operates close to perfect competition.

In that idyllic situation there is no Wal*Mart, no Google, no City bankrupt conglomerates endlessly recapitalized by the BoE/Treasury.

If a J Bezos happened to be born in that idyll, the strong arm of government regulation would limit him to sell only the stuff he could personally make and personally deliver, to prevent him from having might in the labour markets or the product markets and make them less than perfectly competitive.