Friday, May 21, 2010

Free the Markets

Did you know that the Dalai Lama is a self-proclaimed Marxist? In a recent interview he explained why. It's because, in his words: "Marxism has moral ethics; whereas capitalism is only how to make profits." Link here. Via Instapundit.

I think we have a right to wonder what he means by moral ethics here. It is no secret the Marxist political systems have murdered and starved more people in a shorter period of time than any other.

So we must conclude that the Dalai Lama is talking about motivation, not consequences.

The Dalai Lama could not deny that capitalism had been good for the people of China. When it came to providing goods and services, to say nothing of food, it was far more successful than communism. Capitalism, he declared: "brought a lot of positive to China. Millions of people's living standards improved."

Apparently, the Dalai Lama objects to capitalists for their motives. Perhaps he read Adam Smith, because Smith famously declared that capitalists distribute more goods and services despite the fact that they are in it for their own self-interest. He also stated, less famously, that people who are motivated by a desire to be charitable do less well at producing economic growth.

According to Smith, the butcher does not sell you the steak because you are needy or because he feels charitable. He sells it to you because he wants to earn a profit.

In my view Smith is simply marking the difference between what motivates people in the marketplace and what motivates them in church. His viewpoint feels like an expansion on the concept of the separation of church and state, or between church and marketplace.

I believe that he is saying that the virtues that pertain to religion produce dysfunctional economies. He might also have said that self-interest is a bad reason to worship.

Once this distinction is made, I see no reason why we should limit our butcher's motives to profit. True enough, he wants to make a profit. He would not do what he is doing for free. And yet, he might also want to do a good job, to support his family, to provide good quality at a good price, and to be an upstanding member of his community.

All of these will make him a better businessman, but it is not entirely fair to reduce him to a profit-seeking animal.

It sounds to me like the Dalai Lama sees the profit motive as morally dubious; Western ethics does not draw as stark a contrast. Wanting to make a profit does not necessarily mean that a butcher will do anything whatever to achieve that goal.

I do not see a dichotomy between good and evil, but one between two different kinds of good.

The Dalai Lama is not the only person to object to the way markets work. And he is certainly not the only person to distrust the motives of market participants.

If you think that people are fundamentally venal, or are being driven by their animal spirits, you would not want to allow them too much freedom in the marketplace. Left to their own devices, you would think, market participants will produce outcomes that are necessarily unjust and unfair.

In their minds the only good markets are regulated markets.

But note that regulation is not simply about being the referee or the umpire. Strict regulation will also work to redistribute profits in ways the regulators consider to be more just and fair. Thus, regulation can easily morph into income redistribution and social justice.

Regulation can certainly work to weed out cheats and frauds. But can it also protect the markets from extremes like bubbles and crashes? Do you believe that regulation is necessary because markets are always being manipulated by a venal few? Do you believe that people cannot be trusted to act rationally when they are investing or consuming?

If regulators are keeping everyone honest, they are ensuring that the market's outcomes, its judgments, its distribution of goods and service, are respected.

But that does not mean that the market will necessarily distribute things equitably. A functioning market will not necessarily take from each according to his ability and give to each according to his needs.

This basic Marxist principle appeals to the Dalai Lama. In reality, it demoralizes people, for depriving them of their freedom to excel and to enjoy the fruits of their labor.

It makes little sense to criticize markets because they do not produce perfect outcomes. They were not designed for perfection and cannot be judged ill in comparison to a fictional world where outcomes would be perfectly just.

Markets are not perfect; they are simply better than any other economic system yet devised.

Obviously, many people do not believe in markets. They refuse to accept market outcomes, and believe that their own intelligence is far superior to that of the market.

Or better, they feel that their superior intelligence will produce superior outcomes to those produced by self-interested market participants.

Behavioral economists argue that unregulated markets are prone to extremes of bubbles and crashes because they believe that human beings are motivated by their animal spirits.

Since human beings are subject to emotion, they cannot really be trusted to do the right thing. Thus, their behavior as market participants must be constrained.

A counterargument suggests that the markets are perfectly capable of controlling irrational exuberance, and of making people pay for it. Markets correct; markets correct violently. If they never corrected, then that would be irrational. One might easily argue that correction is a rational process that occurs when people occasionally act irrationally.

But that does not necessarily mean that the markets are irrational beings. Or that market participants cannot be trusted to exercise their freedom. After all freedom involves responsibility. And when you become complacent or irrationally exuberant, a well-functioning market will usually make you pay for it.

That does not make the market an instrument of injustice; quite the contrary.

What happens then if people do not believe in markets. If they do not believe that the free decisions of millions can produce an effective distribution of goods and services.

Among those who believe that markets are corrupt are those who accept the corruption and believe that they can work it to their own advantage. They become market manipulators and cheats, because they believe that someone is always cheating, so why would it not be them.

And those who believe that the market is corrupt sometimes use government to make it produce more just results. Isn't this what caused the housing bubble? How much of the housing bubble and the ensuing financial crisis was produced when the government attempted to regulate the distribution of mortgages.

How many bankers, relying solely on their impulse to make a profit, would have made all of those subprime loans to unqualified borrowers?

Could it be that markets are pushed to extremes by people who do not respect them, who attempt to manipulate and control them?

Do we need more regulation or do we need to free the markets from government interference?

After all, the financial crisis was caused by an unholy alliance between regulated banks and semi-government entities like Fannie Mae. It was not caused by the largely unregulated hedge funds.

1 comment:

Anonymous said...

You hit on the paradox at the heart of anti-freemarket marxists:

If you think that people are fundamentally venal, or are being driven by their animal spirits, you would not want to allow them too much freedom in the marketplace. Left to their own devices, you would think, market participants will produce outcomes that are necessarily unjust and unfair.

Necessarily unjust and unfair to the fundamentally venal, or those being driven my thier animal spirits.

Which makes the market fair.

However, if people are not fundamentally venal, or being driven by their animal spirits, then the market is necessarily just and fair.

Which makes the market fair.

Marxism is self-consistent only if you consider only yourself fair and everyone else venal and driven by animal spirits.

Which is, of course, why the 'elites' are drawn to it.