Tuesday, January 7, 2014

The Tyranny of Markets

More than a few of the faithful were dismayed to hear Pope Francis denounce “the tyranny of markets.” Many who lacked faith cheered him on.

While some felt that the pope would do better not to set economic policy—“Render unto Caesar that which is Caesar’s; render unto God that which is God’s" — others pointed out that Pope Francis hailed from Argentina, and, as you know, Argentina, like France, prefers big government to free markets.

Like all human institutions, markets are corruptible. That does not mean that they are always corrupt.

As it happens, many anti-market South American nations have been doing fairly well. To some extent, it depends on whether they can sell commodities. With the exception of radically socialistic Venezuela and less radically socialistic Argentina, Latin American nations that sell commodities have been doing fairly well of late.

David Luhnow describes the current situation in South America:

There are two Latin Americas right now. The first is a bloc of countries—including Brazil, Argentina and Venezuela—that faces the Atlantic Ocean, mistrusts globalization and gives the state a large role in the economy. The second—made up of countries that face the Pacific such as Mexico, Peru, Chile and Colombia—embraces free trade and free markets.

Because both sets of countries share similar geography, culture and history, this divide makes the continent today something of a controlled experiment in economics. For almost a decade, the economies of the Atlantic countries have grown more quickly, largely thanks to rising global commodity prices. But the years ahead look far better for the Pacific countries. The region as a whole thus faces a decision about (as it were) which way to face: to the Atlantic or the Pacific?

Luhnow explains that the future seems to be siding with free market nations. They will be more apt to lift more people out of poverty than will nations that use government policies to regulate and control the markets:

Economists say that countries in the free-trading side of Latin America are better poised to prosper, with higher productivity gains and open economies more likely to attract investment. The Pacific countries, even those like Chile that still rely on commodities such as copper, have also done more to strengthen exports of all kinds. In Mexico, manufactured exports now account for nearly a quarter of annual economic output. (The figure for Brazil: a paltry 4%.) The Pacific economies are more stable too. Countries such as Mexico and Chile enjoy low inflation and bulging foreign reserves.

By contrast, Venezuela and Argentina are starting to resemble economic basket cases, with high inflation and weak government finances. In Venezuela, inflation is running above 50%—on par with war-ravaged Syria. President Nicolás Maduro, the successor to the late populist Hugo Chávez, is doubling down on price controls to try to tame inflation. The fairly predictable result: widespread shortages of everything from new cars to toilet paper. A popular new app uses crowdsourcing to tell residents of Venezuela's capital where lucky shoppers have found, say, meat—allowing others to rush to the store and snap up the precious stuff.

But, everyone knows that free markets are the best antidote to poverty. Rigged markets produce the greatest levels of inequality.

It is well known, Emory professor Paul Rubin explains, that free markets provide for people far better than do more socialist economic schemes. One need but look at the transformation that occurred in China when that nation introduced free market reforms in the late 1970s.

America has prospered by letting free markets work their magic. Yet, Americans have lately seemed prone to elect politicians who blame the markets. Blame them for what? Obviously, politicians love to blame markets for mistakes that they themselves have committed.

Rubin writes:

Here in the United States, we have twice elected a president who is attempting to engineer one-sixth of the economy with a centrally controlled mechanism for health insurance, and regulating as many other markets as he and his regulatory minions can. The people of New York City have elected an extreme anti-market candidate as mayor by an overwhelming margin of those who bothered to vote. France chose an outright socialist to be president. The list could go on.

How can we explain this emporiophobia—a fear of markets—given the overwhelming evidence that such institutions provide the greatest wealth, health and happiness for humankind?

In the first place, it is not so obvious that today's America enjoys free markets.  Anyone who took out a subprime mortgage, a mortgage that they could not afford would rather seek political redress than to take responsibility for their decisions.

People who do not practice the disciplines that ensure success in the marketplace prefer to blame the market. It's better than changing their behavior.

Why does the free market have such a bad reputation? Rubin suggests that the discourse about markets has distorted the truth. We have all been told that people compete in markets; we have not been told that people cooperate in them.

He wants to rethink the notion of  the free market to emphasize cooperation and to de-emphasize competition. After all, market transactions are negotiated compromises in which both parties feel like they have gained. A market in which some gain at the expense of others cannot long function.

Rubin explains:

Consider the most basic economic unit, the transaction. A transaction is cooperative because both parties gain from a voluntary exchange. There is competition in markets, but it's actually competition for the right to cooperate. Firms must compete for the privilege of selling to consumers—for the right to cooperate with consumers. Workers compete for the right to cooperate with employers. Competition matters because it ensures that the most efficient players will gain the right to cooperate on the best terms available. But competition plays a supporting role, while cooperation makes markets thrive.

True enough, firms compete with one another for the right to provide goods and services. The compete for access to the marketplace. Thus, Rubin notes, they are competing for the chance to cooperate with customers. 

Competition is necessary because, without it, there would be no incentive to improve one’s product or service.

We generally understand that competitions creates winners and losers. But that is something of a distortion. While it is true that only one team wins the Super Bowl, that does not mean that the other team is a bunch of losers. It is the second-best team in professional football that year. All professional football players are paid, some more than others.

In order to play a game or to compete in a market, a group needs to work as a team. When teams compete they need to be playing by the same rules.

This does not mean that both teams can come in first. In a free market, some will do more business than others. And some will go out of business. Problems arise when people start suspecting that those who are doing better are gaming the system, either because they are bending the rules or because they are not playing by the same rules.

Games require umpires and referees. A non-partisan third party must ensure that the game is being played fairly. Yet, this is not the same as saying that the outcomes are always going to satisfy our sense of justice. 

The market is designed to distribute goods and services efficiently and effectively. It is not designed to discriminate for or against certain participants. As long as everyone gets something, thus, that no one gets everything and no one gets nothing, the game is presumed to be fair.

A free market cannot function if people reject its verdict. The rule applies to elections. People need to believe that the elections were fair, that one candidate won and the other lost. If an elected official decides to impose a tyranny, it is acceptable for him to be removed from office. With that exception in mind, in a democratic system, everyone needs to accept the results of a fair election, just as they must be willing to accept the results of the marketplace competition between two brands of soap.

If cooperation is the key concept in markets, then the good of the team should take precedence over self-interest. Moreover, all participants have a vested interest in maintaining the integrity of the market.

And yet, when some people keep coming in second, they begin to harbor resentment. 

Some people are so intent on what they would consider a fair and equal distribution of goods and services that they would happily destroy what others have built, the better to ensure that they do not feel bad for not having built the same. And the better to ensure that they need not learn better ways to cooperate in order to compete.

Surely, markets are not in the business of giving everyone has exactly the same thing. The message comes to us from the book of Exodus. There the Tenth commandment tells us not to covet our neighbor’s possessions. Isn't this commandment one of the great statements of the sanctity of private property?


Sam L. said...

But, but, but, that's not FAIR!!!!!!

Sam L. said...

Because equality of outcome trumps equality of opportunity, say some in very LOUD voices.