Tuesday January 6, 2004

Can we really rely on free
markets to achieve our values?
 

Solomon Kebede

(Continued from last week)
All the while, the Department of Commerce's Advanced Technology Program handed these very same corporations hundreds of millions of dollars a year to subsidize the development and marketing of new products. One study concluded that in 1996 U.S. corporations received more in direct subsidies and tax breaks than all the American poor received from the government's safety net programs, including Aid to Families with Dependent Children (AFDC), student aid, housing subsidies, food and nutrition assistance, and other kinds of direct public assistance.
Congressional cheerleaders for laissez-faire are notorious hypocrites too, pulling out all the stops to get government contracts for their districts even as they denounce that same government for catering to special interests. Newt Gingrich, a famous critic of big government and pork-barrel politics, made sure when in power that his constituents were prime recipients of federal largesse, ranging from a $100,000 federal grant to the University of Georgia for research on Vidalia onions (a local crop) to a billion-plus contract to Lockheed Martin to build new military aircraft in Marietta, the Speaker's home town.
But while exposing hypocrisy can be fun, it doesn't speak directly to the underling issues. After all, libertarians have their own fantastic solution to that problem: they would make it impossible for anyone to benefit from public spending and government regulation. So the question remains: Can we really rely on free markets to achieve our values?
Academic economists and policy analysts have covered much of this ground elsewhere and at length. But because market worship has returned, and the critics of laissez-faire have so effectively been banned from the airwaves, it's worth repeating their most telling complaints. To begin with, as Locke, Smith, and Mill understood, only government can establish the basic rules of social, political, and economic life, including the rights to both liberty and private property that conservatives rightly insist upon.
Unless these rights exist in law, and have the backing of a government sufficiently powerful to enforce them, the law of the jungle would prevail. Russia's recent experience privatizing and deregulating its economy without first establishing these basic rules, illustrates just how difficult life can be when government is not strong enough to impose basic standards of conduct. Gangsterism prevails.
Government is also needed to regulate basic commercial transactions, including the supply of money and credit, upon which all other business activity depends. And only government can establish and enforce limits on what can and can't be sold in the market. It took laws, not just good intentions and moral exhortation, to stop slavery and indentured servitude in the U.S. It will take laws, strongly enforced, to end the trafficking in women and the sale of dangerous narcotics to children. Without these rules, and the sanctions to back them up, these would remain viable business enterprises.
Markets fail in other ways. Some things (economists call them "pure public goods") will not be produced in sufficient quantity or quality, despite their importance to the market system as a whole. The underlying theory of pure public goods is a bit technical, but the idea is not: these are things that benefit everyone (whether or not they pay for them), and that are far too expensive for any single individual to purchase on his or her own. As a result, if we are to have it, we must do it "collectively."
Lighthouses used to be a favorite example; defense is one contemporary one. Unless we use the government to decide how much defense we want, and then make people pay for it with taxes, we will not have enough. The hard truth is that people would get "free ride," letting others pay the costs while hoping to enjoy the benefits. As a result, defense would be undersupplied. Even the richest among us could not fill this gap alone.
Markets also have some pretty nasty side effects. Technically, these are called "by-products" or "externalities". Put simply, there are some goods whose production or exchange has consequences for people who are not directly involved in the transaction. While these consequences can be positive, the negative ones are more consequential. Air and water pollution are famous examples. Consider the production of steel. The steel producer pumps the by-products of the manufacturing process into the surrounding air and water, polluting the environment of the factory's unwitting neighbors. They pay the price; the steel producer sees only the profits from not cleaning up. Absent government regulation, the seller (and whoever has bought his or her product) neither changes his or her behavior nor compensates the victims.
Markets also have a tendency to under produce certain things, most significantly the "social" or "public" investments that are critical to the long-term health of the economy and society. Essential infrastructure investments, including roads, bridges, tunnels, airports, and harbors, might be organized privately, but the record suggests that, for similar reasons, this is not likely to happen. These will be under produced because they do not yield returns in a timely fashion, or in a way that can be easily captured by potential investors, who are typically rather shortsighted and want to see profits relatively quickly. The stock market reinforces this tendency, because shareholders can easily dump stocks that don't meet quarterly profit expectations and move on to the next big thing. In the end, only the public sector, with its power to tax and spend, is prepared to step up and make the necessary commitment.
Take the biomedical revolution that is transforming medicine and paying huge dividends too. Biomedical research got off the ground in the 1960s not because private investors dumped millions into it, but because government agencies underwrote the research and development costs, believing that biomed would prove important down the road. Indeed, many of the most important advances in drug therapy have resulted not from research and development spending by the pharmaceutical industry, but from government labs.
While the big drug companies do spend tens of billions of dollars every year hunting for new drugs, much of that is spent developing treatments for baldness, obesity, and impotence; the publicly funded National Institutes of Health do the medically important science. A recent National Bureau of Economic Research study indicates that fifteen of the twenty-one drugs with the highest therapeutic value developed between 1965 and 1992 resulted from research done with public money. The National Cancer Institutes spent $35 million to develop paclitaxel (Taxol), used to treat breast, lung, and ovarian cancers, before handing it over to Bristol-Myers Squibb, which now sells the drug for twenty times what it costs to make. Working with Duke University researchers, the NCI spent taxpayer money to develop AZT, the anti-AIDS drug, which is now a cash cow for Glaxo Wellcome.
Because the market wouldn't do it, the research that led to the creation of the Internet also began as a government funded project. Whether or not AI Gore invented the Internet, it's clear that Microsoft and Sun Microsystems did not. American computer scientist Vinton Cerf, working on a government project, developed the first internet and transmission control protocols (the infamous TCP setting), which were used to link computer networks at several American universities and research laboratories. An English computer scientist, funded by the European Organization for Nuclear Research - founded by a consortium of European governments - developed the World Wide Web.
In fact, the educational system that made both of these innovations possible is itself a product of long-term, public investment. After all, how many people are prepared to front $100,000 or more to assure a single child's education? Today we call these things "human capital"." But whatever it's called, the point is the same: private investors are not fond of investments that are both uncertain and pay off far in the future. If we waited for them to act, only the children of those could afford it would get a decent education.
Even when markets do produce enough things, they rarely distribute them in an equitable fashion. Rather, demand governs distribution, and demand is a function of both desire and purchasing power. As a result, the distribution of valued things is likely to mirror the distribution of income and wealth. As long as people's economic resources vary, so will their ability to purchase what they want and need. It's hard to get worked up over every one of these inequalities. Few political philosophers would spill much ink arguing for the equal distribution of plasma screen televisions or Armani leather jackets.
But the unequal distribution of other goods and services, such as health care, education, and personal safety, is hard to ignore. These are primary goods, things that shape how people live their lives, the choices that they have, and even their life spans. Unless one assumes that the ability to purchase something is the only ethical consideration that should be taken seriously, it's hard not to conclude that markets cannot be left alone to decide these issues.
Government also turns out to be the only actor capable of intervening effectively when the overall economy fails to perform. Regardless of the reigning economic orthodoxy, no one is prepared or willing, least of all bankers and industrialists, to let capitalism "take its natural course," if that means high unemployment, or runaway inflation, or declining profits. When recession looms, or supply bottlenecks emerge, most people, including corporate executives and stockholders, turn to government for solutions. And rightly so.
Firms, trade associations, even the most powerful CEO's, cannot mobilize the resources necessary to overcome systemic and structural problems. Only the government, precisely because it is such a powerful economic actor - the single largest purchaser of goods and services, including military hardware, transportation, health care, and education - has the wherewithal to respond.
Finally, having free markets in everything would impose an enormous decision making burden on people who might be far better off spending their time thinking about other questions. Like it or not, people are not always prepared to make the decisions that markets force on them. Many involve technical questions, requiring a fair amount of information and expertise. The choice of phone provider can be enormously complicated, let alone the decision to opt for one or another health insurance plan.
In these sorts of cases, peoples' decisions, and therefore market outcomes, are likely to be based as much on accident, ignorance, or a company's good luck to have signed up the next NBA superstar to spearhead its advertising campaign, as they are on rational choice. Consumer education helps people a bit. But high quality, reliable information is hard to find amid the clutter of advertising and manipulation, and few people have the time to process it.
To be continued…
By solomonkebede@yahoo.com