ParEcon Questions & Answers
Markets and Parecon?
“Markets” is a term denoting allocation via competitive buying and selling at prices determined by the competitive offerings of the buyers and sellers. A market is therefore not merely the food store or the mall, but the entire entwined allocation system of buyers and sellers each acting to further their own interests by selling dear and buying cheap. That is what Parecon rejects - an allocation system based on competition and promoting greed. Perhaps the easiest way to discuss such a big topic is a step at a time, in terms of our values...
First, markets would destroy the remuneration scheme, rewarding output and bargaining power instead of effort and sacrifice. Markets would also force buyers and sellers to try to buy cheap and sell dear, each fleecing the other as much as possible in the name not only of private advance but of market survival. Markets, in other words, would generate inequitable allocation and anti-sociality.
Third, markets would even produce dissatisfaction because it is only the dissatisfied who will buy and then buy again, and buy again, and again. Consider what the general director of General Motors' Research Labs, Charles Kettering thought of the matter, as researched and summarized by Juliet Schor: “business needs to create a `dissatisfied consumer’; its mission is `the organized creation of dissatisfaction.’ Kettering led the way by introducing annual model changes for GM cars--planned obsolescence designed to make the consumer discontented with what he or she already had.”
Markets also mis-price items, taking into account only the impact of work and consumption on the immediate buyers and sellers but not on those affected peripherally, including those affected by pollution or, for that matter, by positive side effects. This exclusion means markets routinely violate ecological balance and sustainability while subjecting all but the wealthiest communities to collective debit in water, air, sound, and public availabilities.
Fifth, markets, more subtly and even beyond all the above, create a competitive context in which workplaces have to cut costs and seek market share regardless of implications for others. To do this, even our workplaces with self managing councils and wanting to have equitable remuneration and balanced job complexes would have no choice but to insulate from the discomfort that cost-cutting imposes precisely those people who they would earmark to figure out what costs to cut and how to generate more output at the expense of worker (and even consumer) fulfillment.
To cut costs and otherwise impose market discipline there would emerge, again, a coordinator class, located above workers, violating our preferred norms of remuneration, accruing power to themselves, and obliterating the self-management we desire.
In other words, under the pressure of market competition the firm I work at must try to maximize its revenues so as to keep up with or outstrip competing firms. We would also have to try to dump our costs on others, to bring in as much revenue as possible via inducing even excessive consumption, to cut our costs of production as much as we can, to reduce comforts for workers, to win market share regardless of benefits and costs to others, and so on.
To do all these things requires both a managerial surplus-seeking mindset, and also freedom from suffering the pains that managerial choices induce. So we hire folks with appropriately callous and calculating minds of the sort business schools produce, and we give these new employees air conditioned offices and comfortable surroundings, and say to them, okay, cut our costs.
In other words, ironically we impose on ourselves a coordinator class, not as a matter of natural law, or because we want to, but because markets force us to do that or to lose market share, lose revenues, and eventually go out of business.
There are those who will claim that all these ills I have listed, and more, are a product not of markets per se but of imperfect markets, markets that haven’t attained a condition of perfect competition. Aside from the fact that this is a bit like saying the ills associated with imbibing arsenic are always due to the oddity that we never get pure arsenic but always get only arsenic that is tainted with one or another additional ingredient, and aside from the fact that in a real society there is literally no such thing as frictionless competition in any event, we can point to the fact that the closer we have historically come to a pure market system without state intervention and with as few sectors as possible dominated by single firms or groups of firms or with as few unions as possible, the worse the social implications of exactly the sort we have described above become. So, there have rarely if ever been markets as competitive as those of Britain in the early nineteenth century. Under the sway of those nearly perfect markets, however, as the economist Robert Solow put it, “infants typically toiled their way to an early death in the pits and mills of the Black Country.” He adds that “well-functioning markets have no innate tendency to promote excellence in any form. They offer no resistance to forces making for a descent into cultural barbarity or moral depravity,” in accord with our own perceptions.
Markets undeniably often permit buyers and sellers to interact conveniently for mutual benefit. In fact, taking into account only their own immediate circumstances, market exchanges nearly always benefit both buyer and seller. But unfortunately, immediate convenience and relative short-run benefit for both buyer and seller do not imply immediate equity or efficiency, much less a positive social interaction over extended periods. In these wider dimensions market exchange aggravates inequities, generates grossly under- estimated inefficiencies, and disastrously distorts human relations. To judge markets regarding equity we need some shared framework of beliefs about how markets affect people’s attributes and people’s attributes in turn affect the operations of markets. We propose the following:
If these propositions are true, then clearly markets cannot provide a morally justified allocation of income and will therefore fail to uphold the values we arrived at in the last chapter. But are the propositions true—and moreover, are they true not merely in existing historical circumstances for existing and arguably contingent market arrangements, but true intrinsically and unavoidably for all market economies due to the very nature of market exchange?
The first part of p one is that people have different abilities to benefit others. This is self-evident. Mozart obviously had greater ability to please music lovers than his “rival” Salieri. Michael Jordan had greater ability to please basketball fans than other NBA players. A skilled brain surgeon has greater ability to benefit her patients than a garbage collector to benefit his “clients” (except when New York City is in day twenty of a sanitation workers’ strike). In short, people are born with unequal “talents” for benefiting others, and differences in education and training or even just location can instill in people different abilities to benefit others even even when they do not have significant genetic differences.
We should note, however, that as evident as proposition one is, there are nonetheless people who reject it, at least emotionally. They presumably feel that once one admits such differences one is on an inexorable slide toward justifying economic inequality. Their opposition to economic inequality is so great it causes them to deny that genetic and training differences exist in a prophylactic move to prevent what they deem inevitably correlated inequality before the fact. They think that to assert that people have differential talents and abilities is “elitist.”
However, two problems with this attitude arise: (1) To deny the existence of different abilities is obviously out of touch with reality. Imagine a society that refused to give glasses to people with poor eyesight or gave lower incomes to people with poor eyesight. Some might respond to this obvious injustice by denying that people’s genetically determined attributes were different. But this would be silly. Wishing it so doesn’t make it so, and anyway, there’s no reason why social or economic inequality is a necessary consequence of inequality in people’s eyesight. What needs to be challenged is not the fact that people differ in their eyesight, but the social practice that rewards people differently based on their eyesight.
But (2), imagine that there were no differences in talents, abilities, etc.—what a boring world it would be if each and every person had the same talents, no one was exceptional in any respect, and each was able to develop capabilities only just like those that everyone else had already developed. Sometimes aspirations for equality lead justice-advocates down strange intellectual paths. In any event, other than for well-motivated people who worry about its implications and who will in any event be freed from these feelings by the rest of our arguments, the first part of proposition one is not controversial, so we move on.
The second part of proposition one is that when operating in the context of markets, people will have different abilities to secure a favorable share of the benefits of exchanges. This is equally self-evident, but less often noted.
Different abilities to secure a greater share of benefits from competitive exchange can result, for example, from differences in people’s abilities to withstand failure to reach an agreement. A single mother with a sick child and no other means of securing health insurance is at a disadvantage negotiating with a large corporate employer compared to someone with many options who can hold out for better terms, even if the two have identical skills. A peasant with no savings is at a disadvantage negotiating a loan for seed and food with a rural moneylender compared to a corporation able to withstand delays.
Different abilities to benefit from competitive exchange can also result from more accurate predictions about uncertain con- sequences or from differential knowledge of the terms of exchange (which in turn could stem from genetic differences in this particular “talent” or differences in training or, more often, from different access to relevant information).
Or differences could stem from personality traits that make some more willing or able to drive a hard bargain than others, or to abide the pains risked or, more often, the pains imposed on others. The truism that in our society nice guys finish last attests to this last point. If you cannot abide hurting others or at least ignoring the hurt endured by others, in a competitive context you are at a severe disadvantage when it comes to your own self-advancement. Differences in social values could (and do) prevent some people from seeking maximum advantage at the expense of others, even as they encourage others to do so. Different opportunities and/or willing- ness to disobey the golden rule to do unto others as you would have them do unto you and to instead obey the rule of the marketplace, to do others in before they do you in, make for different abilities to garner benefits in the context of competition.
And unfortunately, competition—the famous harmonizer of the private and public interest—by systematically weeding out the less devious and aggressive actors, enforces lowest common denominator consciousness regarding willingness to invert the golden rule. So, in the ways listed above and others that could be enunciated as well, the second half of proposition one also proves true. And once it is clearly stated, about this there is virtually no dissent. After all, a large part of contemporary economic activity involves precisely trying to get ahead by utilizing such differences.
As compared to proposition one, the issue addressed in proposition two is more philosophical and complex, but luckily already navigated in the last chapter. What reasons for differential compensation are morally compelling and what reasons carry no moral weight? Our earlier discussion of values established that only acts under our control and not owing to luck and circumstance provide moral justification for income differentials, which makes proposition two true, with associated controversies having been dealt with in the last chapter.
You do this and I do that so that the total of what we both do is greater than if, instead, we reversed it and I did that and you did this. Who gets the gain? Proposition three points out that those with greater abilities to capture the benefits of market exchange will obviously capture a greater share of the efficiency gains from a division of labor in a market economy. And any student of the laws of supply and demand knows that the greater the benefit a commodity affords a buyer, the higher the price a seller will receive, other things being equal. So those with greater ability to benefit others will also benefit to a greater extent than those less able to benefit others.
Two actors or agents meet in a market exchange. This occurs over and over, with partners changing, rotating, and otherwise varying in an unpredictable pattern. Those who can benefit others better can demand more in return; those who can accrue more of the benefits that exchanges make available can accrue more in return. Since both these differentials among those playing the roles of buyer and seller exist, differential outcomes arise. Since having greater wealth confers further advantage, the differentials steadily enlarge. In time, therefore, there emerge people who make substantially more and people who make substantially less. More formally put, taken together propositions one, two, and three spell out the case that market economies will subvert equity whether combined with private or public enterprise:
More simply put, in a market economy the big strong cane cutter gets more income than the small weak one regardless of how long and how hard they work. The doctor working in a plush setting with comfortable and fulfilling circumstances earns more than the assembly worker working in a horrible din, risking life and limb, and enduring boredom and denigration, regardless of how long and how hard each works. To earn more due to generating more valuable output despite contributing less effort and enduring less sacrifice goes against the values that we settled on last chapter but is a defining feature of market remuneration. Is this there is for our critique, or are there additional equity problems?
First, it is instructive to note that even if rewarding according to the social value of contribution were regarded as fair, which our values deny, market valuations of workers’ contributions system- atically diverge from an accurate measure of their true social contribution for two reasons:
Using markets to reward contribution to output is more or less as if we believed that people ought to be paid for how much they weigh, and we then adopted an elaborate system to find this out, but the system that we chose for the task involved a scale with additional bags of sand added to one side or the other, thus increasing the weight of some and not others. Obviously the whole weight norm in the first place is immoral, as we believe remunerating for output is. But, in addition, if one does advocate the weight norm, it would make no sense for anyone to also advocate a set of institutions that in fact systematically misrepresent it—unless, of course, there were other things about that system one greatly liked and the rhetoric about the weight norm was mere window dressing that one didn’t take seriously.
To return to our own standards, it is very important to note that the problem of some people receiving higher wages and salaries than others who make greater personal sacrifices cannot be corrected in market economies without creating a great deal of inefficiency. The issue is both intrinsic to markets and also intractable under their sway. Even at their very best, in market transactions, labor is paid what is called its “marginal revenue product”—the valuation of its contribution to output—which, as we have seen, can differ significantly from a true valuation of output, much less from effort expended. But suppose we realize the injustice of this basis for remuneration and decide to correct it by keeping markets otherwise unchanged while legislatively substituting “effort wages” (i.e. just wages) for “marginal revenue product (unjust) wages.” Can’t that ameliorate this particular problem? We keep markets, generally, but we correct market wages. What is there to dislike? To a degree this would ameliorate one problem, yes, but it would also lead to inefficient uses of scarce labor resources, thereby offsetting any gains made.
The point is this: while our morals lead us to want to remunerate labor according to effort and sacrifice and not the true value of labor’s output, on the other side of the allocative coin, we want to use the true value of output in deciding how much labor should be apportioned to different tasks. For example, you do not want to value something more and thus put more resources into it merely because it takes more effort to produce. Instead, you only want to produce more of something if the product’s worth to people actually warrants it. So suppose we pay labor according to effort and sacrifice in an otherwise market driven economy. As a result the markets will operate as though the value of the product of work is measured in large part by the effort and sacrifice that was expended in its production, but this in turn reduces attention to the impact of the product on recipients. In other words, while we do not want to pay the surgeon according to the value of the surgery to society for moral reasons having to do with what we believe people should earn, we also do not want to say that the value of the surgery should be determined solely by effort and sacrifice involved in it. Instead, the value of the surgery depends largely on the benefits it bestows. A good allocation system has to remunerate in accordance with our preferred values of effort and sacrifice, of course, but it also has to allocate in light of full true social costs and benefits. Since in a market system labor costs form a substantial portion of total production costs of most goods and services, if wages are forcibly made just, with markets this would distort the valuation of the products of that labor, in turn causing the entire cost structure and price system of the economy to deviate substantially from reflecting true costs and benefits.
The adapted system would then have products valued according to what was being paid to labor for its effort and sacrifice but not according to the amount that the products are desired by their consumers. To use the terminology of economists: in a market system with effort-governed wages, goods made directly or indirectly by labor whose effort wages were higher than their marginal revenue product would sell at prices higher than their real costs, while goods made directly or indirectly by labor whose effort wages were lower than their marginal revenue product would sell at prices lower than their real costs. Since prices in a market economy help to determine not only what laborers get paid but also how much of what items are produced, any attempt to make wages more equitable while retaining market exchange must cause a systematic misuse of scarce productive resources.
More of some items and less of others will be produced than proper valuations of their social benefits and costs would dictate. In other words, if left to their own devices, market economies distribute the burdens and benefits of social labor unfairly because workers are rewarded according to the market value of their contributions rather than according to their effort or personal sacrifice. But if we correct this problem by enforcing wages that are better correlated to actual effort and sacrifice, then the adapted market economy will misvalue products and misallocate productive resources even more than otherwise.
In addition, why would the economically advantaged in any market economy not translate their advantages in resources and leisure into disproportionate political power with which to defend market wage rates against critics? Why would they not use their disproportionate political power to obstruct attempts to correct wage and salary inequities? Of course, the answer is the advantaged would take both these paths, and very effectively, as we have seen throughout history.
Moreover, people naturally tend to rationalize their behavior so as to function effectively and respect themselves in the process. The logic of the labor market is: he or she who contributes more gets more. When people participate in the labor market, in order to get ahead they must defend their right to a wage on the basis of their output. The logic of redistributing income to attain more equitable wages, however, runs counter to rewarding output. So participation in markets (with or without private ownership) not only does not lead people to see the moral logic of redistribution, it inclines them to favor the argument that everyone gets what they contributed, so redistribution is unfair. Participation in markets empowers those who oppose redistributive schemes and intellectually and psychologically impedes those who would benefit from them.
In conclusion, while of course the degree of inequity is far greater in private enterprise economies wherein people can accumulate ownership of means of production and a flow of profits from that property, income inequalities due to unequal human talents and abilities, though smaller, are inequitable for the same reason. When payment is based on the value of contribution to output, unavoidable unequal distribution of human or non-human talents, abilities, and tools will lead to morally unjustifiable differences in economic benefits. Moreover, whereas it is theoretically possible to equalize ownership of non-human assets (like training or tools) through their redistribution, it is not possible to do so in the case of unequal human assets (innate talents, size, etc.). The only conceivable way to eliminate “doctor versus garbage collector” inequities of the sort discussed last chapter is to base benefits on something other than contribution to output and this is not possible in any kind of market economy.
Okay maybe markets aren't equitbale, but what about solidarity?
Disgust with the commercialization of human relationships is as old as commerce itself. The spread of markets in eighteenth century England led the Irish-born British political philosopher Edmund Burke to reflect:
Likewise, the British historian Thomas Carlyle warned in 1847:
And of course through all his critiques of capitalism, Karl Marx complained that markets gradually turn everything into a commodity corroding social values and undermining community:
Like all social institutions, markets provide incentives that promote some kinds of behavior and discourage others. Markets minimize the transaction costs of some forms of economic interaction, especially those that are personal and involve private agents, thereby facilitating them, but markets do nothing to reduce the transaction costs and thereby facilitate other forms of interaction, especially those that are public and involve collective implications.
Even beyond simple inefficiencies, if the forms of interaction that are encouraged are mean-spirited and hostile and the forms of interaction that are discouraged are respectful and empathetic, the negative effects on human relations will be profound.
In effect, advocates of markets say to us: “You cannot cooperatively and self-consciously coordinate your economic activities sensibly, so don’t even try. You cannot orchestrate a group of inter-related tasks efficiently in light of people’s shared human needs, so don’t even try. You cannot come to equitable agreements among yourselves, so don’t even try. Just thank your lucky stars that even such a socially challenged species as yourselves can still benefit from a division of labor thanks to the miracle of the market system wherein you can function as greedy, non-cooperating, competitive, isolated atoms, but still get social results. Markets are a no-confidence vote on the social capacities of the human species.”
But if that daily message were not sufficient discouragement, markets mobilize our creative capacities and energies largely by arranging for other people to threaten our livelihoods and by bribing us with the lure of luxury beyond what others can have and beyond what we know we deserve. They feed the worst forms of individualism and egoism. And to top off their anti-social agenda, markets munificently reward those who are the most cut-throat and adept at taking advantage of their fellow citizens, and penalize those who insist on pursuing the golden rule. Of course, we are told we can personally benefit in a market system by providing service to others. But we also know that we can generally benefit a lot more easily by tricking others. Mutual concern, empathy, and solidarity have little or no usefulness in market economies, so they atrophy.
But why and how do markets impede solidarity?
For workers to comprehensively evaluate their work they would have to know the human and social as well as the material factors that go into the inputs they use plus the human and social consequences their outputs make possible. But the only information markets provide, with or without private property, are the prices of the commodities people exchange. Even if these prices accurately reflected all the human and social factors lurking behind economic transactions, which they most certainly don’t, producers and consumers would still not be able to adjust their activities in light of a self-conscious understanding of their relations with other producers or consumers because they would lack the qualitative data to do so, and they would still have to compete. It follows that markets do not provide the qualitative data necessary for producers to judge how their activities affect consumers, or vice versa. The absence of information about the concrete effects of my activities on others leaves me little choice but to consult my own situation exclusively. The fact that marks pit buyers against sellers—the one trying to buy cheap and the other to sell dear—means the absence of information causes no aggravation. Rather, all economic actors are forced to be anti-social and lack the means to do otherwise, in any event.
That is, the lack of concrete qualitative information and the obscuring of social ties and connections in market economies make cooperation difficult, while competitive pressures make cooperation irrational. Neither buyers nor sellers can afford to respect the situation of the other. Not only is relevant information unavailable, solidarity is self-defeating. Polluters must try to hide their transgressions, since paying a pollution tax or modernizing their equipment would lower their profits. Even if one producer in an industry does not behave egocentrically, others will. If altruists persist in socially responsible behavior they will ultimately be driven out of business for their trouble, with egoists rising to prominent positions. Market competition squashes solidarity regardless of encompassing ownership relations.
But rather than further pursue our rejection of markets on grounds of their implications for human relations, it may be more compelling to hear the US-based economist Sam Bowles, a left advocate of market allocation, eloquently explain this failure of markets:
In short, markets pit buyers against sellers creating an environment that is almost precisely the opposite of what any reasonable person would associate with solidarity. In each market transaction one party gains more only if the other party gains less. What ought to be the case—economic actors sharing in benefits and costs and moving forward or back in unison with the interest of each actor furthering the enhancement of other actors—is turned topsy-turvy, to the point where each actor’s interest is opposed to that of all others. As Bowles explains, even against our better natures, this literally instructs us, molds us, and cajoles us into being unsympathetic egoists of the worst sort.
What about Self-Management?
Confusing the cause of free markets with that of democracy is typical of modern commentary, but astounding given the overwhelming evidence that market systems have disenfranchised larger and larger segments of the world’s body politic. First, markets undermine rather than promote the kinds of human traits critical to the democratic process. As Bowles, who is, remember, an advocate of markets, explains:
Second, markets empower those with greater ability to extract rewards at the expense of those “less able” to do so. By concentrating economic and therefore political power in the hands of a few, markets work to the comparative advantage of the more “able,” and therefore, of those who are likely to be more powerful in the first place. If the more powerful party succeeds in appropriating more than 50 percent of the benefits of an exchange, as will generally occur, the exchange further disempowers the less powerful party and further empowers the more powerful party. In the next round of exchange, the deck is stacked a little more, and so on, ultimately leading to wide disparities.
Those who deceive themselves (and others) that markets nurture democracy ignore the simple truth that markets tend to aggravate disparities in economic power. Advocates focus on the fact that the spread of markets can undermine traditional elites. This is certainly true, but it does not prove that power will be more evenly spread and democracy enhanced. If new and more powerful obstacles replace old obstacles to economic democracy and participation, we are not moving forward, or at most are barely doing so. If the boards of directors of multinational corporations and banks, the free market policemen at the World Bank and the IMF, and the adjudication commissions for international treaties like NAFTA and MAI are more effectively insulated from popular pressure than their predecessors were, the cause of democracy is obviously not served, even though some old obstacles have been pushed aside.
But there is more to be said. Markets have class implications just as central planning does. Consider a workplace in a market economy: even without private ownership and profit-seeking for owners, the firm must compete for market share and reduce costs and raise revenues in pursuit of surpluses to invest. If it fails in the competition for surpluses relative to other firms in its industry, it will lack funds to invest and will steadily decline in assets and eventually go out of business. Therefore survival in a market system, even in the absence of private ownership, requires pursuit of surplus. A key component of pursuing profit or surplus is reducing labor costs and extracting more work from those employed. But this is not uncontested. Workers, of course, all other things being equal, prefer the opposite goal: higher wages and better conditions.
So imagine a workplace in a market economy. Typically, there is a broad corporate division of labor between conceptual workers making decisions and overseeing and disciplining the workforce, and rote workers carrying out orders given to them by their superiors. Given the remuneration scheme of markets, the employees with empowering work and decision-making prerog- atives will earn more and enjoy better conditions than those who merely carry out orders. More, because of this disparity, the empowered group will be in position to largely implement its own schemes and defend its position to do so, also seeing themselves as worthy to do so. These people do not opt to reduce their own incomes or worsen their own work conditions (though in an economy with capitalists, the capitalists may try to do this to them) in order to reduce workplace costs. Instead, they force the rote workers to accept lower wages and worse conditions.
Now imagine that this same workplace has removed such divisions of labor. By whatever means, all workers earn according to effort and sacrifice and enjoy equally empowering and fulfilling work conditions. By the rules of the workplace they may share equally in sensible, informed decision-making. However, their workplace exists in a market, and as a result they must compete with other firms or go bankrupt.
In this context, assuming that they reject bankruptcy, they have two broad choices: they can opt to reduce their own wages, worsen their own work conditions, and speed up their own levels of work, which is a very alienating approach that they are not very emotionally or psychologically equipped to undertake. Or, they can hire managers to carry out these cost-cutting and output enlarging policies while insulating the managers from feeling the policies’ adverse effects by giving the managers better conditions, higher wages, etc. In practice, very predictably, the latter is what occurs. Even ignoring their remunerative implications, markets therefore have a built-in pressure to organize a work force into two groups: a large majority that obeys and a small minority that makes decisions, with the latter enjoying greater income, power, and protection from the adverse effects of the cost-cutting decisions they will impose on others.
In other words, the information, incentive, and role characteristics of market systems subvert the rationale for workers to take initiative in workplace decisions even if they have the legal right to do so. For example, worker’s councils in the old Yugoslavia had the right to meet and make decisions over all aspects of their economic activities, but why should they? Market competition created an environment in which decision-makers had no choice but to maximize the bottom line. Any human effects that did not bear on costs and revenues had to be ignored or else risk competitive failure. Workers’ councils motivated by qualitative human considerations would ultimately fail, thus putting out of work the very people the councils were intended to empower. Since competitive pressures have adverse effects on workplace satisfaction, it is perfectly sensible for workers’ councils in market environments to hire others to make the decisions for them. The pattern is simple: first, worker attention to and desire for self-management erodes. Next, workers hire managers who in turn hire engineers and administrators to transform job roles according to the dictates of market competition. Even in the absence of private ownership, a process that begins with workers choosing to delegate technical and alienating decisions to experts who are insulated from the negative effects of those decisions, ends up by increasing the fragmentation of work, bloating managerial prerogatives, and substituting manager’s goals—or, perhaps more accurately, market goals—for those of workers. It is not long before a burgeoning managerial class of “coordinators” begins to increase the proportion of the surplus earmarked for themselves and to search for ways to preserve their own power.
Even beyond generating income inequalities, which would be more than bad enough, by creating a class division and elevating the conceptual workers whom we call coordinators to positions dominating workers who do the more rote and obedient tasks, markets empower some folks disproportionately at the expense of others, and create conditions that permit these coordinators to parlay their power into grabbing still more income for themselves. Obviously all this creates opposed interests and destroys solidarity.
Okay, markets fail for your humanist values, but we do need efficiency. They are good for that, aren't they? So good, we have to put up with all theother flaws, no?
Increasing the value of goods and services produced and decreasing the unpleasantness of what we have to do to get them are two ways producers can increase profits in a market economy. Competitive pressures drive producers to do both, a situation which is sometimes desirable, as, for example, when it leads to innovations in methods of production. But generally undesirable is the maneuvering to appropriate a greater share of the goods and services produced by externalizing costs such as pollution, and competitive market pressures drive producers to pursue this route to greater profitability just as assiduously as any other. The problem is that, while the first kind of behavior often serves the social interest as well as the private interests of producers, the second kind of behavior does not. When buyers or sellers promote their private interests by avoiding responsibility for costs of their actions and pushing them onto those who are not party to the market exchange, as with generating pollution and not cleaning it up, their behavior introduces a misallocation of productive resources and a consequent decrease in the overall value of goods and services produced.
The positive side of market incentives has received great attention and admiration, starting with Adam Smith who used the term “invisible hand” to characterize it. He meant, of course, that competitive pressures to profit induce many efficiency increasing choices, such as employing more productive technologies and guiding actors to seek more productive and less expensive options. The darker side of market incentives has been neglected and underestimated. Two modern exceptions are Ralph d’Arge and E.K. Hunt, who coined the less famous but equally appropriate concept, “invisible foot” to describe the socially counter-productive behavior of foisting costs onto others that markets also promote.
Market advocates seldom ask: Where are firms most likely to find the easiest opportunities to expand their profits? How easy is it to increase the size or quality of the economic pie and thereby accrue more? How easy is it to reduce the time or discomfort that it takes to bake the pie, thereby accruing more? Alternatively, how easy is it to enlarge one’s slice of the pie by externalizing a cost or by appropriating a benefit without payment, even if the overall size or quality of the pie declines as a result? Why should we assume that it is infinitely easier to expand one’s own profits through socially productive behavior that increases the size of the pie than through socially unproductive or even counter-productive behavior that actually reduces the size of the pie? Yet this implicit assumption lies behind the view that markets are efficiency machines.
Market advocates fail to notice that the same feature of market exchanges primarily responsible for making business easy to undertake—the exclusion of all affected parties but two from a transaction—is also a major source of potential gain for the buyer and seller. When the buyer and seller of an automobile strike their mutually convenient deal, the size of the benefit they have to divide between them is greatly enlarged by externalizing the costs onto others of the acid rain produced by car production, as well as the costs of urban smog, noise pollution, traffic congestion, and greenhouse gas emissions caused by car consumption. Those who pay these costs and thereby enlarge car-maker profits and car-consumer benefits are easy marks for car sellers and buyers because they are geographically and chronologically dispersed and because the magnitude of the effect of each specific transaction on each of them is small and varies widely from person to person. Individually the mass of folks who are separately affected each have little incentive to insist on being party to the transaction. Collectively they face formidable obstacles to forming a voluntary coalition to effectively represent a large number of people, each of whom have little and different amounts at stake. Nor is the problem solved by awarding victims of external effects a property right not to be victimized without their consent. Moreover, making markets perfectly competitive or making the cost of entering a market zero (even if either were realistically possible) would not eliminate the opportunity for this kind of rent-seeking behavior.
That is, even if there were countless perfectly informed sellers and buyers in every market, even if the appearance of the slightest differences in average profit rates in different industries induced instantaneous self-correcting entries and exits of firms, and even if every economic participant were equally powerful and therefore equally powerless—that is, even if we fully embraced the utterly unreal fantasies of market enthusiasts—as long as there were numerous external parties with small but unequal interests in market transactions, those external parties would face much greater obstacles to a full and effective representation of their collective interest than the obstacles faced by the buyer and seller in the exchange. And it is this unavoidable inequality in their ability to represent their own interests that makes external parties easy prey to rent-seeking behavior on the part of buyers and sellers.
Moreover, even if we could organize a market economy wherein every participant were as powerful as every other and no one ever faced a less powerful opponent in a market exchange—another ridiculous fiction—this would still not change the fact that each of us has small interests at stake in many transactions in which we are neither buyer or seller. Yet the sum total interest of all these external parties can be considerable compared to the interests of the two who are presumably the most affected—the buyer and seller. It is the difficulty of representing the collective interests of those with lesser individual interests that creates an unavoidable inequality in power, which, in turn, gives rise to the opportunity for individually profitable but socially counter-productive rent-seeking on the part of buyers and sellers.
But of course the real world bears little resemblance to a hypothetical game where it is impossible to increase one’s market power so that there is no reason to try. Instead, in the real world it is just as rational to pursue ways to increase one’s power vis-à-vis other buyers or sellers as it is to search for ways to increase the size or quality of the economic pie or reduce the time or discomfort necessary to bake it. In the real world there are consumers with little information, time, or means to defend their interests. There are small innovative firms for giants like IBM and Microsoft to buy up instead of tackling the hard work of innovation themselves. There are common property resources whose productivity can be appropriated at little or no cost to the beneficiary as they are over-exploited at the expense of future generations. And there is a government run by politicians whose careers rely mainly on their ability to raise campaign money, begging to be plied for corporate welfare programs financed at taxpayer expense.
In short, in a realistic world of unequal economic power the most effective profit maximizing strategy is often to maneuver at the expense of those with less economic power so as to re-slice the pie (even while shrinking it) rather than to work to expand the pie. And of course, the same prevails internationally as US-based economist Robert Lekachman points out with eloquent restraint:
In any case, leftist advocates of markets concede that externalities lead to inefficient allocations and that non-competitive market structures and disequilibrating forces add additional sources of inefficiencies. And they also concede that efficiency requires policies designed to internalize external effects, curb monopolistic practices, and ameliorate market disequilibria. But there are also many significant failings of markets that market admirers do not concede, and their sum total importance is undeniable.
As E. K. Hunt explained:
This means that accurate correctives, or what economists call “Pigouvian” taxes, after the British economist Arthur Pigou (1877-1959), are hard to calculate even in an isolated market. Any hope of accurately estimating external effects in market economies lies with actors’ willingness to accept damage surveys which have well-known biases and discrepancies that can be exploited by special interests. And the fact that estimates derived from willingness to accept damage surveys are commonly four times as high as estimates derived from willingness to pay surveys is hardly comforting, when, in theory, they should be roughly equal. Suffice to say, this problem is another thorn in the side of markets.
In the real world, where private interests and power take pre- cedence over economic efficiency, the would-be beneficiaries of accurate corrective taxes are usually dispersed and powerless compared to those who would have to pay such taxes. This makes it unlikely that full correctives would be enacted—even if they could be accurately calculated.
As noted earlier, people are affected by their economic conditions and activities and they will learn to adjust their preferences to the biases created by external effects in the market price system. Consumers will increase their preference and demand for goods whose production and/or consumption entails negative external effects but whose market prices fail to reflect these costs and are therefore too low; and will decrease their preference and demand for goods whose production and/or consumption entails positive external effects but whose market prices fail to reflect these benefits and are therefore too high. In short, we adjust ourselves to benefit from what we see to be systematic bargains and to avoid what we see to be systematic scams. While this adjustment is individually rational to take advantage of market biases, it is socially irrational and inefficient since it leads to greater demand for the goods that the market already wrongly overproduces, and lowers demand for the goods the market already under produces. Morever, because the effects of this phenomenon are cumulative and self-enforcing, over time the degree of inefficiency in the economy will grow.
The upshot of these points is that the invisible foot operates on a par with the invisible hand. The degree of allocative inefficiency due to external effects is significant. Hope for “Pigouvian” correctives is a pipe dream. Relative prices predictably diverge ever more widely from accurate measures of full social costs and benefits as consumers adjust their endogenous preferences to individually benefit from inevitable market biases. In sum, convenient deals with mutual benefits for buyer and seller should not be confused with economic efficiency. When some kinds of preferences are consistently under-represented because of transaction cost and free rider problems (wherein folks get the benefit of public goods without paying for them), when some resources are consistently over- exploited because they are common rather than private property, when consumers adjust their preferences to biases in the price system, and when profits or surpluses come as often from greater power as greater contribution, theory predicts free market exchange will result in a misallocation of resources. And when markets are less than perfect (which they always are), and fail to reach equilibrium instantaneously (which they always do), the results will be that much worse.
While markets are currently widely praised, perhaps before moving on we should point out that we are not markets’ only detractors. Consider the US Nobel Prize-winning economist Robert Solow’s observations that:
Or US Nobel Prize economist James Tobin’s observation that:
Or US novelist Edward Bellamy’s (1850-1898) observation that:
Or, arch marketeer US Nobel Prize-winning economist Milton Friedman’s recent observation that:
A summary of findings regarding market inefficiencies is that the cybernetic, incentive, and allocative properties of markets involve a pervasive bias against discovering, expressing, and developing needs that require social rather than individual activity for fulfillment. Markets do not provide concrete information about how people’s decisions affect the life prospects of others or vice versa. They do not even provide accurate summaries of the social benefits and costs associated with what people decide to do since markets mis-evaluate external effects—and external effects are the rule rather than the exception. Actual market allocations under supply social goods and activities and over supply individual goods and activities. They establish incentives for individuals to wean themselves of needs that require socially coordinated intercourse and accentuate needs that can be met individually. Moreover, markets reward competitive behavior and penalize cooperative behavior.
In sum, markets not only erode solidarity, they also systemat- ically mis-charge purchasers so that over time, preferences that are individually rational for people to develop combine with biases inherent in market allocations to yield outcomes increasingly further from those that would have maximized human fulfillment. And to top it off, markets generate gross economic inequality, severely distorted decision-making influence, and class division and rule. In the end, the fears of “utopian” critics who decry the socially alienating effects of markets prove more to the point than the assurances of so-called “scientific” economists that markets are ideal allocation institutions. Regarding markets, abolitionism is an appropriate attitude.