05 Oct 2009
I am fascinated by Michael Sandel's course on Justice at Harvard, which is now being televised on PBS and broadcasted online for free. He is an effective instructor from what I've seen so far. My interest piqued, I sought more of his material and discovered that he delivered the 2009 Reith Lectures, which I have finished listening to.
He says in the first lecture:
We're living with the economic fallout of the financial crisis and we're struggling to make sense of it. One way of understanding what's happened is to see that we're at the end of an era, an era of market triumphalism. The last three decades were a heady, reckless time of market mania and deregulation. We had the free market fundamentalism of the Reagan-Thatcher years and then we had the market friendly Neo-Liberalism of the Clinton and Blair years, which moderated but also consolidated the faith that markets are the primary mechanism for achieving the public good.
This statement may sound fine and good to those without a background in Austrian Economics or an honest view of history, especially after the recent bubble collapse. Instead of taking easy knee-jerk stances on capitalism and free-markets, let's instead explore what free markets and capitalism really are.
Free markets are simply transactions between voluntary parties in non-coercive situations, and capitalism is simply letting private parties decide on the distribution of money, labor, and goods instead of the government.
No country today has truly free markets. Just like no country can ever become totally socialistic or communist, there is always going to be coercion of some sort in the world to prevent completely free markets. Indeed, a completely capitalistic society without any coercion and where goods are perfectly distributed through voluntary transactions to fulfill personal preferences is just as utopian and impossible as a fully communist society where everyone gets what they need by an omniscient state.
So what's the difference? Easy: one is compatible with natural law, and the other is completely incompatible.
We live in a world of competition. In nature, it's "dog eat dog." However, humans stopped eating dogs a while ago (at least most societies) and we now have morality and have put restrictions on what is considered ethical. The Founding Fathers said, "life, liberty, and the pursuit of happiness." Assuming the latter implies property rights, and that the Founding Fathers were correct, we can say that everyone is entitled to their lives, their freedom, and the fruits of their labor. Capitalism naturally fits these rights: you own what you earn, and you can trade what you have with someone else, if you want to. Communism is the opposite: you don't own anything, and the state takes care of all your needs, ignoring your preferences.
Backing up to Sandel's quote, I disagree with his interpretation of deregulation and "free market fundamentalism" as being the causes of our current problems. He does not explain the rationale or give any examples, so we don't know what his reasoning is. Our money supply, controlled by the Federal Reserve, is far from free, favoring banks and the government. People are forced to pay a third of their salaries for things they have no control over. On the free to unfree market spectrum, we are moving further and further from the free end.
Sandel raises another point that is much better developed:
And to have this debate, we have to think through the moral limits of markets. We need to recognize that there are some things that money can't buy and other things that money can buy but shouldn't... Economists often assume that markets are inert, that they do not touch or taint the goods they regulate. But this is a mistake. Markets leave their mark. Often market incentives erode or crowd out non-market incentives... Perhaps the best-known example of market norms eroding or crowding out non-market norms involves the case of blood donation. The sociologist Richard Titmuss compared the United States system, which permitted the buying and selling of blood for transfusion, with the system in the UK which banned financial incentives and relied wholly on donated blood. Titmuss found that rather than improve the quality and supply of blood, the commercialization of blood led to shortages, inefficiencies and a greater incidence of contaminated blood. His explanation: putting a price on blood turned what had been a gift into a commodity. It changed the norms associated with blood donation. Once blood is bought and sold in the market, people are less likely to feel a moral obligation to give it out of altruism.
He gives plenty more examples along the same line that ask the same question: should markets be used to make all decisions?
Let's discuss the blood donation example. First of all, the cost of donating blood is low (give up about one hour of time for a resource that's easily replenished) while the rewards are high (the feeling that you're potentially saving someone's life). Because the cost is low, a market may not even be necessary. Titmuss's argument that "putting a price on blood turned what had been a gift into a commodity" may be valid, but inconsequential. If more blood is needed, you can hold more donation drives. If even that is insufficient, you can offer payment. There is no coercion of any sort.
Pollution is another heated topic that is often discussed. Should "cap and trade" programs be initiated to control pollution? Sandel is completely right on this topic and the answer is no:
1) Mandating an arbitrary upper pollution limit and imposing fines is coercion for an act (polluting) that is almost impossible to quantify, unless some party is directly hurt as a result (usually not the case).
2) Imposing limits and credits gives companies a license to pollute.
I think it is rather obvious that any company that wants to succeed in a free market environment will try to minimize the potentiality for social ostracism and a tarnished reputation, and thus will want to minimize pollution out of goodwill and publicity. However, until technology improves, pollution will always be a byproduct of some processes, including breathing.
What do you think will reduce pollution more: taxing your power company for polluting, who will simply increase what they charge you to make up for it, or ostracizing your neighbor for driving an oversized Hummer? What do you think has already happened?
Note that some people will consider "cap and trade" programs as "free market intrusions" to public policy, and this is completely false. Cap and trade programs are pseudo-markets enforced by government mandate and coercion through taxation; there is nothing free in speech or beer about it.
But just because some things in life don't really fit markets, doesn't mean that markets shouldn't be used for most things. Healthcare and education, two domains that require serious labor, need to be distributed by markets. Access to food and shelter are not rights, and neither are healthcare and education. To make a moral case for them would fail unless we defined them as rights, and even if we did, we would fail like the communists for practical reasons.
Morality and free markets depend on each other. Free markets rely on non-coercion, and members of free market communities have much to lose from being amoral. Sandel is partially right: markets needn't/shouldn't be used for everything, but for everything else, there's free markets.