Today I listened to a podcast on faith and justice from Bill Moyers and a number of philosophers talking about the seismic shift in the global economic system. A common theme was that we were in the midst of a “transitional moment” in economic history. They claimed that the market has failed us.
I side with another philosopher, Ecclesiastes, who said, “there is nothing new under the sun.” Since the beginning of time, people have traded with one another in order to achieve higher levels of utility, or in other words, to get more of what they wanted. The blacksmith and the cobbler and the doctor all had different levels of training and different levels of compensation, but what they had in common was a desire to make themselves individually better off and they traded their particular service with the other in order to achieve this. Some traders took great risks to achieve great utility or benefit to themselves, but in so doing, they also produced great innovations and great benefits to others in society. Economic history is littered with boom and bust cycles because of our human nature to achieve more and more and more for our own personal gain. But those who take this too far are often destroyed by that motivation that had made them so successful. This is part of the cycle of life itself, the process of creative destruction, the process of learning from our mistakes, the process of survival of the fittest that makes our society and world stronger and stronger and stronger over time.
But in the midst of this, there is destruction of the weakest and poorest and oldest and least intelligent. In this process there are those who manipulate and take advantage and abuse those who, in economist speak, are less well endowed with the capacity to achieve higher levels of utility. Prior to Adam Smith ever codifying any form of definition of capitalism, the earliest of societies realized this and put in place systems by which to control and limit power of some and increase the power of those who had less. Adam Smith defined a market system in the context of having these controls in place. He and others have defined specific areas where the market system fails and requires some form of intervention in order to correct for its failures.
The following are the areas where the market is destined to fail:
- When products or services are Public Goods. When there are products or services that cannot be efficiently provided by the private market because the public benefits from the product or service and because no one can be excluded from the benefits of the public good. Examples of these products include lighthouses, national defense, bridges, air, and fish in the ocean.
- When a Monopoly/Oligopoly situation exists. When an entity becomes so powerful that it can dictate the total output volume and price of products or services for an entire market.
- When Externalities exist. When benefits and costs of certain activities are not able to be priced by the market and are not directly borne by the producer or consumer of those activities (pollution, parks, etc), leading to inaccurate pricing of those activities.
- When there is no effective system of Property Rights. Without just and accurate definition of who has the right to buy or sell certain assets, there is implicitly no market.
- When people have Imperfect Information. When buyers or sellers are not aware of all of the information relevant to the conduct of a transaction, leading to artificially high or low prices.
So not only is the global boom and bust that we have experienced recently not unique in history. It does not portray the failure of capitalism or the market system. It is the market system. The market system is built to fail. The market system is defined by the existence of these failures. There is no market system without these failures. This recent boom and bust cycle does not indicate a transition from thousands of years of human nature. It is not a “transitional moment” to some new third or fourth or fifth way. The market is the most efficient system of allocating goods and services to benefit the greatest number of people, if and only if the above market failures are properly managed.
The market system demands that some governing body intervene to correct for these market failures. And that is where the fault lies in the suffering and injustice being experienced today. The governing bodies have failed miserably to intervene and correct for these market failures.
The tragedy is that the government would rather blame someone other than itself for the current suffering and injustice. And in representative governments, the citizens are the government. If our politicians produce ineffective legislation, it is because we want them to; because effective legislation requires sacrifice on the parts of the governed in order to correct for the market failures. We might actually have to pay more for products if we want to decrease pollution. We might have to endure higher taxes if we want to recognize the societal benefit of a baseline level of medical care and education for all. We might have to pass up opportunities to take advantage of insider information related to a particular transaction.
Here’s a revolutionary thought from the late President of the United States, John F. Kennedy. “Ask not what your country can do for you, but what you can do for your country.”
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