Imperfect Markets: Too little freedom or too much?
I ended my last post with this observation:
Market economies create incredible economic information exchange systems. Assuming everyone were perfectly virtuous, that they truly knew what was in their best interest, and that they acted upon that knowledge with every transaction, you might be able to say that we could achieve a near utopian society. In fact, some libertarian folks see the obstacle to a virtuous society as being virtually anything that impinges on personal choice. Absent government interference, they see markets acting with near perfect fairness and efficiency.
As Christians we know that all have sinned and fall short of the glory of God. No one is perfectly virtuous and the great majority of us are far from it. Furthermore, being finite beings with limited knowledge, we can’t always correctly determine what is in our best interest. Capitalist economies create large corporations and complex transactions where adequate knowledge is difficult to garner even when there is no attempt at deception, much less when there is an intention to mislead and conceal. Many libertarians esteem both human nature and human discernment too highly.
So, we know that market economies do an astounding job of integrating all our decisions (virtuous and bad, well informed and errant) into one organic feedback loop. Maybe we can just filter out the bad stuff. Enter the liberal thinkers.
One possibility for filtering out the bad is to have someone oversee everything, making sure bad stuff doesn’t happen. They can look out for the common good. The obvious candidate for the job would be a representative government.
At first blush this looks quite encouraging but it does not bear up under scrutiny. First, government is drawn from the same less than virtuous pool of folks as the ones who are behaving less than virtuously in the marketplace. While many people enter politics with noble motives, the opportunity to wield power also draws in those he seek power for less than noble reasons.
Second, let’s assume we do have a government of only noble servants. I demonstrated in the previous post the incomprehensibly complex nature of the market. What makes these government officials specially qualified to comprehend how their decisions will reverberate through the market and to know that any given policy is going to be an improvement on the common good over what the market delivers?
We know that some well-intentioned government interventions have had perverse consequences that harm the common good. For example, a city has a homeless problem so it institutes rent controls in order to keep housing affordable. The city tells landlords how much rent they can charge and how much they can increase rent each year. Housing demand rises so fast that it drives the amount renters are willing to pay to a level beyond that which landlords can charge. Renters have an incentive not to surrender their leases. Instead, when they decide to live elsewhere, they keep the lease and sublet the apartment. They charge the new tenant the rent they owe the landlord plus a premium above the landlord’s rent that the landlord is forbidden to charge. People already with apartments are less inclined to move because usually the one time the landlord can bump up the rent is when a new renter moves in. It is cheaper for the renter to stay put so turnover comes to a halt.
As a consequence of these actions, developers stop building new dwellings because they know they won’t be able to collect the full value of the rental property. Existing landlords began to skimp on maintenance because they can’t collect what the market dictates should be paid. As the situation deteriorates, some landlords go bankrupt, others turn to nefarious strategies like arson in order to collect insurance, while others just walk away. The net result is greater homelessness from a dwindling housing supply. The shortage drives prices still higher, freezing up turnover even more and the cycle continues.
We don’t have to look farther than today’s headlines to see evidence. The present financial crisis was brought on in part by good intentions of both Democrats and Republicans to expand home ownership. One theory also has it that just as multiple uncoordinated intelligence gathering entities led to mistakes prior to 9/11, multiple uncoordinated financial regulatory entities led to failure to detect problems in financial markets. Now congressional Democrats are on the populist bandwagon of protectionism, which 90% of economists of all stripes deem to be a bad idea. Politicians are just like the rest of us, prone to do corrupt things and fallible finite human beings.
Third, politics nearly always generates less than optimal solutions. Political solutions usually factor in the impact on the intended targets of legislation, but political solutions are always a product of appeasing and balancing competing groups with an interest in the legislation. Thus, political solutions are nearly always skewed one way or the other from optimal solutions.
So to summarize, the ability of people to feed their wants and needs into the real-time complex information system called the markets has created an unprecedented (and that is an understatement) ability of the economy to function as a dynamic generator of abundance, meeting a wider portion of the population’s basic needs than ever before. But because people do not always correctly evaluate what is in their best interests with regard to wants and needs, either due to corrupt minds or the simple finitude of our faculties, the market economy is also a prodigious producer of bad things as well.
Getting more freedom into the system isn’t going to bring us into some quasi-utopian new age. Neither are government control and regulation. The Right is persuaded that government is a bigger obstacle to a better world than is economic freedom. The Left is persuaded that economic freedom is a greater threat than government intervention. While greater freedom might lessen some dysfunctions of government and more government might lessen some dysfunctions of destructive decisions in the market, neither deal with the underlying character of the participants in the market and the government. From a Christian perspective, both agendas are quibbling at some important margins of the fundamental problem, but they are still only at the margins. That problem is human nature.
