For many years, I subscribed to the Economist, and it was my primary news source. I would spend about an hour a day working my way through it. I let that subscription lapse for a while, and tried resubscribing, but discovered that during my time away, my perspective had changed, and I was put off by what I thought of as their “free-market triumphalism:” This is their schtick. Their straight news reportage is great, but they also have a lot of opinion writing, and they are quite open about their bias that free-market mechanisms can solve just about any problem. I felt I had seen too much evidence that these mechanisms were not working, and that their philosophical position was out of sync with the real world.
I was reminded of this when I ran across an article on California’s cap-and-trade system. Long story short, the system is subject to being gamed. Surprise.
This got me thinking about the rigor with which market-based remedies are applied in general. In political discussions today, we generally see two approaches to solving public problems: firm regulations—meaning hard limits, taxes, etc; and “business friendly”—meaning businesses can do whatever they want.
And this made me wonder whether we’ve ever seen a fair example of market-based remedies being put into practice. In order to see this, we’d need to see a free market in practice.
Free-market types will argue that we have a free market, and that distortions will eventually come to light, and the market will correct for them. This is false—or if it isn’t false, then we have different ideas about what we mean by the phrase “free market.” If “free market” simply means “whatever you can get away with,” then yes, we have the free market that free-market types advocate for. But if it means “level playing field,” then we do not have a free market. Level playing fields do not naturally emerge, and they require constant maintenance to keep them level. We see examples of this over and over again. When you buy a car, if you want to buy a new car, you’re obliged to sign an agreement to use arbitration (in case the dealership sells you a lemon, etc), with the arbitrator being chosen by the dealer. The only way to opt out of arbitration is to opt out of buying a new car at all. In labor markets, we see employers exerting more and more onerous demands of their workers, going so far as to include non-compete clauses in the contracts of minimum-wage employees. If you don’t like those terms, don’t get a job. In competitions between businesses, there is generally an advantage to incumbents, which incumbents seek to maximize. The entire investment approach of the Softbank Vision has been to create monopolies that can subvert free markets —admittedly this has not been working out so well for them, which might support the argument that free markets correct distortions, but the fact that this was a reasonable investment strategy to contemplate in the first place, and that some entire industries have been destroyed along the way, is an argument against.
In all these deals, there is clearly an imbalance between the parties.
We see the same thing when it comes to solving public problems, such as pollution, only more so. There is a small number of well-funded organizations with a vested interest in one outcome, and a large number of unfunded individuals, and some public-interest organizations, with an interest in the other outcome. One of the two sides is able to tilt the playing field to their advantage.
When we talk about market-based remedies, we’re using the language of the “business-friendly” crowd, and so it is natural to conclude that these remedies are intended to achieve business-friendly outcomes. And it seems that’s usually the case. But what if the means do not necessarily entail the ends? What if market-based remedies were a tool for achieving rigorous regulatory goals? I don’t think this idea has ever received a fair shake. This would require narrow guardrails with sharp edges to keep people on the straight and narrow.
I still think that the Economist’s free-market triumphalism is wrong, but now I wonder whether it is wrong in theory or just wrong in practice.