One reader of this blog (in
an email exchange) has found it very hard to accept that I have been
propounding only a “preference” for
the market rather than gung-ho adherence to market capitalism. Consequently, I
take this opportunity to set the record straight and review briefly[1]
the reasons why our preference should be conditional;
the market is not a perfect means to achieve Christian goals. We must recognize
the existence of market failures, instances where, if the market were left
uncontrolled, it would not achieve Christian goals. Each of the following ten[2]
issues calls for government intervention. However, the extent of that
intervention remains in doubt and will, no doubt, give grounds for debate until
the Lord comes back.
1. Rules of the Game—the Justice System
Due to the “depravity of man", God has instituted governments "in order that the licentiousness of men be restrained."[3] The government obviously has the task to maintain justice so that the evildoers are punished and the good may lead a peaceful life. In economic life, that means the government must set the "rules of the game"-- to maintain a system of justice with a legal framework and a means to ensure compliance with it--laws, regulations, courts, police, etc. Without such a system a free market could not even exist; the strong would just “take” from the weak. Market transactions would, at best, take place only between those who are equally strong. Laws and regulations are obviously necessary to protect people and property[4]. These laws must, obviously be enforced. Moreover, justice must not be unduly delayed.[5] The degree and method of regulation will, of course, always remain in debate.
Two major economic
institutions deserve special mention since they are “creatures” of the
government. Corporations owe their existence to legislation providing “limited
liability” which permits shareholders to be put at risk for only the amount
invested in the corporation instead of all their wealth. The invention of
“limited liability” was essential to the modern world. However, it allows managers
of corporations to take more risk than otherwise—since their total personal
assets are not at stake. Similarly, unions are legal entities sanctioned by
government. Government must, therefore be held responsible to adequately
regulate these institutions.
2. Lack of information
In a perfect market, buyers
and sellers have equal knowledge about the product or service being offered for
sale. Buyers are assumed to be able to evaluate what they are getting. With
some of today’s highly technical products, that is simply not the case and,
without government intervention, injustice may prevail. Consequently, laws such
as those concerning the safety of the product, the required information to be
made available and forced recalls of defective products can readily be
justified. Moreover, the court system mentioned above can be used to bring suit
where necessary—although that process is too costly and cumbersome to make relevant regulation unnecessary. We can’t just leave it to
the courts.
3. Undefined Property Rights
The justice system, as noted
above, must protect private property to even allow markets to function. Proponents of free markets tend to assume
that everyone knows what property rights are; they seem to think these rights
are easily recognized and unchanging—e.g. the right to own your own land,
house, car etc. The reality is more
complicated. Property rights are not always clearly defined. Rather they may
change as society and government changes. Consider, for example, such things as
computer software,pharmaceutical drugs or “air rights” above your property (Can
you put up tall buildings, wind turbines etc. as you please?). Without
protection, new inventions could be copied leaving no incentive for inventors
to develop new products or service.
To deal with this problem,
governments have over time introduced copyrights on books, patents on new
products, etc. Moreover, we now have water rights, air rights, radio and
television rights to airwaves, rights to pollute etc.. All of these intangible
property rights have varying degrees of clarity and enforceability.
The point is, that the market
can work only after government and/or society have defined (an possibly
assigned) property rights and developed the necessary means to enforce them.
4. Unjust Distribution of Wealth of Income
If you don’t have money, you
can’t participate in the market; only dollar votes count in the market! Many
may be wholly or partially excluded from the market because the “initial
distribution” was unjust. For example, the white man owns most of the land
taken at gunpoint from indigenous people. Where wealthy landowners own the bulk
of the acreage, the markets are unable to improve the lot of the poor. Without
government action, they remain unjustly marginalized.
A related market deficiency
concerns those who are unable to offer their services for pay in the labour
market. Those who cannot work—the physically or mentally handicapped, the
unskilled, the single mothers with small children cannot adequately participate
in the free market. While family and altruism have their place, they have
proven to be insufficient and a role is left for the government[6].
5. Boom & Bust: the Business Cycle
Most economists agree that
the market, if left to itself , would not settle at a satisfactory
“equilibrium”, i.e. at full employment and without inflation. Rather, we have inflationary boom followed by recessions or depressions. While the
government’s exact role at any point of time is hotly debated, the government
no doubt has a role through using macro-economic tools -- fiscal policy (e.g.
increasing spending, reducing taxes and running a deficit in periods of
unemployment) and monetary policy( the central bank reducing interest rates to
encourage investment and increasing them to fight inflation).
6. Monopolies and concentration of power.
I have recently
discussed the importance of competition and the need for governments to control
monopolies[7] Overall, I concluded, with Chewning, that “competition
has an overall salutary effect on fostering business conduct that provides the
best economic outcomes for the most people in a fallen world.” Consequently,
we must be careful that, in considering solutions to the economic ills of the
day, we do not unnecessarily reduce competitive forces. In addition, we should
generally be supportive of government actions which seek to maintain and
increase competition. Moreover,
governments themselves must not establish or protect monopolistic industries.
Markets, if left to themselves, would lead to concentration of power unless
products are perfectly homogeneous and many buyers and sellers can freely
participate.
7. Insufficient Necessary Goods and Services
While the market goes a long
way to provide the goods and services that society needs, there are certain
goods that will not be produced in a free market or will be produced in
insufficient amounts. Pure public goods
such as defense, policing and infrastructure such as roads and highways would
not be provided voluntarily by individual business. Other goods such as
education and health care would be provided by the market only to some—those
who could afford to pay for them. Such “pseudo-public” goods would not be
provided in the quantities that we as society believe are necessary. How much of
these goods are necessary remains debatable. For instance, we tend to agree
that elementary education is necessary but is university for all?
While the government has a role to ensure that goods
considered necessary are available, it does not follow that the government must
provide them itself. For example, instead of building and operating schools,
the government could simply distribute money or vouchers to parents/students
and leave it up to the market (including non-profit entities) to build and
operate schools from which parents could choose. A conditional preference for the market implies that
we leave as much scope as possible for using the market while ensuring that all
receive an adequate share of these necessary goods and services.
8. Neighbourhood Effects
A related, well-recognized
market failure is caused by what are referred to as “externalities” or
“neighbourhood effects”. These are
situations when “third parties”—those not involved in the market transaction
bear costs or receive benefits from the market transaction. By definition,
these costs or benefits are not reflected in the market price of goods produced
and are not considered in the decision processes about whether or not a seller
will produce the product or whether a buyer will purchase them.
Pollution and other
environmental effects are, probably, the most pervasive of these
“externalities”. If a steel making plant
sends toxic particles up its smoke-stack during the production process, these
particles fall upon its neighbours and their properties. In an uncontrolled
market, the company would not have to pay for the damage caused by its
effluent. Rather, the neighbours bear that cost in pain and suffering as well
as the actual cost of medical care, clean-up etc. The company does not have to include that
cost in deciding whether to produce the steel or in how much to charge for it.
On
the other hand, if the government was to charge the company for the amount of
particulate that it discharged[8],
that cost might cause it to produce less of the steel or change the process
involved to discharge less pollution. If they increase their selling price to
reflect the extra costs, some buyers will buy less of the final steel product.
Thus, the cost of pollution will be reflected in the production, marketing and
buying decisions. The “market” would reflect the true costs involved; the
externality would be internalized.
Many more examples of
neighbourhood effects could be mentioned. Obviously, if the market is left
uncontrolled, serious injustice may be done to innocent neighbours who God
requires us to love.
9. Non-economic goals ignored.
Moreover, markets have little
concern for non-economic goals such as maintaining strong families, providing for
the poorest, observing Sabbaths, treating employees "rightly and
fairly." In addition, without constraints, the market would
unquestioningly cater to the demands for abortions, prostitution, pornography,
narcotics, etc. Certainly, the market is not a perfect means to attain
Christian goals; it will simply reflect
the sinful preferences of depraved people.
10. Short-run orientation.
It is also argued that the market
is oriented too much to the short-run. Public companies are fixated on
improving the next quarter’s earnings while long-term impacts are said to be insufficiently
considered. There is some truth to this but it must be noted that markets have
an amazing ability to adapt. Before the current situation of low oil prices and
oil glut, it was (surprising in retrospect) common to see references to “peak oil”; oil production would
soon peak, eventually, we would run out of it. Action must be taken to ensure
that these resources were available for our grand-children. However, long
before a resource such as oil is actually used up, the market price would rise.
This increase would provide an incentive for users to conserve, for producers
to search out substitutes and improve techniques for discovering and producing
previously unknown or inaccessible deposits. That is exactly what has occurred
with the discovery and utilization of “off-shore” oil, oil-sands, shale
deposits,solar and wind. As long as prices are allowed to reflect true scarcity, the market has
the capacity to encourage the stewardly utilization of the resources God has
provided for us.
Moreover, it is questionable
that the government can do a much better job than the markets. In spite of the
fact, that our prime minister, Justin Trudeau, has just encouraged his caucus
to look forty years ahead, the sad reality is that politicians are primarily
focused on the next election.
In Sum
We have reviewed some of the
market’s imperfection.Proper recognition of these imperfections is important
for Christians; it should keep us from becoming uncritical market ideologues or
unconditional proponents of the view that the free market is the
Christian economic system. However, we must also not jump to the left and believe
that the government must take care of it all. Rather, as I’ve been at pains to
point out in this blog, we should have a preference for the market and seek
government action only to the extent that is absolutely necessary.
RELATED POSTS
Competition is Good; A Biblical/Economic Perspective
Choice of Economic Systems: A Conditional Preference for the Market—what does that mean?
Note: Most of the market
deficiencies noted above can form the basis of a future blog post; if you would
like me to expand on a specific area let me know in a comment or directly to johnboersema@rogers.com.
[1]
See my book, p. 165-173, I have set these out in more detail.
[2] They
could easily be rearranged to come up with a different number.
[7] Competition is Good; A Biblical/Economic Perspective
and Competition Good; Monopoly Bad; Government Permitted Ones also Bad!
[8] And use that money to compensate the
“neighbours”. Of course, government can also simply forbid such discharges and
force the company to adjust or close down.
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