My Market Preference is Conditional because of Market Failures

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.

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[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.

[3].Article 36 of the Belgic Confession. See Rom 13, 1 Tim 2:1 and 2, Deut 16,18-20, Jer 22:3.

[4] Private Property or Common Property: What does the Bible Say?

[5] Organized Procrastination or necessary Environmental Review?

[6]  Boersema, p.111

[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.

Organized Procrastination or necessary Environmental Review?

One of my favourite commentators, Rex Murphy, wordsmith at both the CBC and the National Post, recently presented a critique of Obama on the Keystone XL pipeline and Trudeau’s changes to the National Energy Board’s regulatory process under the title “Organized Procrastination”[1]. Murphy’s musings are always interesting but from this one I really had to share. I will add some further observations on regulation but first, “heeere’s Rex’[2]

  

Rex Murphy’s Take

 

The Keystone XL pipeline which was proposed to bring oil from the Canadian oil sands in Alberta to refineries on the U.S Gulf coast suffered through environmental reviews while “the Earth made eight full revolutions  around the sun” . “Keystone was given eight full years of protests, hearings, lawsuits,editorials, seminars,submissions, arguments and grandstanding—all to get to a big, fat “no” from Obama.”

“During much of those eight years, it seemed like Congress, the U.S. State Department or various unions might give Keystone a splinter of brittle hope. But the environmental lobby…crowded the halls of Washington or Ottawa. In response, the always elastic environmental review process was extended, redefined, subjected to presidential delays and put up for debate—again and again. Keystone, in other words, was utterly stonewalled.”

“At its climax , in the decaying days of his presidency, Obama, the great procrastinator, put the kibosh on the project to add gloss to his heal-the-planet pretensions. But not before the companies behind the project spent $2.4 billion, while the perpetual motion machine of the review process ground furiously and spuriously away.”

 

And concerning Canada’s pipelines in waiting (especially, the proposed Energy East pipeline designed to bring Alberta oil to Canada’s eastern coast):

“An environmental review process is an organized procrastination. And this week’s announcement of changes to the National Energy Board’s regulatory process-- it’s going to become more ‘robust’—promises to be a classic in this field. Along with the seemingly infinite expansion of “stakeholders,” the addition of a myriad of new consultations, reviews, panels, and inquiries, it has added the sublime requirement of measuring the “upstream” contributions to our newly Paris-taylored CO2 exhalations. That ought to speed things up."

“Canadians, particularly Western Canadians, and those with tenuous connections to the oil industry—you know, the thousands who used to have jobs in it—were surely delighted to hear that this new regulatory framework was not going to bring the Energy East pipeline ‘back to square one’. But that’s not much of a consolation.”

“ We’ve come to a strange point in this country, when industry and employment have to fight so hard to breathe, when instead of saying prayers of gratitude for the immense gift of our natural resources, we apologize for their existence and build a thicket of review and regulation to appease all those who are ideologically and temperamentally opposed to their exploitation. This is called, I believe, sustainability.”

Some  Observations

 

I have previously, concluded that:

“The Bible does not teach that the government may not exercise control over private property. Regulations are required to control the sinful nature of mankind. In the current situation, however, we should welcome deregulation and encourage continued review of all requirements and the weeding out of those no longer necessary. “[3]

Regulation is necessary. Certainly, good stewardship demands that we do protect God’s creation as much as possible—remembering that God gave us His resources to use.  These excerpts from Murphy’s article, however, illustrate emphatically that regulation comes at a cost and can quickly become overly burdensome. It seems obvious that pipeline approval processes must be streamlined and sped up rather than added to. Isn’t justice delayed, justice denied? We can only hope that the companies involved in Keystone XL debacle will be successful in their lawsuit seeking to recover some of the $2.4 billion lost in the process!

Quick resolution of the Energy East pipeline approval process and those proposed to the West Coast, is also critical in our current slow growth economy.  Why focus on increased government infrastructure spending to lift the economy and ignore pipelines which private industry is ready to finance? Are these not “nation-building” projects which will unlock Alberta resources to the benefit of all Canada? Or, would we rather continue to import oil from Saudi Arabia and other questionable regimes? Or, will we continue to ship oil dangerously by rail? Will that really significantly decrease green-house gas emissions? Let’s quickly decide on the necessary regulations and get on with the job. Our prime minister Trudeau needs to be the “cheerleader” rather than pretend to be an impartial referee--like Obama until he dictated the end.  Specify whatever conditions are needed (and already many have been) but get on with the job!

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[1] Rex Murphy, “Organized Procrastination”, National Post, Jan. 30,2016, p. A14

[2] With apologies to Peter Manbridge for you CBC viewers.

[3] John Boersema,  Political-Economic Activity to the Honour of God, Premier Publishing, Winnipeg, 1999

Competition Good; Monopoly Bad; Government Permitted Ones also Bad!

In the last post, I discussed the importance of competition and the negative aspects of monopolies and oligopolies (a limited number of sellers). Among other things, monopolies can produce less efficiently, charge higher prices, pay lower wages and provide products of lesser quality than would be the case in a competitive market. Consequently, the government has a role to play in encouraging competition and, where that is not possible, to regulate the monopolies. Nevertheless, monopoly power in the market place is often sanctioned—or even exercised—by governments. In fact, Ronald  Nash has claimed that it "is impossible to point to any single monopoly that did not arise as a result of special favours from government." ^[1] Now, as we saw in the last post, public utilities—e.g. electricity, water, natural gas—that use public land obviously require government cooperation. In this post, I draw attention to some other government-permitted monopolies—e.g. occupational licensing, milk marketing boards, taxis, labour unions, beer and  wine monopolies—that are not necessary or are being abused.

Licenses

Many businesses and occupations e.g.doctors, teachers, auditors, etc. are licensed by the government–at least initially--for the benefit of the consumer. Unlicensed– untrained, unskilled--practitioners are prevented from exercising their trade. While we would all recognize the benefit of not having an untrained doctor removing our appendix, the other side of the coin is that the number of practitioners is limited. Entrance requirements may be set so high that "Neighbours" may be excluded from exercising their calling and the favourable impact of competition is reduced. The current controversy concerning Uber is a case in point. The innovative company uses modern smart-phone technology to allow private drivers to offer ride-sharing in competition with the heavily regulated taxi industry. The government regulated taxi industry has been able to significantly restrict entry of new cabs and thus maintain prices .  The large user demand for Uber illustrates that Uber drivers can provide better service and (normally) lower prices^[2]; the monopolistic regulated industry has been taking advantage of consumers!

 Governments which approve and/or regulate these occupations must remain vigilant to ensure that the requisite skills/training and safety of consumers of the services are the only reasons for limiting entry.  Protection of current licensees from competition should not be accepted.

Supply Management

Canada’s system of supply management in the dairy and poultry industries provides another example of government-sanctioned monopolistic restrictions which permit producers to “tax” consumers with prices higher than those that would have prevailed in a more competitive market. The Canadian Dairy Commission, for example, has the authority to establish milk quotas and set prices in a “market” protected from import competition.  The system set up to protect the farmer has become a major barrier--preventing new farmers to enter the industry! Moreover foreign completion has been excluded by law. By preventing new competitors, existing farmers have managed to keep prices artificially high. Not only do consumers of milk pay these higher prices directly but also indirectly with purchases of milk-derived products such as butter, ice-cream, cheese and pizza.

           

Unions

Although, so far, the possibility of powerful companies misusing their dominant positions has been discussed, it should be recognised that any form of coercion which causes market transactions not to be voluntary, prevents the market from producing the most desirable results. Thus, powerful unions may create the same negative impacts as do monopolistic companies.  Union power is explicitly granted by government legislation which recognizes the right to organize, negotiate and strike. In all of Canada and most U.S. states, they also receive the right to exclude non-members from employment in a company, i.e. the “closed shop” with union membership (or at least the payment of union dues) required as a condition of employment.

Hay has noted that unions with their "increasing influence" in the market economy have been able to "protect their workers from technological change by insisting on restrictive work practices" and "to pressure employers into the concession of wage increases which cannot be justified on the basis of higher output."^[3]  Overly generous union concessions may well come home to roost in less prosperous times. The last recession which led to government bailouts of General Motors and Chrysler, is a case in point. Unfunded, health and pension arrangements negotiated in better times contributed to the default of these companies. Excessive union power almost led to the demise of a large part of the North American auto industry. It would seem natural that a government that seeks to apply biblical justice will have to be concerned about the misuse of union powers just as much as that of businesses--particularly where the government, through legislation, provides the union coercive power in the first place (e.g. "closed shop" arrangements and “right to strike” legislation).

On the other hand, it must be recognized that employers who have a dominant position in the labour market (e.g. “The only employer in town”) can also take advantage of their employees. In the extreme, governments may have a role to play here in, for example, providing information about job opportunities elsewhere, financial incentives to move and relevant training. Only when employees are relatively free to move to other alternatives, can the market provide a reasonably just wage.

The Ontario Alcohol Monopoly

 

Non-Canadians may be surprised to learn of another example of government sanctioned monopoly powers.  In Ontario,^[4]  the law provided that beer could only be sold through a chain of “Beer Stores” owned by three large (now) foreign brewers^[5] or through LCBO (Liquor Control Board of Ontario).  The Beer Stores also control all wholesale distribution in the province. While one might have thought that an up-date of this law would lead to a competitive market as in Alberta and many foreign jurisdictions, that is not the case. Now we are allowed to buy beer in grocery stores—but only in a selected few, only in six packs (instead of by 12’s or 24’s) and only at the price set by the “Beer Store” monopoly. Some competition!   These limited changes do lead one to wonder what is behind it the lack of real change. Can it be, as has been suggested^[6], that our government was influenced by campaign contributions by the companies and unions involved?

The LCBO’s which distribute and sell all alcohol products are pure monopolies. They are Ontario government owned -- albeit operated as a crown corporation and thus a step removed from political influence. The LCBO has even negotiated an agreement with the beer monopolists  that force us to return the wine and spirit bottles, that they sold to us, to the Beer Stores to recover our bottle deposits.

Now Christians might sympathize with such monopolies if the “control” part in LCBO was really essential. However, no data has been brought forward to suggest that in other provinces, states and countries where beer and wine are freely available in grocery stores, abuse of alcohol is more prevalent than in Ontario.  Moreover, the LCBO seems to be in the business of encouraging alcohol consumption since it regularly distributes door-to-door a glossy sales catalogue! Since the government appears to be doing a reasonable job of regulating the sale of tobacco in a wide variety of places, it seems plausible that they could also regulate the sale of alcohol without actually selling it. If it is necessary to have a returnable deposit on all alcohol containers^[7], then both wine and beer should be permitted to be sold by all merchants who will accept the “empties”.

Conclusion

We should generally be supportive of government actions which seek to maintain and increase competition.  Concerning the monopolistic practices mentioned above, government sanctioned restrictions on entry (e.g.  educational requirements for certain professions  and trades) must be continually reviewed to see that they meet the public interest.  The power of unions should be reduced.  Government run or sanctioned alcohol monopolies should be abolished.  Overall, reducing monopoly power should be our goal both in the government and the privates sector.

Readers are encouraged to comment either on the blog or directly to me at johnboersema@rogers.com.

RELATED POSTS

Competition is Good; A Biblical/Economic Perspective http://johnmboersema.blogspot.ca/2016/01/competition-is-good-biblicaleconomic.html

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[1]. See, e.g., Bernbaum, John, Economic Justice and the State: A Debate between Ronald H. Nash and Eric H. Beversluis, Christian College Coalition Study Guides, Baker, 1986,p.42  

[2]. I do not mean to condone any illegal activity—if it is that. If Uber is, illegal, the regulations should be changed to put all drivers on an equal footing but permit consumer choice and competition.

[3]. Donald A. Hay, Economics Today: A Christian Critique, Eerdmans, Grand Rapids, 1990,p.153.

[4] Of the Canadian provinces only Alberta and Quebec allows beer to be sold freely in grocery stores.

[5] In 2015, part ownership was also offered to small Ontario breweries with Board representation. These small brewers have also been offered free listing at the five Beer Stores closest to their breweries. Control, however, appears to be firmly in the hands of the three giants.

[6] Chris Selley: “ If Ontario banned corporate donations, would The Beer Store even exist?” National Post, Sept. 24,2o15, http://news.nationalpost.com/full-comment/chris-selley-if-ontario-banned-corporate-donations-would-the-beer-store-even-exist

[7] We don’t have deposits on any other containers in Ontario; they are voluntarily recycled through a “blue box” curb pickup with our regular garbage.