Why pure free markets will fail (and what might work better)

Modern popular discussion about socioeconomic systems revolves around how much government we should have (more? left wing. less? right wing). But that naive dichotomy is based in and to some extent obscures some more interesting questions.

Slightly more sophisticated discussions talk about the market, and whether it is a good thing or not. When we talk about big government or small government, we are often really talking about small market or big market. In our heads, socioeconomic organisation is state+market, government+corporations. That is also a false dichotomy, but if we dig a little deeper again there are more interesting questions.

We can also ask, do we want bottom-up systems, or top-down systems, for running our lives. Much more interesting! To modern sensibilities, the top down system is anathema. It’s hierarchy, elites controlling the proles. We have a gut reaction against that, as we might well be advised to, because we don’t identify with the elites, we identify with the proles, and so we don’t want to be thus controlled. Actually, some people clearly do identify with these elites, they are classical conservatives, the type of conservatism that dates to before the right rejected “big government”, and the only type which really deserves the label, *except* that the society they want to conserve hasn’t existed for at least the better part of a century. Note that this imagined elite isn’t based purely on money (it’s not a modern concept), but on a network of those intended to rule; one way into this small circle would definitely be immense wealth, but wealth isn’t the whole story.

So bottom-up systems sound like the answer, right? Well, maybe. This is a big space we are papering over with a dichotomy. Just because we reject top-down systems, doesn’t mean bottom-up systems are “the answer”. I can expect good systems (what is “good”? I’ll come to that) to have an attribute of bottom-up-ness to them, but I can’t say much more than that.

My unwillingness to commit here is an aberation though, as far as I can see, probably a character flaw. Mostly people don’t have this problem. In fact they are happy to simplify further!

Over the last few centuries we’ve managed to simplify the idea of the bottom-up system, into the idea of the free market. Bottom-up organisation is often a codeword for free market, especially in libertarian circles. So in modern discussion, to accept bottom-up organisation is usually to accept the free market. Even better, in our wonderfully polarized discourse, to accept bottom-up organisation is to rabidly defend every aspect of free market organisation, and often even to defend capitalism and corporatism, the latter clearly being an assertion of the worst kind of top down control inside the shell of a bottom-up system. Perhaps I am too hung up on logic, but I find this baffling.

Let’s get back to the idea of free market. What is it? Here’s a tidbit from wikipedia:

“A free market is a market without economic intervention and regulation by government except to enforce ownership (“property rights”) and contracts. It is the opposite of a controlled market,
where the government regulates how the means of production, goods, and
services are used, priced, or distributed.”

So that’s a kind of bottom-up system. There is no top down control (except that there is, the prohibition of force, but let’s paper over that). The market is made up of property ownership and contracts between consenting individuals. Contracts are a bottom up rule, definitely. Private property, enforced from the top as it is, and doled out in some original fashion also in a top down manner, or at least somehow outside the system, is a bit more questionable.

How do we say anything else about this system? We can say if it is bottom-up or not (free market has the attribute of bottom-up-ness, although I don’t think I could say it is 100% so), and we can probably say whether it is self-sustaining or not (when you run it, does it continue to exist on its own?). And we have said that bottom-up is good. So free markets are good, no?

The problem is that we can’t say that bottom-up is good, as has been argued above. Bottom-up-ness is merely a necessary condition for a good system, whatever that is. Clearly we are missing criteria for what is good, and a method for judging a system against those criteria.

How to define good? Here, values enter the picture. Good is what we believe it to be. It may also be that there is some absolute foundation for what is good, but I can’t hope to address that here. I will posit that there are cross-cultural values (like injunctions on murder and incest).

I don’t want to argue the rest of this using an abstract notion of what are the right values. Rather, I’ll propose some which I think are more or less uncontroversial (for whom? I’ll get to that). Simply, we all want to be free. We try to approach maximal individual freedom. I will allow here that if you don’t believe individual freedom to be a basic value, parts of the following discussion wont be supported.

I think from freedom you can generate a lot more values. Firstly, we have equal consideration of interests, what they call  universality in politics. Maximal freedom is impossible because we interact with others with incompatible desires. The best we can do is to say, let’s all not coerce each other, and let’s treat each other’s interests as equal in weight, and work from there. I’m ignoring an elitist view here where you might say that a few can do better in a small group by treating their interests as worth more than everyone elses’, because I think all such systems will end in a lower over all outcome (not least of which is because the people who propose them and benefit from them tend to be arseholes).

And you can keep generating more and more specific subrules. The Golden Rule flows from the preceding paragraph. Don’t murder people, don’t unfairly discriminate, etc.

So how does the free market look when we judge it according to a reasonable set of values derived from the principle of individual freedom? It comes off kind of tarnished I think. For one thing, people have uneven resources in the system, and we find that the more resources you have, the better you are likely to do. People start with uneven resources as accidents of birth. So, that’s not really compatible with equal consideration of interests, and if we say that more resources tends to mean more freedom, it’s not really working. We know that resources tend to distribute according to a power law.

As you get more specific rules (people should be able to live a dignified life… eg: enough to eat, roof over their heads, etc), you will necessarily keep finding failures; it just doesn’t do this for some (not enough resources down the tail end of the power law curve). Overall, it doesn’t measure up terribly well.

Here we come to blows. Progressives want to fix these problems by addressing them directly. Not enough food? give people some. Incomes too disparate? Smooth it with tax and benefits. Not getting education to the poor? Government makes some. Meanwhile free-market enthusiasts say we shouldn’t do this, because it breaks the bottom up system, and you’ll have unintended consequences of your additional top-down constraints.

Note that unintended consequences means unintended bad consequences. Unintended good consequences would be serendipity, a boon. Unintended bad consequences means you have made a modification to more closely approach the ideal, but it has not worked and/or has moved you away from the ideal in some other unforeseen way.

I contend that no simple, preconstructed system that doesn’t directly incorporate values is
going to be able to solve our problems. The values we hold about how human society should function are not parsimonious, and a parsimonious system, preconstructed, can’t address them. That doesn’t mean we can’t create a just, free society, it just means it’s going to take tinkering. It’ll be an iterated solution, not a gleaming marvel of platonism, sprung forth fully formed from the mind of Zeus (or Adam Smith, or Marx for that matter).

We need a meta system where we have our proposed system and our values. We run the system, measure against our values, and modify the system accordingly. Wash, rinse, repeat, ad infinitum.

I’m reading the Black Swan (Nassim Taleb) at the moment, and the point is made clear that we can’t predict what is going to happen in a social system, it’s too complex, at least past a very short threshold. So we need iteration. This isn’t a pre-plannable mission, it’s driving a car across unknown territory; we have to actively steer.

Now there’s a lot to pick at in what I said above. Who determines the values? Who determines how we measure against them? Who determines how we modify the system in the light of the values? Who is this “we”?

My answer is, that “we” is all those people under the influence of the system. This is where we get back to bottom-up. We need a mechanism so that we as a whole can determine values, measure the current state of the system against them, propose modifications to the system, choose which to implement, and implement.

Arguably a government is supposed to be this, but we feel as though it is the canonical example of top-down. This is fair, and it’s at least in part because we use a system designed for our communications impoverished past. It was impractical to include us all in all steps, because the logistics wouldn’t work. Just voting in elections was a monumentally expensive, lumbering, error prone process.

That’s no longer the case. Everyone can be consulted. Everyone can propose new approaches. Everyone can be able to take part in decisions. It’s cheap and instantaneous. Groups can come and go and be entirely ephemeral. Also, we should read “everyone” here as “everyone who cares” if it’s looking intractable!

We can make a new kind of organization, an organic, bottom-up one, which can drive our socioeconomic organisation down the highway of the future, and keep us from running off the road.

Notice that I haven’t proposed an actual system here, I have proposed some attributes/elements of what a good system might look like, some qualities it might have.

Free markets do not fit this bill on their own. They could be a part of the solution though. They do have some lovely properties in allowing weak tie groups to function, and that’s a difficult thing to achieve. It allows you to scale. But we need to not be afraid to regulate markets. I’ve shown above that regulation doesn’t need to be a top-down activity, it just needs to be outside the maret, and can use a different type of bottom-up system which is more directly tied to first level values.

It must be noted that there is some automatic behaviour in a free market; it’s meant to adapt to the preferences of the participants, adjusting prices to match supply & demand. However, individual market preferences are not values. One of the best ways to see this is that markets can’t enforce an implicit value of their own system, that coercion is wrong. Instead they rely on an external agency to enforce this, top down. There are proposals to do polycentric law, policing, etc, which are supposed to deal with this, but I’m not going to address those here. It sounds like warlords to me.

A strong objection to everything I’ve said above is to my choice of values. Free market advocates can and often do say that we are looking at the wrong set of values. Instead of lots of first order values about how we treat people, we should have second order values about creating and maintaining a bottom-up system, not interfering, and letting it solve the first order concerns. The free market will solve your problems if you just get out of its way.

I have a huge problem with this, which is that you are adopting the rules of the system you are proposing as your values, then judging it against these values, finding them 1:1, and declaring success. These second order values are not actually values at all! They are a stub placed where values should go.

I think it is the job of values to be about people. They are meant to be a way of deciding whether your behaviour or system is appropriate. Redeclaring your values to be whatever the behaviour is your are measuring is to perform a kind of ethical lobotomy.

Crucially, it also renders you unable to steer as you navigate the future.

You could build a car with no controls, no steering wheel, no accelerator, no brake; you just turn the ignition and it goes whichever way the wheels are pointed. You could logically say that it is working correctly, even as you plow into a tree – it went where its wheels took it. You could say, yes, I’m seriously injured, but what’s wrong with that? My health isn’t part of the value set. It’s wrong to care about it.

You could even build in some more clever simple rules – for instance, the car detects obstacles and avoids them, changing direction or slowing down and steering around them. Now the car system is self sustaining. But where is it going? It’s on a random drive through unknown territory. Are you getting to where you want to go? You can’t even ask the question, because you haven’t defined any goals.

You have to use first order values, in my opinion. They’re for steering, and you need to steer, because you cannot design a machine, a system, to negotiate such complex terrain as the future without a steering mechanism. You can’t even give the machine itself values and the ability to steer based on them without human intervention (here we are in AI territory), because what is important is the fluctuating and partially contradictory values of all the passengers. Those living inside the system must have the ability to equally participate in steering the system.

I think a lot of problems in western culture arise from us believing the myth that second order values are ok, so we don’t notice that we actually have no values, just a kind of post-amputation stump.

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Why pure free markets will fail (and what might work better)

2 thoughts on “Why pure free markets will fail (and what might work better)

  1. The Destructionist says:

    THE EVOLUTION OF CAPITALISM

    Capitalism was founded upon basic principles: production, supply and demand, and capital accumulation. It is a social theory whereby prices are determined by profit and loss, as well as market interest and fluctuations.

    Although I understand the need for a free market enterprise, such a theory should not imply that we are willing to disregard our environment, or sacrifice the needs and comforts of our humanity in an attempt to realize higher profits (a.k.a., BP, Lehman Brothers, Goldman Sachs, etc).

    Capitalism may be wonderful, but like anything else, it is still a flawed system. It’s a work in progress. It needs to be tweaked here and there in order to perfect its balance and to soothe the inordinate swings that occur day-to-day in our financial markets. If left unchecked, however, such a system will prove to be our economic downfall.

    How so?

    Well, for one thing, there is only so much profit a business can make from a product before it is left to cut costs in both quality and workmanship. In order to continually sustain a profit, businesses have to create those same products with lower quality ingredients and cheaper labor: which means that they must pull up stakes and move to other countries like China, Taiwan, or Mexico in order to survive. What does this eventually mean for people like you and me? It means that the very financial theory that promoted our country to super power status has turned on us. It means that the American workforce is now expected to work harder, longer, cheaper, and faster if we are to compete with the global economy now breathing down our necks.

    Where do we go from here?

    George Orwell had it right, to some extent, when he wrote his book1984. Many years from now, money will become worthless and the global populace will be employed and subject to hundreds (if not thousands) of individualized corporations that managed to survive attrition through merger aquisitions. It will be a feudalistic society: every corporation out for blood and vying for global dominance and absolute power. Our children and grandchildren will be there too: housed, clothed and fed by these various corporate entities; all the while being sent out on occasion, like brainless automatons, to errands of war, in an effort to absorb the weakest corporations into the fold. After all the dust settles, and everything is said and done, the remaining corporations will finally merge into a one-world government.

    Science fiction, you say?

    (…I’m left wondering.)

    1. emlyn says:

      Well, that’s a possible dystopian future. I don’t think I share your certainty in that, but I do think modern capitalism, extrapolated from here, doesn’t lead anywhere that we want to go. Luckily we are thinking beings who can reinvent the way we do things. The current system isn’t a law of nature, it’s an invention, and we can change that.

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