Before Resorting to Markets
I’m glad E. D. Kain’s post about markets has been recovered. It’s easier (and fairer) to critique something that actually exists. He writes:
Choice and economic liberty are only useful instruments within society because they avoid many of the traps that come along with big government picking winners, rewarding rent seekers, and so forth.
I can’t say I agree.
Let’s start with economic liberty. Although it’s true that a well-run market will avoid the traps that come with state action, markets are also good in another way. I’m sure he knows this, but it bears repeating.
Markets discover distributed and inarticulate knowledge about preference and utility. Markets are useful not only because they avoid the government picking winners, but also because outside of the market virtually no one, government or otherwise, can tell who the “winners” are at all, at least not if they act alone. The government may be bad at picking winners, but so is everyone else.
We need markets because we need to them to solve a very difficult problem, the problem of gathering up widely distributed, paper-thin, ever-changing knowledge about what people want and need. As Friedrich Hayek put it,
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
Do markets do this perfectly? Certainly not. Markets can fail due to outside interference (see: government). They can also fail because defining property rights, reducing transaction costs, and accounting for externalities can be very hard. These difficulties must often be solved by resorting to politics, and thus incurring the problems of politics anyway.
But the real question is not whether markets work perfectly. It’s whether any of the alternatives can do the job as well or better. When we consider that the real work of markets is to gather up distributed knowledge and render it publicly legible, it seems clear to me that few other social institutions are even seriously trying. Many of the worst of them, government programs above all included, act as if this work has already been done — as if Hayek’s dispersed knowledge had already been aggregated once and for all, and as if the action at hand weren’t going to upset it all in the process.
To be perfectly clear, markets aren’t the be-all and end-all of public policy for me. They are, however, the option we ought to try first, because properly designed, they tend to tell us what’s going on. This is tremendously important, and it’s very difficult to admit that we don’t know it.
We should also resort to markets, possibly with creative modification, when the other avenues have failed. Not everyone will agree with me here, but I’d argue that “the” market seldom fails, as if “the” market were always and everywhere the same thing. It’s much more often the case that free choice constrained by the given ruleset has failed, so we need to rework the rules to better reflect market principles. Perhaps we’ll succeed, and perhaps we won’t. Politics may intervene, as it so often does.
And briefly, as to “choice.” I can’t believe that “choice” merely serves to avoid the pitfalls of government, and that it has no other function. (Does anyone?) The exercise of individual choice is aesthetically beautiful. It sharpens our powers of judgment and reasoning. It grants dignity and moral responsibility to all of us, and these should not be lightly surrendered.