September 8, 2010
A Venture Capitalist People?
Chris explains how the state is often necessary to secure a working, competitive market economy. In brief: as a source of finance the state can provide start-up business opportunities allowing competition to emerge in markets that would otherwise be dominated by monopolists and cartel-running oligopolists.
As Chris says, this raises “basic questions”. Indeed; let’s explore the underlying ideas side of things.
Free marketers and libertarians are (rightly) wary of the role of the state as an agent for big business. Marxists can join this critique too, even if the intellectual foundations are different. Whether it’s corrupt politicians bedding down with fat cats, or the ruling capitalist class ensuring the means of production are ordered in the manner best suited to exploiting the workers, when the state props-up and favours the bloated beasts of capitalism the valuable benefits of competition, efficiency, growth, and opportunity are lost.
But whereas a lot of focus is paid to that side of things by left and right, the latter – and they have become intellectually dominant for the past 30 years – are far more reluctant to talk about the opposite problem: when markets left to themselves become concentrated in the hands of a few ruthless tycoons, with the same results. Railroad Robber Barons of 19th century USA, anyone?*
It’s not hard to see why the right is reluctant to talk about this side of things: if markets not only fail, but become concentrated in anti-market hands breeding collusion and oligopoly, then only the power of the state can reverse this. And that means state power interfering with capitalist systems of production and distribution, removing the property rights of tycoons and their shareholders. Not a pretty picture for the anti-state right, even if they want the end of capitalist competition to be secured.
But as well as these instrumental worries – about property rights, an interfering state growing more powerful, etc – that are likely to be shared only by a relatively small number of philosophically inclined right-wingers, there’s another idea doing work here and one more widely shared.
It’s the idea that there is something more “genuine” or “authentic” about (free) market production and distribution than that brought about by the state. This was the view I attacked Giles Wilkes – the much-missed Freethinking Economist – for holding unreflectively, leading to a rather acrimonious exchange. But I stand by my point: it is question-begging and arbitrary to assume that a production method or distribution is better if brought about by a free market just because it’s the free market. Whether the state or the free market is used is a question about means, and we should favour whichever turns out to be best on a case by case basis. The free market has no inherent superiority just because it’s the free market.**
This, however, is not the common belief. As Murphy and Nagel observe most people are “everyday libertarians”; they assume that the market is best and should be the default, and any departure from it must be justified – rather than starting from a baseline of all means being potentially equal and picking the best one dependent on circumstance, the market thus having to be justified rather than always serving as default.
We might, however, note that this view of the world – market or state – is at best a big oversimplification. The conmen at Connaught offer a nice example: a supposed market firm, in fact dependent on state contracts, and now going into administration because of public spending cuts. There is no straightforward market/state dichotomy here, and common-sense views about the market being “better” just because it’s the market aren’t going to get any coherent traction (not that this ever stopped New Labour, mind).
Which takes us back to Chris’ point. He wants to know whether it’s possible to view the state as an agent of market-enablement rather than an “African chief” dispensing goodies from on high. My answer: that will depend on whether the common-sense view of an antagonistic dichotomy between state/market can be overcome, and the fallacious view that market forces are somehow more “authentic” than the state abandoned.
My suspicion: no, because that dichotomy has become deeply embedded in the popular psyche, and serves some powerful interests. Consider: in a world where most people junk the simplistic state/market dichotomy which privileges the latter by default, could George Osborne get away with his drivel about the public sector shrinking drastically to allow the private sector to expand…in a week when a private firm has very publicly gone under because of public sector cuts?
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*Oh sorry, I forgot, that was a libertarian “golden age”. Rofl, as they say on teh internets.
** And don’t say that I’m begging the question. It’s incumbent on those who would say the free market is inherently superior to establish that first. And then we can have that fight.
Luis Enrique said,
September 8, 2010 at 12:46 pm
a lot of these arguments are covered here
http://www.savingcapitalism.com/
as one reviewer puts it:
“Saving Capitalism from the Capitalists is a highly original study of the ways in which vested interests – “incumbent industrialists,” – in the author’s terminology – have sought throughout history to protect their wealth and power by rigging the market structure, even subverting free markets entirely when it suits them to.”
Tim Worstall said,
September 8, 2010 at 1:15 pm
“It’s incumbent on those who would say the free market is inherently superior to establish that first.”
Sure. Something can only continue to exist (for example, the production of some item or other) in a market system because people wish to purchase that something.
There is, therefore, voluntary demand for it.
This is not true (necessarily) of things (say, the production of some item or other) which are produced using the powers of compulsion available to the State.
QED, market production in inherently superior. It can only exist if people actually want it.
Paul Sagar said,
September 8, 2010 at 1:50 pm
Ok Tim, what about when the market produces things that people want but supplies them highly imperfectly and in a way exclusive to many because of cost despite other relevant moral considerations (eg need) being in play – like healthcare, say.
And sure, mad Soviet production might lead to mountains of white elephants. But all that tells us is that in the production of white elephants, market forces would be a better bet (and if no white elephants result from that set up, that’s all to the good).
But these are superficial examples and I worry that you are trading on a variation of some thought that runs a) only the market can know when something is demanded and b) the market is always best at suppling this demand.
In some cases, that will be true. But not always. We know that people want trains and railways – not just for personal use, but collectively insofar as they promote economic growth etc. Whether we the instigate a privatised or nationalised system is a matter of judgement according to circumstance. It’s daft here to say “oh but the private market system is better just because it’s the market”, and even dafter to add “and that’s because markets only respond to real demand” – because that manifestly isn’t what we’re talking about.
I don’t disagree with you that OFTEN markets will be better bets and indeed precisely because they don’t produce in line with the imagination of some central planner. But we have to decide when and if that’s so on a case by case basis – and when non-market modes are preferable, there’s nothing less “authentic” or “genuine” about that.
Tim Worstall said,
September 8, 2010 at 2:10 pm
Oooh, no, now you’re going a long way too far. I’m well aware that markets produce sub optimal amounts of public goods etc (indeed, say so, loudly and often).
I’m well aware that markets aren’t perfect. Even that they’ll often produce as side effects things people don’t want (externalities like pollution).
Even thaqt markets won’t produce, at times, things that people do want.
I’m making one very narrow claim here. That markets will not consistently produce, as their primary purpose, things which no one wants.
State direction of the economy will (or at least, in practice, does).
My claim is only that for that narrow reason markets are better and should be seen as the default.
For example: why hasn’t the market provided high speed trains across the country? No, not why don’t we have them, but why, if they’re so wonderful, don’t they already exist? Pretty high speed trains were after all provided by hte private sector.
OK, we can make a number of stabs at this. We’re more crowded now and State power is required to clear rights of way (as they often were before in fact). Or the private sector is too short term to do something like this (although BP and Shell both have 30-50 year planning horizons so I’m not sure about that).
Or, we could ask ourselves, well, can a private company make a profit doing this?
No? Well, perhaps we might want to start thinking about whether high speed rail is in fact profitable then? You know, worth more than the resources which would be consumed in building and running a high speed rail network?
Which really gets us to the nub of the matter. We shouldn’t be doing anything at all where the results, the outputs, are worth less than the inputs. That’s just making us all poorer.
And this is true whether the actor is the State or private actors in markets. So even if it is the State selected as the actor, we still want said State to act as a market actor would in a world where externalities were internalised: to make a profit in short.
Thus market thinking is indeed our bedrock thinking.
Peter said,
September 9, 2010 at 5:17 pm
Tim Worstall,
This very modest claim sounds right to me. But it doesn’t follow from that that “markets are better and should be seen as the default”. It could be that there are lots of benefits to non-market solutions, that are worth paying the price that (sometimes) things get produced which nobody wants.
Tim Worstall said,
September 9, 2010 at 5:24 pm
“But it doesn’t follow from that that “markets are better and should be seen as the default”. It could be that there are lots of benefits to non-market solutions, that are worth paying the price that (sometimes) things get produced which nobody wants.”
There are all sorts of non market solutions that I think are just absolutely fine and dandy. There are interventions into market solutions which I think are great.
However, you’ve rather given away my point when you say “worth paying the price”. Price compared to what? To that unadorned market solution.
Thus market is the root, the default position. We calculate whether non-market (or intervened in market) solutions are worth the price as compared to what the unadorned market would provide us with.
Peter said,
September 9, 2010 at 10:33 pm
We calculate whether non-market (or intervened in market) solutions are better than the alternatives on offer. Likewise, we calculate whether market solutions are better than the alternatives on offer.
Trying to pass the market off as some sort of default is just an intellectual sleight of hand to avoid giving an argument.
Dan said,
September 9, 2010 at 11:55 pm
Whether the state or the free market is used is a question about means, and we should favour whichever turns out to be best on a case by case basis.
Speaking of begging the question, it seems to me as though the sentiment in this paragraph (“it’s the ends that matter, not the means”) absolutely begs the question against the best arguments for libertarianism, namely that it’s the process that matters, not the eventual outcome. But at any rate, I get the impression that a lot of everyday libertarianism comes from an unarticulated commitment that many people have to something like the principle of self-ownership, and a consequent entitlement to the fruits of their labour. Personally I’m happy to say that it’s really that principle (plus some plausible story about the initial acquisition of property) that means free markets are the moral baseline against which deviations should be compared.
Paul Sagar said,
September 10, 2010 at 12:28 am
Tim, I know I still owe you a reply.
Dan, it’s the deontological autism and the disregard for consequences – a manifest and abidingly important aspect of ethical and political life – that makes your breed of weird rights-fetishist libertarianism so egregiously stunted, inadequate and morally deformed. Sure, pure consequentialism is very dumb too, but salus populi suprema lex esto, not fiat justitia ruat caelum.
Paul Sagar said,
September 10, 2010 at 2:52 am
Tim,
I do worry that at some level there is a confusion doing some work in your thinking, which perhaps runs the error of moving from the (good) observation that markets don’t produce things people don’t want to the (incorrect) inference that markets always produce what people do want. But I’m not sure if that’s really the case, so I’ll focus my reply elsewhere.
Namely, on what Peter is getting at. You say that markets only produce things that are actually demanded. OK, that’s a truism about markets. Here’s another one: sometimes markets are not as good at producing things as (say) state-supported monopolies, because of, say, the relevant economies of scale in a given situation.
Now what? As Peter is getting at, what we have to do is tot-up the pros and cons of different possible production arrangements, and then pick the best one dependent upon circumstance. It’s simply question-begging to say that markets should be “the default” because until we have the concrete circumstances down and under discussion, we don’t know what’s going to be most appropriate. Talk of “the default” is thus fundamentally confused.
It’s not good enough to say “ah, but markets only produce what is actually demanded” as though that somehow provides adequate grounds for always plumbing for markets as the default. For the blindingly obvious reason that you haven’t provided an argument as to why exactly only producing things that are actually demanded is a cardinal value such that it automatically is accorded privileged status regardless of any known specifics about actual situations. Sure, ceteris paribus we’d rather not produce things that are not actually demanded. Fine. Great. But what follows? You seem to think the argument ends there – but quite obviously that’s where it starts.
More generally, perhaps I should (sort of in line with Dan’s comment, but I was going to make this point anyway) delineate the above – i.e. questions of what process should be used – from considerations about what consequences we should tolerate/advocate/justify. The “everyday libertarian” view is typically that consequences/outcomes generated by market forces are somehow more genuine or authentic than those generated by (say) the state, and that departures from market-outcomes need special justification whereas market-consequences themselves should enjoy some privileged status and special justification is required to alter them.
Of course, kerrrazie philosophical libertarians like Dan think that’s so because of mad deontological thoughts about rights, justice in holdings and transfers, pure process trumping awful consequences, and so forth. But insofar as we junk that sort of narrow philosophy, hilariously grounded in complete ignorance of its own intellectual metaphysical foundations in Christian thought, whose secular erosion makes the concepts of rights – and especially property rights – utterly problematic, we are left with decisions about which processes to use to secure a complex matrix of goals, methods, consequences and values.
And when we do that, there’s no reason that market outcomes should get some privileged status just because they’re market outcomes. Instead, we should favour market outcomes when – on balance, after considering a wide variety of factors – we decide those are the best/least worst. Which is fine; I’m all for markets in their place. But it’s just stupidly question-begging to assume that they must always be the default and that it’s departure from the market which a foriori and ex hypothesi need to be justified – for precisely the reason that it’s not appropriate to talk of “defaults” in absence of facts of the matter.
Peter said,
September 10, 2010 at 7:26 am
Dan,
I can’t speak for Paul, but the way I’ve intended to present things above does not beg the questions against those who think that distributive justice is just about historical process. When I say “We calculate whether non-market (or intervened in market) solutions are better than the alternatives on offer. Likewise, we calculate whether market solutions are better than the alternatives on offer” we take into account deontological considerations etc (if there should be any).
Now obviously I think that the deontological constraints are different to what you think they are. That’s fine. That just means we need to have an argument about which deontological constraints (if any we ought to have).
Apologies if my comment above sort of implied I was favouring consequentialism.
Tim Worstall said,
September 10, 2010 at 9:10 am
“For the blindingly obvious reason that you haven’t provided an argument as to why exactly only producing things that are actually demanded is a cardinal value such that it automatically is accorded privileged status regardless of any known specifics about actual situations. Sure, ceteris paribus we’d rather not produce things that are not actually demanded. Fine. Great. But what follows? You seem to think the argument ends there – but quite obviously that’s where it starts.”
As a wider philosophical point, perhaps, but not in economics.
For we’ve boxed ourselves in at the start with our definition of economics: how do we allocate scarce resources so as to satisfy the maximal amount possible of unlimited human desires?
Thus the answer to the question within economics of “why markets?” is indeed that they don’t produce things that people don’t want. Which is the very point of what we’re trying to study: how to get those things that people want.
Dan said,
September 10, 2010 at 12:20 pm
Dan, it’s the deontological autism and the disregard for consequences – a manifest and abidingly important aspect of ethical and political life – that makes your breed of weird rights-fetishist libertarianism so egregiously stunted, inadequate and morally deformed. Sure, pure consequentialism is very dumb too, but salus populi suprema lex esto, not fiat justitia ruat caelum.
I never said you have to disregard consequences entirely – in fact, I think if you were to attempt to charitably reconstruct the “everyday” view of these things, most people would indeed give some weight to economic consequences. But that doesn’t mean that no weight is given to considerations of entitlement, self-ownership, and process – that’s just incredibly implausible. No one in his right mind believes that he has no rightful say over what happens to the entirety of his income, even though that is what (e.g.) Rawlsians believe. So you can sneer at rights-based libertarianism all you like (and since it’s hard to refute a sneer, I don’t really know what to say in response, except that your attack here could be used in a textbook as an example of the genetic fallacy) but by according it some, even if not decisive, weight, it is possible to explain why free-market consequences form the moral baseline.
Peter said,
September 10, 2010 at 5:28 pm
Tim,
<As a wider philosophical point, perhaps, but not in economics.
For we’ve boxed ourselves in at the start with our definition of economics: how do we allocate scarce resources so as to satisfy the maximal amount possible of unlimited human desires?
It doesn’t follow from the fact that markets don’t produce that which is not demanded that markets are the best way to satisfy the maximal amount of human desires.
Dan,
You can’t use this argument. For you, as a very extreme (I don’t mean that pejoratively) deontological libertarian don’t think that desert or need have any role to play in distributive outcomes. This is just as alien to the man on the street as the thought that pre-institutional entitlements play no role.
Tim Worstall said,
September 10, 2010 at 5:57 pm
“It doesn’t follow from the fact that markets don’t produce that which is not demanded that markets are the best way to satisfy the maximal amount of human desires.”
i haven’t said that they are. I’ve quite clearly in fact said that at times they’re not.
What I am saying though is that the market outcome is our reference point, the one by which we should and do measure the merits or not of other systems.
Liam said,
September 18, 2010 at 5:06 pm
“And when we do that, there’s no reason that market outcomes should get some privileged status just because they’re market outcomes. Instead, we should favour market outcomes when – on balance, after considering a wide variety of factors – we decide those are the best/least worst. Which is fine; I’m all for markets in their place. But it’s just stupidly question-begging to assume that they must always be the default and that it’s departure from the market which a foriori and ex hypothesi need to be justified – for precisely the reason that it’s not appropriate to talk of “defaults” in absence of facts of the matter.”
Having read the above exchanges, I notice the presence of a problem with the manner of argument that is quite common in many a discussion about political economy involving markets.
The above quote, taken from Paul, is true to the extent that one selects any process for achieving certain ends according to some defined utilitarian concept as to what is best, or worst. However, as far as I can see, it is only the concept of the market process that allows us to take a generic concept, and understand without a great deal of further clarification how the rules of the game would apply to a specific circumstance. The same cannot be said for other systems for organizing the allocation of resources. So for example, the idea of the state monopoly is articulated by many a person without the burden of ever having to mean anything truly specific by it. In particular, I would demand a more detailed explanation of how such alternatives would be implemented in practice, and the sense in which, if it will be a state institution or be in possession of certain privileges bestowed upon it by the state, it will remain accountable to the democratic process that creates it. The history of democratic institutions being able to effectively control processes that are not in and of themselves easily carried out democratically is extremely poor due to certain fundamental economic features of democratic systems, whereas clearly defined market systems are inherently suited to solving such problems, and I think there is a general lack of recognition of this point.
Libertarians often are very cognizant of this feature of markets and this largely explains the demand that arguments be made “for state” intervention rather than “against non-state” actors forming their own solutions. However, I don’t think that this mode of thinking needs to have sort of deontological implications that you ascribe to libertarians, and you will not find it to be a general feature of mainstream libertarian philosophical writing, certainly not in the Hayekian tradition at any rate.