Monday, May 3, 2010

Flaws of the Free Market Part 1

In his book Development As Freedom, economist Amartya Sen has an interesting chapter entitled "Markets, State and Social Opportunity" that begins with this quote:
"'It is the customary of fate of new truths,' says T. H. Huxley in Science and Culture, 'to begin as heresies and to end as superstitions.'"
He explains that the idea of a free market was rejected by many in the intellectual realm because "every young economist 'knew in what respect the market systems had serious limitations: all the textbooks repeated the same list of 'defects'". This rejection led some to propose alternative methods of organizing an economy without a thorough understanding that these alternatives would have even more serious defects. The story of the 20th century really is a story of suffering caused by these alternative disasters - whether it be communism in Soviet Russia, China or Cuba, or the dictatorships of the Middle East and Africa.

The end of the 20th century was capped by Ronald Reagan's presidency and the fall of communism around the world. It was a triumphant of the free market.

I think this century poses much different challenges.

Again Sen:
"The intellectual climate has changed quite dramatically over the last few decades, and the tables are now turned. The virtues of the market mechanism are now standardly assumed to be so pervasive that qualifications seem unimportant. Any pointer to the defects of the market mechanism appears to be, in the present mood, strangely old-fashioned and contrary to contemporary culture (like playing an old 78 rpm record with music from the 1920s). One set of prejudices has given way to another - opposite - set of preconceptions. Yesterday's unexamined faith has become today's heresy, and yesterday's heresy is now the new superstition."
Sen calls for "middle path". In this chapter he spends time, once more, extolling the need of the market - as a mechanism of liberty - freedom to transact, which is a good in and of itself, but also produces good outcomes in may ways. I won't spend time, as he does in the book, with a wordy explanation. I think this view is widely believed.

But the second half of the chapter, he discusses some of the most glaring shortcomings:

Free markets and Inequality
He speaks to specifically people with disabilities or old age - who have both a decreased capacity to work and to convert what they make into a decent life.
"The equity problems have to be addressed, especially in dealing with serious deprivations and poverty, and in that context, social intervention including governmental support may well have an important role. To a great extent, this is exactly what the social security systems in welfare states try to achieve, though a variety of programs including social provision of health care, public support of the unemployed and the indigent and so on."
Free Markets and Interest Groups
This section speaks directly to this critique of the Federal Reserve, or at least its founding...
"There are many people whose interests are well served by the smooth functioning of markets, but there are also groups whose established interests may be hurt by such functioning. If the latter groups are politically more powerful and influential, then they can try to see that markets are not given adequate room in the economy. this can be a particularly serious problem when monopolistic production units flourish - despite inefficiency and various types of ineptitude - thanks to the insulation from competition, domestic or foreign."
"Here too, as in many other areas already examined in this book, the remedy has to lie in more freedom - including that of public discussion and in participatory political decisions. "

More later...

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