Questioning Markets
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WORK IN PROGRESS
Markets are very powerful tools. When they "work", they create level playing fields, increase access, optimize capital flows, and catalyze value creation. I'm currently selling two broken iPhones and can reasonably expect to make about two hundred dollars between them. I had no idea, and where it not for a large, Internet enabled market, I never would have. It's the market itself which informed me and rewarded me with the value of the phones.
On the other hand, one of the phones I'm selling is a used phone I bought to replace my wife's broken phone. It stopped working two days after it was purchased. The guy that sold it to us was pretty decent, but reasonably didn't want to return our money because he had no idea what we'd done with the phone.
So, the free market means I can get top dollar for broken phones, but finding a used working phone is highly risky.[notes 1] But what's the difference? What is it that's working so well in one case, but is so chancy in the other?
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Defining Markets
Broadly, we can think of markets from a "top down" or "bottom up" perspective. A top down approach conceives as a transcendent, emergent force. This often leads to an over-zealous trust in "the market" as something bigger, smarter, and better than ourselves and leads to maxims such as "Don't question the market."
Bottom up approaches tend to conceive of markets in technical terms. Here we look for the existence of something called "free trade". The less regulation and "outside" influence, the more "market" we have.
Both definitions are relatively useless. The top down approach usually has the effect of taking whatever currently is (or the variant favored by speaker) and just labeling that "the market". In the top down view, "market" is often just a synonym for "the way things should be".[notes 2]
The bottom up approach fares better in the sense that it's useful to establish "operational definitions", but in terms of defining markets in some general sense... I'm not so sure. It's hard to think of a succinct definition that really fits what most people mean they say "market". "[T]rade or traffic, especially as regards a particular commodity"[1] seems to work well, but that applies just as well to the market in a centrally planned economy as that of a free market economy.
TODO: I think we should just talk about "free markets" and avoid this talk of "markets" in general. It's really "free markets" we're examining.
Questioning the Market
Society has determined that outside the confines of war and policing powers, violence is never legitimate. Consequently violent action, whether it would be profitable or not, is not permitted. This creates a whole area of restriction and regulation which limits action regardless of market judgment. These restrictions are universally upheld by the members of society for even the violent criminal is in favor of protection of his person from others and the most ardent capitalist desires the police keep the poor and destitute from taking the obviously profitable action of murdering him and stealing his possessions.
Even as we admit that there exist limits, we must also admit that the historical record and empirical evidence tend to favor a minimal set of limitations. In general, the market is the most effective and efficient distributor of resources for most if not all perspectives. The less restricted a society's economy, happier, more productive, and wealthier that societies members tend to be.
Market Mistakes
It's easy to take that single correlation and consider the question closed. This is in effect the position of the maximal capitalist. There is a problem here, however. In most recent surveys, Norway beats the US both in standard of living, satisfaction, and purchasing power. In other words, the average Norwegian is happier and can buy more stuff than the average American. The maximal capitalist has an even bigger problem with the absolute monarchy of Qatar, which has the highest purchasing power parity per capita in the world.
There are certainly arguments that both these nations enjoy a big bump from their oil reserves. This defense is complicated for two reasons. First, relying on the oil bump puts the maximal capitalist in the position of arguing against their own position. By raising the idea that differences in oil reserves make the comparison unfair, ones is explicitly injecting an extra-market judgment into the discussion.
Second, if we are to admit a certain level of sophistication which extends the discourse beyond the balance sheet is necessary even for the maximal capitalist, we are still left with the problem that the value of the oil reserves is not determined in a vacuum. If the US market had diverted a vanishing fraction of profits to alternative energy research 10 years ago, the US would not be so dependent on oil, oil would not be so valuable, and the US would be in a relatively stronger position.
We know this to be the case because major advancements in alternative energy have been made at relatively little expense and the technologies underpinning those advances have been around for quite awhile. All that has been wanting is minimal investment.
The current situation was not hard to foresee. Many did see it and spoke loudly about it. The only fair conclusion is that the US put itself in a position to be eclipsed by oil rich nations. In other words, the market made a mistake.
Engaging the Market
How to reconcile the fact that market manipulations are almost always a bad idea with the fact that the market is sometimes insufficient and incorrect? One position holds that reliance on the market is the best we can do. There is simply so much noise/luck in the system that less free markets sometimes win out, but the best tactic is still a maximal capitalist economy.
This is not a bad or irrational approach, and at one time it may have even been the best approach. In modern times, our ability to gather and organize information and our historical perspective allow us to do better.
If we turn our attention to the idea of natural monopoly, we see an instance where extra-market judgments seems to provide superior results vis-a-vie a naive free market approach. The historical example of unregulated railroad building and the subsequent economic, social, and national failure of the US to build a viable rail and shipping infrastructure is one of the best document and understood examples. Today, it is taken for granted that utilities and certain infrastructure require a regulated monopoly to function--at least during certain periods of development.
One could characterize these instances as market failures and determine that extra-market judgment is required. It is also possible to understand the failures in terms of our failure to engage the market. In other words, with perfect information between actors the competing rail lines that insured that no rail line succeed might have been able to organically form their own natural monopoly. If one has faith in the market, this organic natural monopoly would be assumed superior to the artificial one created by government regulation.
Whether or not extra-market judgment is ultimately necessary, it seems clear that a superior engagement and more sophisticated understanding of the market--that goes beyond next quarter's bottom line--is both warranted and likely very fruitful.
Hanging Paragraphs
Given the historical record, it's hard to argue against the basic concepts of the free market. It's equally important to acknowledge that not only is our theory of the free market is certainly incomplete and inaccurate, but our implementation leaves much to be desired. The situation is not surprising. Anyone who has ever dabbled in even very narrow economic modeling understands two things. First, the information we have to deal with almost overwhelming. Second, the vast dearth if information.
