The market as the antidote to capitalism
Here's an article I wrote, published by The Times this week.
The anti-capitalists, now more than 50 days outside St Paul’s, have a point: capitalism is proving unfair. But I would like to try to persuade them that the reason is because it is not free-market enough. (Good luck, I hear you cry.) The market, when allowed to flourish, tears apart monopoly and generates freedom and fairness better than any other human institution. Today’s private sector, by contrast, is increasingly dominated by companies that are privileged by government through cosy contract, soft subsidy, convenient regulation and crony conversation. That is why it is producing such unfair outcomes.
Item: the finance industry, protected from upstart competition by high regulatory barriers to entry, handles the supply and demand of a good — money — that is priced by government fiat. For doing so, it trousers big bonuses even when arranging the issuance of bonds to pay for the bailing out of itself. That’s capitalism, but it’s not a free market.
Item: the private finance initiative suits government by postponing cost, suits business by giving it handsome returns — and roughly doubles the cost of infrastructure to taxpayers, the Treasury Select Committee says.
Item: The planning reforms were drafted in close consultation not with real people who want to build conservatories, but big developers.
Item: the defence, transport, energy and healthcare industries live almost entirely at the whim of government procurement, subsidy or regulation.
We must distinguish two meanings of the word “market”: one is “commerce”, a forum where people exchange goods and services, for consumption, in freely competitive ways. The consequence is innovation, efficiency and general improvements in quality and price for which regulation is barely necessary, except to deter monopoly and enforce contract. The reason that your toothpaste is cheap, available when you need it and not substandard is that people are competing to supply your needs, rather than because armies of trading standards officers make it so.
The other meaning of the word “market” is a casino where you buy goods for resale (like stocks and shares) and speculate on them. Such markets are necessary to allocate capital but they are prone to booms and busts and need regulation. They also produce unequal outcomes and tend towards monopoly. The housing market should provide a service (accommodation) but it keeps being turned into a casino. Instead of deregulating finance and over-regulating commerce, we should have done the opposite.
That commentators confuse these different kinds of market is bad enough. (Until recently, I used to.) The real problem is that those who spend other people’s money — public servants — do so too. And by repeatedly supporting crony capitalism rather than commerce, they repeatedly screw up markets. No wonder our political servants (I nearly wrote masters) forget whose side they are supposed to be on.
The political divide between the champions of the public sector and the private sector misses the point; the key divide is between those who support the monopolistic tendencies of both capitalism and government, and those who support the competitive effects of markets. Big oil companies, airlines, national health services and education authorities divert their energies into political defence of their partial monopolies, while smaller start-ups invent things that customers want, such as cheap gas, cheap flights or personalised genetic medicine.
It was ever thus. In 1349, London glovemakers petitioned the mayor to cap wages and restrain freedom of movement of employees. High demand for gloves because of the approaching plague had put their workers in a strong bargaining position. The mayor naturally granted the request. Remember this when you see the BBC lobbying for its licence fee.
As Adam Smith, who championed the market but not capitalism, put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The market is where these conspiracies get exposed. To win in it, you don’t lobby, you innovate.
Lobbied by big companies, politicians do bonkers things like rewarding innovations that increase the cost of fulfilling a need — such as putting up the price of electricity to subsidise wind farms and claiming it “creates jobs”. Any hairdresser, unable to make a new hire because of his electricity bill, could tell them that it does the opposite.
Wherever free markets have been even tentatively tried, from Ancient Greece to modern Hong Kong, they have produced not just rising living standards, but net moves towards peace, tolerance, freedom and equality.
Today, global inequality has probably never been lower than since the Stone Age: according to the economist Xavier Sala-i-Martin, the Gini coefficient of world incomes, which measures inequality, has been dropping like a stone for 20 years. Free trade did that. Yet inequality has gone up within Britain and America, where markets in goods and services have been getting less free and barriers to social advancement have been built by government monopolies on education.
Capitalism represents the interests of the rich, whereas the market represents the interests of the poor. Let’s hear it for the market as the antidote to capitalism.
Comments (26)
"regulation is barely necessary, except to deter monopoly and enforce contract"
Is it really necessary in these cases: monopolies have only existed with state support (or in the imagination of regulators as in the case of IBM, Microsoft's Internet Explorer, and now Google's search); contacts are still mainly enforced by the market participants themselves - look at eBay.
Dear Mr. Ridley
Sorry that you had to write so much to explain a theory that fails in the main assumption - that is, free market is right, free market is not the problem and might be the solution.
You are right in some points (capitalism does not mean free market, the bad habits of capitalism can ruin the ideal of the free market, regulation very often just makes things worse and even more unfair). But a market is a place where two individuums with different interests meet. So it's not going to be a perfect place just by nature. And free market cannot make that more efficient. Can you tell of the naivety of such an assumption?
Good not to find at this article: "First assumption: human decisions are all rational". Cause that what a free market needs first to be efficient.
Best regards
I can only say "Brilliant"! Your essay provides insight if not solutions. The former is a requisite for the latter. Perhaps we should have a discussion about regulating "casino markets".
Perhaps we are currently experiencing an important natural step in the evolution of democracy - the various levels of government world-wide are now so large and top-heavy that their sovereign debt outweighs their ability to collect enough tax to pay for all their ponderous and over-developed systems.
No doubt it will be painful as some of the fat is pared away, and we can expect lots of protests. But just as for other life forms, when any important resource becomes scarce then a period of adjustment is inevitable.
Human political dogma of any kind does not prevail for long over these realities. "Communism" went under for the same reasons, now it's the turn of "Capitalism". The versatile human animal will adapt - that's why it is so prolific.
You never know, we might even enter an era where government actually becomes LESS monolithic!
Dear Brain In Zurich, a free market is the most efficient of all available systems even if it is not "perfectly efficient". Like you said a market is a place where two individuals with different interests meet. COntrary to a free market, your solution is probably to insert a government/regulator into this process. Pray tell me how will inserting a third party with its own interests and one which does not know the interests of the two original individuals make this process any more "efficient"?. Letting the two individuals negotiate freely is all that a free market requires, whether it meets your criteria of efficiency or not. It definietly does not require omniscient ratioanality like you suggest.
Mr. Ridley, great article; however, you said, "... except to deter monopoly and enforce contract."
On monopoly, you made the case yourself that they naturally break without government support. As far as early 20th century robber barons, see Antitrust and Monopoly: Anatomy of a Policy Failure, Dominick Armentano, 1996:
" This study… will argue that orthodox competition and monopoly theory is inherently flawed and misleading and cannot rationally support any antitrust policy. Further, it will demonstrate that the business organizations under indictment in the classic antitrust cases were expanding outputs, reducing prices, improving technology, and engaging generally in an intensely competitive process. It will conclude that both antitrust theory and history are an elaborate mythology with no solid foundation in either logic or fact.
Many volumes on the subject have presented a welter of antitrust cases, void of relevant conduct and performance information. Consequently, any serious consideration of the indicted firms’ actual behavior have been conspicuously absent. Apparently, these volumes expect readers to assume that the firms indicted under the antitrust statutes were actually raising prices, reducing outputs, producing shoddy products, colluding successfully with competitors, driving competitors from the market with predatory practices, and generally abusing consumers in the marketplace."
To your second point, the government police monopoly, originally designed to protect life, property, and contracts, has been distorted, oversupplied, overpriced, and turned corporatist. See Murray Rothbard for a voluntarist solution to contract enforcement.
What you're describing is rent-seeking capitalism. The people who want to develop windfarms do not want to profit from selling electricity. They want to profit from guaranteed subsidies from governments. They are not market businesses at all. They are rent seeking organizations. Rather than extorting money, the old fashioned way, they manipulate governments to do actually give them money voluntarily, without threats. Nice trick.
Of course, all the agricultural subsidies, trade subsidies, job subsidies, etc are the same.
Without copyright, patent and trademark protection there would also be fewer large monopolies.
The market of commerce and the casino market - confused or conflated. May not the same mistake be applied to commercial Capitalism and casino Capitalism, that is not to understand the two aspects?
However the free market and Capitalism are abstract nouns, intangibles and so can "do" nothing either good or bad, fair or foul.
It is people who do these things.
And are Capitalism distinct inseparable things? Without a free market what would the function of Capitalism be, and how could a free market function without Capitalism?
The problem we have is the need for control over the people desired by politicians in government and the swarm of bureaucrats they attract.
As Capitalism and the free market are distillations of the spirit and essence of Humanity, thus with the same vices and virtues, controlling politicians try and fail to suborn these to their own ends.
I like to point to Copy Right as a source of government enforced unfairness hampering innovation, competition and creating monopolies.
Er ... perfect competition fine, oligopoly not fine. And perfect perfect competition is extremely rare. And we do need to regulate toothpaste, because it would be easy to smuggle substandard product past consumers.
Talking of equality, what about the almost closed shop of big company directors contriving to get awarded ever larger salaries?
That's another area needing regulation.
Nicely written, as ever, but not your most convincing analysis.
I have spent much of this evening trying to find a comment written on this very blog by someone else to no avail so I will try to paraphrase it.
Some time ago on one of Matt's blog posts someone commented on the remarkable phenomenon of progressive minded people who universally subscirbe to the bottom up nature of biological evolution yet somehow still have faith in the heavy handed top down organization of economies.
Matt's book eloquently and persuasively demolishes this idea that ANYONE in the world is smart or noble enough to guide a chaotic non-linear system to thrive for anyone other than the privledged group at the top.
As someone who once considered myself a high minded progressive person, interested in promoting the flourishing of humanity I have found no more persuasive argument than that which Matt repeatedly makes.
I recommend to Matt and everyone who frequents this blog a pair of videos by social psychologist Jon Haidt:
http://www.youtube.com/watch?v=vs41JrnGaxc
and in particular, targeted to an academic audience (though specifically to social-psychology but no less releveant) here:
http://rogerpielkejr.blogspot.com/2011/02/ideological-diversity-in-acade...
In my mind the ultimate message to take away is that while there is a fundamental dichotomy of socio-political views in society as to what policies should be brought about to promote the greatest good it is vital to remember that no matter what you think of the opponent, they are fundamentally rooted in an unconcious, good faith belief in what they truly believe will bring about human flourishing.
The key is, as Matt does, is to show that by all empirical measures, ground up, free-market social behaviour leads to the greatest human flourishing. He does this by and large not through demonizing those who disagree with him as being dunder headed pot smokers but by showing the obvious historical context of humanity's flourishing in the past two centuries in particular.
It is difficult to remember that at their roots, social movements want the same goal: Human Flourishing. The reason in my mind that Matt has made such a persuasive case is that he has on the whole remained in tune with his younger self's desire to make a better world but been willing to adjust that world view to the indisputable data of 18th-21st century human success.
Matt, the strength of your argument is not in rallying any kind of politically likeminded base but in being a persuasive conduit of objective knowledge willing to destroy what was previously held sacred.
I'm commfortable with your concept of "market" as “commerce”, a forum where people exchange goods and services... in freely competitive ways. I suppose a rational person would aim to have as much of the economy function as "commerce" and as little of the economy function as a "casino" as possible. Regulation and associated costs would be minimized.
Global or corporate finance might seem a complex and scarey "casino" that should be highly regulated, however, most of it can work like "commerce" when two parties to a transaction have complete information about the risks and rewards of a transaction. With this knowledge, they can determine the right price. If it worked this way, it shouldn't require much regulation.
The sub-prime mortgage meltdown in the U.S. occurred because the debt instruments were mis-priced because the buyers did not have complete knowledge of the risks associated with the products they were buying. Had this area of the market been more like "commerce" the buyers would have done their "due diligence" better and they would not have been duped.
Excellent article! The markets vs. distinction is emphasized heavily at Center for a Stateless Society. You might like to check it out: http://c4ss.org. We've just put out an anthology called "Markets Not Capitalism."
Everyone likes to pick on wind energy, when all of our carbon based energies also recieve subsidies. I think everyone, except the old energy monopolies would like a level playing field.
If it weren't for capitalism, the people protesting probably wouldn't be alive today, Matt.
Not everyone in the Occupy movement is anti-capitalist. Not by a long shot. That's an oversimplification and mischaracterization that does a great disservice, and reduces your own credibility.
Competition prevents monopolies? I bed to differ. The natural, eventual outcome of competition is monopolies. As long as there is always the drive to profit more, to increase your market share, to become bigger than your competition, then companies are always going to try to drive competitors out of the market to increase their own share. Even without government support of certain companies, competition creates winners and losers. Every time someone loses, the winner's market share gets bigger. As companies get bigger, they get more powerful and more able to squash other competitors. The cycle continues until you have one, ultimate winner - the monopoly.
Furthermore, some industries are natural monopolies. For example, large networks that provide vital services to everyone, such as health care and telecommunications, gain massive efficiencies by sharing one, all-encompassing network. As long as there is oversight to prevent excessive profit (or no-profit), society benefits by not having so much time, energy, and money wasted on redundant networks.
And I am really fed up with the self-correcting market crap. The myth of the self-correcting market is based on two very important assumptions that are nowhere near true in the real world. 1 - that people always make rational decisions. 2 - that people have access to all the information they need to make an informed decisions. There have been plenty of studies in the field of Behavioral Economics to completely blow away the notion that market participants behave rationally (also, just look at how many times the market creates bubbles that later pop - where was the rationality there??). Furthermore, without good regulations, companies don't share information that might harm their sales or reputation, thus, there are boat loads of useful information that customers likely don't have access to. Add to that the constant barrage of advertisements that play to people's emotions and people become pawns rather than informed decision makers.
To sum up - this is a load of crap. The market does not self-correct - never has, and never will. That is why things that aren't profitable, yet are necessary to society, fall by the wayside. It's why we've had to fight, and continue to fight, for environmental protection, workers rights, and a long list of ailments that the market leaves in its wake. There may be areas where the market has its place, but certainly not without oversight by the people who suffer the consequences of ruthless market forces.
The problem with the free market is lag.
Someone might think it is easier to make money watering down milk with melamine, people become aware of this and don't buy the milk, hey presto the market at work. The problem is in the time it took for people to acquire this knowledge quite a few probably died. Far better to regulate in the first place that melamine shouldn't be in milk.
Think of regulation as outsourced decision making.
Dear Matt
Nice post. Small comment on "politicians do bonkers things like ...putting up the price of electricity to subsidise wind farms".
I'd agree that it's not clear whether or not it creates jobs, but the main reason for the subsidy is to overcome a market failure. Namely, that the damage done from CO2 isn't included in the production of electricity. I'm aware that you are hopeful that this damage is very small, but many would disagree. Believe me, I hope you're right, but it's a risky gamble. Fom this perspective, the subsidies are more prudent than "bonkers".
Best, Banda
Banda,
What's the right amount of CO2? Who's to decide? We're at 390 parts per million today - that's 0.039 of ONE percent (I think). At levels up to a few thousand parts per million crops, trees, plants etc. are more productive. Horticulturalists pump CO2 into green houses to make them more productive. Levels in the natural world constantly vary. They always have and they always will. CO2 levels have been ten times higher in the not too distant past and we're all still here - no meltdown occurred...it's a natural cycle. If you propose factoring in the "costs" associated with CO2 into the cost of energy, then you must also add the value of the benefits of higher CO2 in the value of the energy.
Dear Anonymous
Thanks for the response.
I believe that the info on CO2 levels over the long term comes from ice cores. Take a look at the graph here (you have to scroll down a little):
http://www.sciencemag.org/content/310/5752/1285.full
If I've understood it correctly, it suggests that CO2 hasn't been above about 300ppm for 600,000 years. I think you're right that levels have been much higher, but only a VERY long time ago.
Does that mean that CO2 is necessarily dangerous? No, but this is new territory.
And lastly, if weather patterns don't change significantly, then I'd agree with you that agriculture should become more productive with more CO2.
Best, Banda
Hello Banda,
Sorry, when I meant "the not too distant past" I meant a few million years ago, when dinosaurs roamed the earth from the site
CO2Science:
http://www.co2science.org/subject/questions/1998/historic_co2.php
"In very general terms, these long-term reconstructions of atmospheric CO2 levels depict a gradual rising back in time to approximately five times earth's current concentration at about 220 million years ago, followed by a dip back to near-current levels between 250 and 350 million years ago, with a rise to perhaps 20 times today's concentration between 450 and 550 million years ago. Beyond that point in time, the CO2 content of the air is generally portrayed as rising all the way to a full bar of presure (1,000,000 ppm) at 4.5 billion years ago."
Also of note is their finding that CO2 levels are caused by temperature changes (i.e. they don't cause temperature changes). Either that, or they are completely uncorrelated.
Katie B (14th December 2011 - 00:27am) sees the glaringly obvious.
In an absolutely free market someone is always better (smarter, works longer hours, etc etc) so prospers. (and yep, he deserves to)
Then, as a business gets bigger, it gets brand name recognition; it gets financial and political advantages, and can afford advertising and the best accountants.
Free market theory says a new, more efficient competitor will come along and slowly take over. But, any little competitor gets copied, absorbed or squashed, the big guy can just wait him out, taking losses all the while waiting for the little guy to fail.
The capitalist markets we have now only work because of a set of rules.
We may need more rules, not less, and we certainly need rules to prevent monopolies.
Katie B (14th December 2011 - 00:27am) sees the glaringly obvious.
In an absolutely free market someone is always better (smarter, works longer hours, etc etc) so prospers. (and yep, he deserves to)
Then, as a business gets bigger, it gets brand name recognition; it gets financial and political advantages, and can afford advertising and the best accountants.
Free market theory says a new, more efficient competitor will come along and slowly take over. But, any little competitor gets copied, absorbed or squashed, the big guy can just wait him out, taking losses all the while waiting for the little guy to fail.
The capitalist markets we have now only work because of a set of rules.
We may need more rules, not less, and we certainly need rules to prevent monopolies.
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