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Home , Amartya Sen, Joseph Schumpeter, Market failure, Market mechanism

PAD 6436 lecture 7

University of North Florida Master of Public Administration program PAD 6436 Fall 2017 ethics Market ethicist of the week

Photo credit Amartya Global market ethicist

Lecture goals: Discuss the ethical strengths and limitations of markets. * Among others, has made the case for markets as a force for good. Keep in mind the classical economic view of the magical, of markets harnessing individual greed for the social good: “As every individual, therefore, endeavours as much as he can… to employ his … and so to direct that industry that its produce may be of the greatest ; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public , nor knows how much he is promoting it. …by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to for the . It is an affectation, indeed, not very common among merchants, and very few words be employed in dissuading them from it” The of Nations (1776, p. 479). This, too, is the point made in my article (Candler pp. 329-31): is not justified for its ability to make the rich richer; or for its richly rewarding those who work hard, while viciously punishing those who don’t. Nor is capitalism justified because the individual right to accumulate wealth is enshrined in global, not to mention Western values. Indeed, the Christian faith that has been so much a part of is lukewarm, at best, to wealth. Instead, capitalism is justified for its ability to promote the interest of society. How it does this is largely through, as Pierre Elliott Trudeau puts it, producing more. All else equal: more is better, indeed if a society hasn’t got enough, our of action is restricted:

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PAD 6436 lecture 7

“Without a healthy economic climate, we cannot be free to make choices as a nation, cannot provide enough jobs for our workers, cannot assist the less fortunate peoples of the world. Unless we control the damaging forces of and , we will lose the benefit of the social we have made. Unless we provide an adequate supply of essential , and make sure our economic institutions serve our national goals, we will have less freedom to shape our own future” (Trudeau 1998, p. 34).

Freedom itself a value. Sen goes even further than this. For him ‘freedom’ is a value separate from its contribution to the economic well-being of a society. In this he is not referring just to labour bondage, slavery, and that sort of thing (which are all but absent from ‘developed’ countries like the US). Instead, empowers people by allowing them to make their own choices about what is in their best interest.

Freedom v. ‘capture’. Finally, economic freedom is also important when government is ineffective, and/or ‘captured’ by private . These private interests especially include government employees themselves, when they act in their personal, or corporate interest, rather than that of the broader society. Like labour bondage, this, too, is something that is relatively rare in the US and other rich countries, but more common in countries with large state-owned enterprises. So to the extent that markets give people the freedom to avoid corrupt public , they both promote and personal freedom.

Market (and other) exchange inherently human. As Sen puts it: To be generically against markets would be almost as odd as being generically against conversations between people… The freedom to exchange words, or , or gifts does not need defensive justification in terms of their being favorable but distant effects; they are part of the way human beings in society live and interact with each other (unless stopped by of fiat). The contribution of the market mechanism to is, of course, important, but this comes only after the direct significance of the freedom to interchange – words, goods, gifts – has been acknowledged... (1989, p. 6) (by the way) put it like this, in referring to: …a certain propensity in human which has in view no such extensive ; the propensity to truck, barter, and exchange one thing for another. (1776, p. 17)

Freedom > economic growth. Still, Sen’s advocacy of markets is not a blanket one. His advocacy of freedom, as itself a value independent of the economic growth that market freedom helps promote, is indicated in his advocacy of broader, non-economic measures of social well- being (1989, p. 3).

Role of government. This is also evident in Sen’s recognition of the role of government: “social support, public regulation, or statecraft when it can enrich – rather than impoverish – human lives” (1989, p. 7). Though on when government may not enrich human lives, notes: “We must improve the poor's access to by making sure that bureaucrats are replaced by markets wherever possible. As I remarked earlier, the anti-market protestors do not adequately appreciate that... far too many bureaucrats impose senseless restrictions just to

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PAD 6436 lecture 7

collect bribes or to exercise power. Letting markets function is therefore often an egalitarian allocation mechanism” (Bhagwati, p. 58).

A discordant perspective. This is all hunky dory: government to intervene to reduce fairness. As we saw earlier (week 2) in my take on Amartya Sen’s views on ’s views on justice (phew!): …justice is about fairness. Note that we are now discussing fairness, not ethics, but the two concepts are certainly in the same ‘normative’ realm of ‘why’ public administration exists. For Rawls, fairness is especially concerned with treating all members of society ‘fairly’. He identified two key principles of justice: a. Each person has an equal right to a fully adequate scheme of equal basic which is compatible with a similar scheme of liberties for all. b. Social and economic inequalities are to satisfy two conditions. First, they must be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they must be to the greatest benefit of the least advantaged members of society. (Sen 2009, p. 59)

So far, so bolshie (second definition) sounding! First, everyone gets a ‘fair go’. Second, inequality is only justified if unequal benefit is earned (inherited wealth, position, or influence would be suspect), and ‘taking from the rich’ is only justified if this is used to benefit the disadvantaged. I’ll add that literally, this does not say to benefit the poor, but rather the least advantaged. As a result, the slack-arsed who become unemployed are not so much the beneficiaries of Rawlsian justice, as are their (blameless) children.

I then went on to flippantly present a libertarian critique of all this, from . Having swotted up on this since, Nozick’s perspective is that: If the world were wholly just, the following inductive definition would exhaustively cover the subject of justice in holdings. 1) A person who acquires a holding in accordance with the principle of justice in acquisition1 in entitled to that holding. 2) A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding. 3) No one is entitled to a holding except by (repeated) applications of (1) and (2). (Nozick 1973, p. 47)

At the risk of criticizing the libertarian perspective and feeding the academics-as-socialists meme, first economics long ago concluded that: “It is true that many of the largest fortunes are made by rather than by truly constructive work: and much of this speculation is associated with anti-social strategy, and even with evil manipulation of the sources from which ordinary derive their guidance” (Marshall 1920, p. 719).

1 Loose definition: fair and square.

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Even earlier, questioned the legitimacy of inheritance: “Whatever fortune a parent may have inherited, or still more, may have acquired, I cannot admit that he owes to his children, merely because they are his children, to leave them rich, without the necessity of any exertion” (1820, p. 221).

…and finally, A.C. Pigou: “hence very heavy death duties could probably be levied on large fortunes…without…exercising any large influence in discouraging rich men from ” (1920, p. 718-9).

Market failure (with apologies to PAD 6060 students)

Sen also identifies a number of market failures in assessing the limits of markets as mechanisms to achieve efficiency in resource allocation, in production, and in (pp. 116-7, 120-1). Note the ethical implications of many of these. Sen doesn’t dwell on these market failures, so I will, below For a fuller discussion, click here):

To start: Adam Smith's "three duties of the sovereign"

1. Defense: "The first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force" (1776, Volume II, p. 213).

2. Justice: "The second duty of the sovereign, [is] that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice..." (1776, Volume II, p. 231; see also , 1690, quoted above).

3. Public works: "The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain" (1776, Volume II, p. 244).

4. Public institutions: Smith added what has come to be seen as a fourth, distinct form of . Beyond major infrastructure “for facilitating the commerce of the society,” he added institutions “for promoting the instruction of the people. The institutions for instruction are of two kinds: those for the education of youth, and those for the instruction of people of all ages”. Related to 3 and 4 is the broader topic of public goods.

5. . Smith implied this type of market failure, as well, in his discussion of relations between workers and employers: “What are the common of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour. It is not difficult to see which of the two parties (masters and workmen) must, upon all ordinary

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PAD 6436 lecture 7 occasions, have the advantage in the dispute, and force the other into compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen” (1776, Volume I, p. 74). See also.

A subset of monopoly is what is referred to as (Schiavo-Campo/ McFerson, p. 35): in some cases total are kept to a minimum when one producer serves the whole market. Gas, telephone, water, cable, etc. are common examples. Infrastructure is expensive, duplication irrational (see also JSTOR link). Note: this monopoly then needs to be regulated to reduce -gouging.

More:

6. Asymmetric (one knows more than another): 'buyer beware' is out of favour. Public information gathering is required to identify firms using environmentally- damaging production methods, producing environmentally-damaging products, dangerous products, etc. See also.

7. : utility maximizing activity by one causes loss of utility to another. See also.

8. 'Substantive' issues: a number of people (of all political stripes) argue that government should be about more than just efficiency and the provision of goods and more or less tangible services (childcare, say). To explain this through an advocate of this approach on whom I have done a lot of research, Alberto Guerreiro Ramos argued that in contemporary public administration "...questions like the 'good' of man or society have no place in the area of rational debate. Rational man is unconcerned with the ethical nature of ends per se. He is a calculative being intent only on accurately finding adequate means to accomplish goals" (1981, p. 106). And so instead, for Ramos public administration needed to concern itself with issues like "love, trust, honesty, truth, and self-actualization" (p. 112). See also. concerns are also very important here.

9. Principal/ problems: The problem here occurs when shareholders of a (the ‘principal’) hire a manager (the ‘agent’) to run the corporation to maximize long terms shareholder value; but the manager instead takes short term risks to maximize her/his short run ‘performance’ bonuses. See also.

10. : Markets assume rational decision-making on the part of consumers and suppliers. Yet as especially the spate of recent bubbles has shown, this is an at least questionable assumption. See also.

11. Implications of : Austrian famously defended the logic of capitalism as follows: “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a

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new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.” -- Capitalism, and (1942). This is all well and good, so long as the costs of the destruction don’t overwhelm the benefits. So if your favorite bakery goes broke, no worries, you can get bread elsewhere. But if your kid’s for-profit school is shut down (example), your child could lose, or experience severe disruption to, a year of education.

The broader context

Crisis economics. As a result of the ‘Great ’ that we are still mired in (certainly in terms of lower-than-desired economic growth2, stagnant growth, and of disturbing signs that growth has slowed), an almost forgotten economist named has been rediscovered. Minsky made his career arguing that, rather than trending toward ‘equilibrium’ (stability), market capitalism was prone to periodic crises (see two recent articles, one in The New Yorker, and one in ). The argument of Minsky (and John Cassidy, author if the first article in the previous sentence, as well as a recent book How Markets Fail; as well as Nouriel Roubini’s recent Crisis Economics) was that government needed to adequately regulate capitalism especially to reduce the likelihood of speculative bubbles.

Distribution! Still, markets can be wonderfully effective ways to allocate resources and to organize production. Another important proviso (and which relates to #8, above) concerns separating out production from distribution. This is discussed with reference to the John Stuart Mill section in the Candler article (pp. 331-2). A fundamental problem with markets as a system of ethics is that they distribute that which they produce not on a one-person, one vote system; but on a one dollar, one vote system. If dollars are allocated on other than meritocratic bases (e.g. inheritance), or if the allocation is wildly unequal, this is unlikely to yield the interest of society. This especially applies in the “diminishing of ” views of and of (pp. 333-5).

Values. The discussion of Léon Walras in my article raises the question of values. Since at least Alfred Marshall, there have been who sought to remove ethical considerations from economics (pp. 332-3). In this formulation, market freedom becomes an end in itself, and cannot be questioned. Think, for instance, of the reactions of citizens to an increase in the price of gas by $2-3 a gallon over the course of a few months, compared to a proposed 10-20¢ increase in the federal gasoline .

As indicated in Table 1, in Lecture 1, government in the US is relatively small. We Americans enjoy more economic freedom than all but a handful of small economies in the world. Another way of looking at this is to look at the relative shares of government v. private initiative in the US. As of the second quarter of 2012, final demand in the US economy (of $13,261b) was composed of the following:  Private consumption: $9387b (70.7%)  Private investment: $1778b (13.4%)

2 Though our growth desires may be unrealistic, given the global environment and our lack of enhancing investment (infrastructure, education, etc.).

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 Government: $2508b (18.9%) Source: Bureau of Economic Analysis

In summary: The government share in the bullets above should probably be a bit higher in the US. We have cut public education, especially, in ways that will probably harm the long term economic viability of this country. Presumably the plan is to compete with on the price of our labour, rather than the quality. Cutting back on environmental, health and other safety regulation is also something that could us, as the recent oil spill in the Gulf of Mexico illustrated. We should also be building more roads, and shifting a lot of health care demand (though not production) in to government hands through a public health insurance scheme, would likely yield large socio-economic benefits, too. These would especially come through better health outcomes, likely at lower cost; while also encouraging job growth by reducing the huge tax on job creation resulting from our current, workplace-tied health insurance system (i.e.: You hire an American worker, you pay health insurance. You hire a machine, you don’t. You hire a Chinese worker, you don’t, as well).

But if these reasonable reforms saw the share of government in final consumption rise to the low 20s (maybe as high as 25% of GDP with health insurance ‘socialized’), that is about as high as it need do, because ‘market ethics’ are an extremely effective way to organize large parts of a modern society. * References

Bhagwati, Jagdish (2004). In Defense of . New York: Oxford. Marshall, Alfred (1920). Principles of Economics. Eighth edition. 1961 Mill, John Stuart (1848). Principles of with some of their Applications to Social . Toronto: University of Toronto Press. 1965. Nozick, Robert (1973). “Distributive Justice.” Philosophy & Public Affairs, 3(1), pp. 45-126. Pigou, A.C. (1920). The Economics of Welfare. London: MacMillan. 1962 Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of Chicago Press, 1976. Trudeau, Pierre (1998). The Essential Trudeau. Toronto: M&S.

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