Saturday, December 02, 2006

WHY DO WE HAVE TO ALWAYS DEFEND FREE MARKETS?

A couple of days ago, Ramchandra Guha wrote an article in The Telegraph about the traditional disdain of Indian intellectuals for free markets. Quite aside from the other specific points he makes, one paragraph of his turned out to be more provocative.

The market does have its imperfections. One is that left to itself, it tends to pollute and degrade the environment. A second is that employers generally do not pay attention to the health and safety of the worker. A third is that without consumer vigilance and action, industrialists do not always deliver on quality. A fourth is that the market disregards those without purchasing power. A fifth is that one cannot rely on the market to deliver on goods and services whose value cannot be reduced to monetary terms, such as primary education and basic healthcare.

Not suprisingly, pro free market bloggers immediately took objection to these points, and Gautam Bastion wrote a rebuke criticising each one of these contentions specificially. However, my take on these matters is different. Let's say tomorrow if someone listed a set of similar grievances about democracy. Rather than vigorously trying to justify democracy as the best system that could possibly exist, I would shrug and say, "Yes, democracy does have its own evils. But it's the least evil of all the systems that we have seen". More accurately, I would paraphrase Bertrand Russell's even more cautious viewpoint- "Democracy is not a very good social and political system. But what it does is prevent certain evils".

My opinion is that most of the objections listed about the free market by Guha are in fact true. But they neither serve any anti-free market point nor in my opinion, justify a blanket defence of free markets. In fact, I believe that by trying to justify free markets as being free of all evils, pro free marketeers open themselves up to criticism, because they simply cannot tout free markets as being perfect. Let me try to judge some of the points raised by Guha as well as replies to those points penned by Bastion. I am no expert and I want to focus on just two points, but I can see that one can very much be pro free markets even with all the criticism about them.

* Left to itself, the free market tends to pollute and degrade the environment:
In fact, I could not agree with this point more. Polluting the environment is one of the most efficient ways in which corporations can exercise externalities. Gautam criticises this point by saying that this is possible only because the rights on the property which corporations pollute are not clear. If people had property rights on the environment, they could have a say in the corporations' environmental practices and put pressure on the corporations to change their practices.

But can such rights really be practically implemented? I quoted the example of global warming, which affects people way beyond local populations. So can the islanders of say Pacific islands exercise their property rights over all the environment that Exxon Mobile pollutes? In the first place, it would be diabolically difficult, if not impossible, to actually quantify and capture the exact contribution of global pollution by Exxon. Or consider the amplification of pesticide residues through food chains, something that affects multiple ecosystems and their denizens. Who should be entitled to property rights? And how would you actually exercise such rights? Also, since corporations always find it more profitable to pollute the environment, I can imagine powerful lobbyists along each step trying to thwart the efforts of anyone who tries to implement property rights. Only if shareholders are themselves directly affected by pollution, can realistic pressure be put on corporations. But how often is that going to happen? Rather than a theoretical dilemma, this solution strikes me as being logistically impossible because of the global effect, and that too not easily quantified, of pollution and environmental damage. It would be almost impossible to take into account all populations, communities, and ecological systems affected by pollution from any particular corporation, and even all of the market. Many of the people affected by this pollution may be too illiterate and weak to actually fight against it. Can we realistically think of forming a cooperative and making all these millions of affected people stakeholders in that cooperative? Such a venture for all corporations may take longer than the next ice age to actually evolve.

In such a case, the real question is, should we do nothing unless such property rights can possibly be implemented? So right now, the only solution, no matter if it is seen as flawed, is to have government intervention in corporate environmental practices. In fact, even in a cauldron of capitalism such as the US, there have been umpteen cases of corporations not complying with FDA or EPA laws. The only intervention that worked to some extent was government taxation and fines. As a matter of philosophy, I don't disagree with Guha at all; corporations, if left to themselves will almost always find it profitable to pollute and externalise costs. But even as a matter of policy, I don't see the free market regulating itself, at least not until catastrophic levels of pollution have been surpassed. When it comes to pollution or climate change, time is of the essence, and anything that saves time is of value, even if in theory there can be a possible better solution after a hundred years. Even if there is a possible solution which can be generated by the free market itself, it is is foolish to wait until it actually is generated. And in the present scenario, and also based on history, I don't see how the free market will keep itself from polluting in a realistic frame of time.
Interestingly, even government fines and taxation don't always work well. In the US, corporations have many times found it much more profitable to pay hundreds of millions of dollars in taxes and keep up with their practices than comply with environmental laws. This is one of the reasons why all that government regulation did not keep the US from becoming any less free than what it was. Outsourcing was a golden solution to simply shift the focus of pollution. But increasingly, it is going to be paramount for every government to implement such fines for pollution, at least if we want to have a sane chance of preserving the world as we know it.

As I was contemplating this matter, a timely editorial appeared in this week's issue of Science. The editor has argued that the 'cap-and-trade' practices that worked well for sulfur dioxide in the US simply cannot be seen to work for CO2 emissions. In the end, he thinks that government taxation really would be the best way to reduce emissions for now, without making harsh demands on consumers. He says,

"Many environmental economists recognize that a tax or fee on CO2 emission from fossil fuel sources is the most efficient system to reduce emissions and spread the burden equitably across all sources: industrial and personal. A tax on emissions of fossil fuel carbon could replace the equivalent revenue from income taxes, so the total tax bill of consumers would be unchanged. A higher tax on gasoline would preserve the personal right to drive a larger car or drive long
distances, but it would also motivate decisions to do otherwise. A tax on emissions from coal-fired power plants, manifest in monthly electric bills, would motivate the use of alternative energies and energy-use efficiencies at home and in industry."


The unique feature of pollution that is different from many other corporate practices is that especially now, it has started affecting the entire globe. Any solution to the problem needs to be more timely than anything else. And I think it would be a dream at this stage to think of the free market regulating its pollution in the near future without government intervention.

* The market disregards those without purchasing power:
Gautam calls this the "most brutal misrepresentation" of free markets. I would call it the most brutal truth about free markets. Again, I would have no objection accepting this point. In fact, of course free markets disregard many people who don't have purchasing power. But what system on earth could possibly not do that?? What distinguishes free markets is that they give incentives to every person in their purview to gain that purchasing power. That is really the nature of the free market soul. So this objection, while true, does not really say anything dramatic. One might as well criticise free markets for saying that they don't make sure that every victim of AIDS in Africa does not get access to the best anti-HIV drugs. Of course he or she does not. But find me a system which would make those drugs available to all those people, and which simultaneoulsy has incentives for self-advancement and progress that are built in Adam Smith's grand ball game. In fact, find me a system which satisfies even the first condition. Except in very limited circumstances, I cannot envisage free markets duly regarding every person and his brother who doesn't have purchasing power. So this critcism by Guha, while warranted, is a trite truism. We knew that for many years; in fact, wasn't that what the communists and leftists have been saying for time immemorial? To say that free markets don't regard people with purchasing power is to enunciate a bitter truth of humanity; all humans are simply not born equal, and in fact most humans won't ever become equal. But what free markets do is to give every man a realistic chance to become equal. In this respect, they are remarkably humanising structures which promise decency to every individual. Again, they may not do this in the best way, but they do this better than any other system we have dared to imagine and implement. So this trite truism will in the end elicit a trite response from me- "True, so what?"

Even in the most capitalist country that we know of, or at least aspire to, so many projects and systems are still controlled by the government. Drinking water, much large-scale construction, implementation of food and environmental laws by the FDA and EPA, all these frameworks are implemented by the government. There is still a large share of the government budget which is dedicated to such infrastructures. And consider the tricky question of health care. The question has not been to choose government over corporations in implementing health care, but to choose the right combination of both that would lead to a palatable recipe. I don't see the US becoming any less free in its market economy than other countries even with this above cited government intervention and participation. There will always be cribs and complaints. But it's only a healthy combination of free markets and government that can sustain a healthy economy. Each one of these has its Dr. Hydes, and it's upto the other to keep him from trampling on consumers and the environment. Maybe the government even has more, but the free market cannot have none.

The pursuit of self-interest can lead to enlightenment, but the government has to set some rules, and commensurately has to exact some penalties then. I don't think pro free market bloggers should worry about criticisms such as the above being heaped on free markets. In fact, I fear that in trying to employ unconditional defences of free markets, they are opening themselves to criticism, but still criticism that they should not have to answer to. But if that criticism is not warranted in the first place, then why is an unmitigated defence of free markets warranted? That also does not mean one should blithely ignore any and all critiques. As in the case of the first point above, government always will have to keep a watch over polluting practices of corporations, at least until due pressure from shareholders can let them pass the baton of policing.

In many ways, the free market is its own defence as well as its own bugaboo.. But the important point is to distinguish criticism that questions the nature of free markets from criticism that questions the rules of the game. As far as the former is concerned, like I said, hey, so what??

Update: Girish reminds me of a very important point that I have missed. It is the non-economic institutions, political and others (including even the tiniest units like family), that really contribute the essential soul-lending framework to the free market. They foster values which mitigate some of the harsher aspects of the market.

8 Comments:

Anonymous Anonymous said...

I followed your argument with Gautam and to me it seems that you miss a big point. I agree with you that free markets are the bets but imperfect solution. However, the "soul" of free markets that you refer to of allowing everyone a fair chance does not come about due to the intrinsic nature of free markets but due to the interference of institutions that are exogenous to the evolution of free markets (erected by political and other entities).. To credit the free market for its soul without paying due respect to the institutions would be missing a crucial point.

6:22 PM  
Blogger Ashutosh said...

I completely agree.

8:26 PM  
Blogger Ashutosh said...

Thanks for reminding me.

8:33 PM  
Blogger Gautam said...

Hi Ashutosh,

I'm sorry I didn't reply to your last comment on my blog.

One way to deal with environmental property rights issues, such as this exists in common law/free market systems. Torts. The right of compensation for damages. But this right should lie with Pacific islanders and not their governments. Perhaps the UN has crowded out the creation of international legal institutions that respond to individual grievances on a global level.

8:43 PM  
Anonymous Anonymous said...

The UN is actually the most efficient institution to do this. However, it is the ineffectiveness of UN that has created a scenario where such local issues cannot be properly adjudicated by global entities.

5:12 AM  
Blogger Ashutosh said...

Sure, no problem.
Yes, the UN is probably the single large body which can effectively do this. As Girish says, it is ineffective in this, as in many other, spheres. But I find it hard to contemplate how the logistics can be calculated, let alone the blame apportioned. And technically, I see every square meter of the earth demanding to be apportioned this way.

5:40 AM  
Blogger Kapilmuni said...

Did you post this on bloop too?

7:06 PM  
Blogger Kapilmuni said...

This doesn't support private comments?

7:17 PM  

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