Tag: Market Failure

Anti-market bias, unemployment and immigration

Economist Bryan Caplan discusses the important topic of market-clearing wages. Why are wages not falling during the recession in order to establish equilibrium and full employment? Caplan gives an answer that seems common sense but receives little attention from professional economists and politicians.

Is labor market rigidity a market failure?  I’m afraid so.  But strangely enough, this market failure is largely caused by anti-market bias!  The main reason workers hate wage cuts is that they imagine that wage-cutting employers are satanically “unfair.”  If workers saw wage cuts for what they are – a full-employment mechanism – they’d sing a different tune.  While they wouldn’t be happy to see their wages cut, they’d grudgingly accept that a little wage variability is a fair price to pay for near-total employment security.  Once this economically enlightened perspective took hold, employers would eagerly cater to it – and the market failure would largely go away.

Bryan Caplan’s position may have implications that he may be reluctant to acknowledge. If the absence of widespread anti-market bias is a necessary condition for the proper function of the price mechanism, arguments that immigration can alter the cultural prerequisites for sustainable capitalism (let alone laissez faire) can no longer be dismissed as “nationalist” or “collectivist.” The potential for capitalism will become a function of the genetic and cultural traits of a population.

The political philosophy of bailout

All politics is redistributive. Although this is often hidden from view through appeals to the social contract, democracy, and the common good, the recent attempts to reward unsound business practices with taxpayers’ money make even the most sophisticated appeal to the “common good” look suspicious. Although advocates of liberty have offered persuasive accounts about the involvement of  the U.S. government and the Federal Reserve Bank leading up to the current “crisis,” the root problem is the teleological mindset that sees the market and government as instruments to achieve certain goals.

Looking at the (long term) consequences of an act is an important part of individual decision making.  This is so obvious that we are led to believe that such consequentialism is possible for society as a whole.  Political consequentialism can take two forms. In its first incarnation, it is assumed that society is a collective effort toward shared goals. This view regards society, and as a consequence “the economy,” as one organism. A good example of this mindset is displayed by Republican Senate Minority Leader Mitch McConnell when he says, “Our whole economy you could think of as the human body and the credit markets as the circulatory system.” Presumably, any measures that are made to restore circulation will benefit us all.

Unfortunately, we see a similar outlook on society among advocates of liberty who talk about promoting “growth” or “efficiency.” Although their policy recommendations may be less intrusive, the assumption of shared goals is the same. Equally troubling is the acceptance of concepts like “market failure” and “government failure” as if these concepts are purely technical in nature, instead of implicit value judgments.

In its second incarnation, different interests and values among individuals are acknowledged but it is believed that policies can be designed to optimize a “social welfare function.” This position is a non-starter on epistemological grounds, as evidenced in real life by the lack of consensus among its advocates. This should not be surprising because consequentialism is not possible without guesswork and making personal value judgments. As the political philosopher Anthony de Jasay has argued, at some point someone needs to make decisions that will be binding for all, and consequentialism will ultimately collapse into authoritarianism, plain and simple. Nevertheless, this view has obvious appeal to people  who advocate government intervention and redistribution of incomes.

In times of crisis (imagined or real), the latter position is simply abandoned for the former, as documented by Robert Higgs in his book “Crisis and Leviathan: Critical Episodes in the Growth of American Government.”

The interventions that led to the current problems, and the proposals to solve them, suffer from the same  activist, fanatical, mindset that looks at society and its institutions as something that can be “improved” through collective choice.

Social contract, free ride

The publisher Liberty Fund has republished Anthony de Jasay’s book “Social Contract, Free Ride: A Study of the Public Goods Problem.” In this book, de Jasay, one of the most original and sharpest political philosophers of our age, offers a critical review of the public goods argument for the state. He argues that a) economists and political philosophers too easily dismiss the possibility of voluntary production of public goods, and b) that the social contract solution to establish a state to remedy market failure and free-riding will create an environment that will bring back free-riding with a vengeance.

Although de Jasay prefers to make his case by staying within the orthodox rational choice framework, he  admits the logical problems implicit in the social contract argument:

“The high road to coercion is the contractarian pretension that acceptance by a person of a share in a benefit he did not solicit is tantamount to his tacit acceptance of an obligation to provide a share of the corresponding contribution in the same way as those who did solicit the benefit.”

The desire for fairness in contributing to public goods tends to generate political arrangements that will undermine both justice and fairness:

“…while the intent of the social contract is to suppress free riding, its actual effects is to open up an altogether new ground on which it thrives with impunity. For the deterrent to state-of-nature free riding is the falling probability of successful public provision of a good as abuse of it by free-riding increases. When the necessary contributions for successful public provision are assured by coercion, no such check operates and free riding is never too risky. Risk, in fact, enters people’s calculations with the opposite sign: from a check upon free riding it turns it into a spur.”

Liberty Funds’ edition of the book is presented as “The Collected Papers of Anthony de Jasay.” Hopefully this indicates the start of an ongoing series of de Jasay’s (unpublished) writings.