Travis says: Economic conservatives profess a faith in “markets.” They lament that if we would simply get government out of the way and allow markets to operate in areas such as education and healthcare, we would obtain better outcomes. In Chapter 2 of his latest book, The Predator State, James K. Galbraith asks some fundamental questions about how markets work and for whom. “When you come down to it, the word market is a negation. It is a word to be applied to the context of any transaction so long as that transaction is not directly dictated by the state. The word has no content of its own because it is defined simply, and for reasons of politics, by what it is not. The market is the nonstate, and thus it can do everything the state can do but with none of the procedures or rules or limitations….Because the word lacks any observable, regular, consistent meaning, marvelous powers can be assigned. The market establishes Value. It resolves conflict. It ensures Efficiency in the assignment of each factor of production to its most Valued use, and of each consumable good or service to the customer who wants it most.”
 
In reality, markets fail all the time – and not just because government gets in the way. For starters, there are the standard textbook examples: monopoly, monopsony, externalities, and the like. But two more fundamental impediments exist. First, humans are irrational. People do not always and everywhere act to maximize utility in every decision. Instead, they are influenced by fashion, whimsy, and a desire to keep up with the Joneses. This is not a moral judgment, my point is that many of the simplest textbook economic models require individuals to act in ways that they do not. The entire field of behavioral economics is dedicated to showing how human psychology prevents the market from working efficiently. Secondly, while the textbook market actors are autonomous individuals or small firms looking out for their own self-interests, in practice large corporations are often the principal players. Corporations do not aim to operate within a market, they aim to control markets. They squeeze out competitors, lobby public officials for favorable tax and regulatory treatment, and seek to exploit human frailty. Galbraith concludes: “The actual world…cannot be what a conservative means by a “free-market system.” In the actual world, the “freedom to choose” among a menu of items set out for sale – however vast – does not give to the consumer an equal weight in the decisions over what is produced. Instead, it merely reproduces, in conditions of comparative but far from complete disorder, the phenomena of planning, rationing, queuing, indoctrination, and control that characterize unfree systems. Advertising is propaganda. Research and development is planning. The call from the Wall Street analyst and the visit from the ministerial inspector are the same.”

So why does there remain so much fealty to the “free-market” mantra? Is Galbraith’s analysis outlined above wrong in some fundamental way, or do conservatives simply trust the motivations of politically powerful global corporations more than democratically elected leaders and government bureaucrats?

If you need a specific market-based reform to think about, use school vouchers. School vouchers appeal to individuals across the political spectrum, from poor members of minority communities trapped in failing schools to anti-tax conservatives. Conservatives believe that if parents are “free to choose” a school, they will gravitate towards those that provide the best education and put the poor-performing schools out of business. But why is that the assumed outcome? Why would we not expect giant corporations to dominate the education business, to dupe consumers with dishonest advertising, to compete on trivialities like which schools have the best sports teams, best lunches, or best uniforms?

Don’t get me wrong, I do not think that the state is inherently good, and I do believe that competition often fosters better outcomes. That said, a conservative’s blind allegiance to the “market” seems at least as dangerous to me as a liberal’s blind allegiance to the “state.” I’m sure you disagree…

(Disclosure: Professor Galbraith is Travis’s dissertation advisor. Professor Galbraith did not see a draft of this column, which does not do justice to the nuance of his arguments in The Predator State. -- TH)

Jim says: My goodness, Travis, I hardly know where to start. First, I’ll surprise you a bit and say in the end, I won’t completely disagree with you. Second, I’ll say you manage to posit in a page and a quarter what might take a complete book for a thorough response. Very impressive.

Undaunted, I’ll give it a shot, but probably not in the order you have above, for I think a few things have to be established first to draw some conclusions. Let us start with corporations. You certainly give them a lot of credit and power. This is interesting, for corporations are nothing but a collection of properly filed papers. I have seen plenty of bad actors with titles such as chairperson, CEO, or COO “frog-walked” to an arraignment, but I have never seen this happen to a corporation.

Corporations, probably less frequently than we realize (for there are so many of them), have employed competent people turned criminal, but a corporation itself can neither be good nor evil, for it, in and of itself, is nothing but a collection of inanimate legal filings. So, may I suggest you redirect some of your corporate venom towards criminally inclined individuals? There are certainly plenty of them around for you and I both to castigate.

Corporations are the evolutionary descendants of the old charters handed out by kings and queens. The Hudson Bay Company, now a Canadian department store chain, known as “The Bay” (or “la Baie” if you are in Quebec) is an excellent example. Such a legal mechanism allowed (and allows in its modern form) individuals to collectively invest their money in a legally living (but inanimate) entity for the purpose of accomplishing a task, and, in the case of for-profits, earning a return for the investors. This entity can hire people of various skills and persuasions, enter into contracts and so forth. All the employees, officers and directors have a fiduciary responsibility first to the owners, to protect and grow the investment. Operating outside the law, whether that be criminal, civil, regulatory, or whatever, jeopardizes the investors’ assets, and is at least a cause for dismissal, if not civil suit, by the investors.

So, the corporation is not evil, for it is inanimate. Its officers and employees do face severe retribution if they act in any manner that jeopardizes the investor’s stake in the company. It thus behooves these people associated with the corporation to behave in a sterling manner. We may have some disagreement as to what a “sterling manner” is but we’ll get to that in a moment. Aiming to “control a market” (your words) leads, at least in the United States, Europe, and the British Commonwealth, to severe retributions. President Teddy Roosevelt was at the forefront of this effort, breaking up the Northern Trust Company and others over 100 years ago. These efforts extend to this day and have resulted in Microsoft being hauled before the proper authorities in Europe, the breakup of the old “ma Bell” telephone company in the United States, and other such activities.
 
When Procter & Gamble bought Gillette a couple of years ago, the antitrust people on both sides of the Atlantic required they give up the “Crest” electric tooth brush for they perceived that this product combined with the Braun line owned by Gillette would engender a monopolistic condition. Speaking of Procter & Gamble, let’s look at them for a minute. A venerable company, founded during the administration of Martin Van Buren and with 2008 top line sales of USD 83 billion, this looks like a “corporation” you might want to castigate. Did I mention their products are used 3 billion times per day? They also spent about 3.5 billion dollars on propaganda, I mean advertising, in 2008. I own their stock, and I trust their CEO, A.G. Lafley, to be a responsible fiduciary. However, Lafley, in a meeting I attended about a year ago, basically admitted, not in quite so many words, that sometimes he is not a good fiduciary for us stockholders. For he and the other officers and the board of directors of P & G believe in safe drinking water for everyone, everywhere. Lafley admits the funds P & G spends on this earn no return for investors. He says they do it because it is the right thing to do (see csdw.org for more information).

One would think a company with 83 billion in sales and whose products are used 3 billion times a day would be very powerful, right? Wrong. When one sets out to have top line results reach numbers such as these, from customers that make decisions two or three dollars at a time (at retail, not wholesale, where the 83 billion counts) and who have the free choice of choosing your product, a competitor’s product, or no product, you (the collection of people and systems that make up the corporation) must be very, very good at what you do.

A short story to illustrate. In the mid-1970s “Bounce” (P & G’s dryer sheet fabric softener) was brand new. “Urban legends” (we did not know to call them that then) abounded that Bounce would set your dryer on fire or corrode it from the inside out. Being on the inside of P & G looking out in those days, I’ll tell you that these were worrisome issues. I was in engineering, but we were close enough to the product managers to see the reaction. First, when it came to the corrosion issue, Bounce was formulated by region of the United States. The coastal regions, where corrosive salt air exists, were supplied a special Bounce formulation with a rust inhibitor—one’s dryer was actually better protected from corrosion by using Bounce. As for dryer fires, these were monitored by P & G throughout the United States and a “swat team,” not unlike the teams the National Transportation Safety Board deploys when a plane crashes, were sent to every dryer fire. They forensically analyzed it, reported on the root causes and replaced the dryer (I am not sure what they did about other home damage). To my limited knowledge, there was never a dryer fire caused by Bounce, but P & G was diligent, one might say paranoid, about stomping out the rumors. They knew the success of Bounce depended on determination and promulgation of the absolute truth.

In today’s news, one can read much about the pirates operating off the coast of Somalia, a lawless country of immeasurable poverty. Yet I will submit these pirates have created a very free market, one certainly without any government regulation (a classic example of Galbraith’s definition). Many ships, reports of over 80 in the last year, have been boarded by the pirate forces off Somalia and Yemen. Why? Because their “customers” have freely paid for the “services” the pirates render. What are these services? To free the ships once they have been captured. The owners of the ships have willingly paid the ransoms demanded to have their property back. The owners’ insurance companies willingly reimbursed the owners who have had to pay for these “services.” The owners have not even bothered to arm their crews, another “market choice” they could have made and have not to date. For as long as the market does not get too far out of hand, the insurance companies charge enough premium to make a profit and reimburse the owners, the owners get their property back, and everyone is happy. However, like all markets, the pirates are getting greedy and may be turning this one into one of “irrational exuberance,” in which case it will be shut down (probably by a coalition of those darned interfering governments’ navies).

Regulation must come to all markets eventually. So, if not free markets, what kind of markets do you want to have? Yes, they have flaws, and, with increasing sophistication (just like the pirates’ handy little business) all markets need creeping regulation to keep up with these changes, but free markets appear to be the best choice, for the other choice seems to be some sort of socialistic one, where somebody smarter than me (read: who thinks they are smarter than me) decides what I will buy, when I will buy it, and what I will pay for it.

This describes the public school system in the United States — a poorly run monopoly if there ever was one. You hypothesize that if parents were “free to choose” a school system those dastardly inanimate corporations would swoop in and hoodwink them and their children into a poor education. I suspect the parents in Detroit wish they could be so lucky. Yet, as you say this, many parents, even when forced by the tax system to pay for the monopolistic inadequate public system they do not use, are choosing to educate their children themselves in “home school” programs. My nephew, your wife’s cousin, seems to have survived such an education and is now a successful student in a prestigious, private university.

With the U.S. Congress recently voting to eliminate an alternative program in Washington, DC, one that would fund some poor children going to the same school as the President’s children, one can only assume that they (Congress) are fearful of free choices in this area. Protecting children from the Quakers (who run the school attended by the Obama children) does not seem to be something anyone would need worry about otherwise.

Face it, the current public school systems in the United States, separately or together, would not be allowed to exist if subjected to the very same antitrust laws by which corporations are judged. We are harder on cable TV companies’ monopolistic behaviors than we are on the school systems’ take it or leave it attitudes.

As an aside, when it comes to socialism, I would submit that socialism and corporations are almost identical in their operation. Both possess strong leadership and subsume the individual’s freedom of choice. The only difference is the corporation’s severest banishment is severance, while the socialistic society uses the penal system (or worse) on the non-compliant.

Well, I have wandered a bit, but let’s come back to a few of your other points to wrap up. Early on you state “… humans are irrational.” Well, that is a judgment call on your part, based upon your own value system and your personal definition of irrational. Every decision does not have to be utilitarian, in fact, I suspect we could not even agree on a definition of utilitarian. Being “influenced by fashion, whimsy….” is not all bad. There are many, many people around the world employed making goods for those that choose to be influenced by fashion. I, for instance, have a perfectly good pair of sandals (with recycled auto tires for soles) that I bought in May of 1969, 40 years ago, at the then fashionable Mabley & Carew Department Store in downtown Cincinnati. Yet, several years ago, to avoid embarrassing the family any further (read: to get them to quit harassing me on the subject), I purchased a modern pair. Somebody had to make this new, unneeded (from a utilitarian point of view) pair of sandals. I gave them a job.

While I will mostly concede your first quote from Dr. Galbraith (while saying under my breath, so what is wrong with markets behaving as he says?) I think there are some problems in the second citation. His statement, for instance, “…does not give the consumer an equal weight in the decisions over what is produced.” is accurate only in the special case of a specific instant in time, and even then not accurate if you give the consumer the choice of the null set (the choice to do nothing). Over time, in a free market situation, the consumer is all powerful and makes every choice in what is produced (except in the case of government services, such as schools, city safety services, highway speed limits, highway bicycle lanes, replacing stop signs with rotaries, the social security system, and so forth, where no choice is offered, not even the null set choice). Otherwise I would not have, for example, a collection of obsolete cell phones, all produced within the last 10 years and all perfectly functional had it not been for irrational consumer decisions to replace them with the latest and greatest.

I also take exception to his blanket statement “Advertising is propaganda” (disclosure: Paperitalo Publications depends on and endorses advertising as an extremely important legitimate activity and its primary revenue source). I will accept that advertising can be propaganda, but on the other hand, advertising is a very efficient method of communication if the program is designed properly. How, for instance, would anyone know that Toyota had produced the Prius, an environmentally friendly automobile, if Toyota had not used advertising? If Toyota had sneaked one into each dealers’ showroom under the cover of darkness and waited while the casual stroller stopped by to see what is new, do you think they would have reached the market penetration they have in a few short years?

As a retort, I would counter Public Television and Radio are propaganda, for why do we need these information services supplied by the government other than to ensure the government gets out the message it wants the populace to hear? I have an infinite selection of channels to listen to and only use the public ones for the old BBC British Sitcoms—I certainly don’t trust these propaganda machines for any legitimate news — the “Daily Show” and the “Colbert Report” rank far above these for legitimate takes on the news (as long as you understand the use of satire). Everyone takes advantage of the “free markets” --even you and, I suspect Dr. Galbraith (I had to look up fealty—having never been a serf, except to the Internal Revenue Service, I was unfamiliar with it). They often serve us very, very well.

You for instance, like blackberries. You have noted, however, that at certain seasons of the year, they are less expensive than at others. Being a wise and practical individual, you also observed that your home refrigerator’s freezer section had some extra room and you could buy a surplus of these berries when the price was low, freeze them, and enjoy them year around at this lowest market price. You probably did not think about it much, but fleetingly you recognized that freezer space was essentially free (you had a surplus of it, so it had no incremental capital cost) and the electricity required to freeze the berries and maintain them in a frozen state was de minimis to your family.

However, suppose over there at your wife’s place of employment, NREL (the National Renewable Energy Laboratory) someone calculates that, when taken as a whole, every refrigerator in the country has a surplus 1 to 2 cubic feet of space in its freezer section that is just wasted, and further, when multiplied by 80 million (I am guessing) or so refrigerators, the continual cooling of this space is the equivalent of running three coal-fired power plants in the United States 24/7 (another guess). Coincidently, at about the same time, the Whirlpool plant on U.S. Route 41 in Evansville, Indiana, falls on hard times. Since the Toyota truck plant, just 20 miles north on 41 in Princeton, Indiana, is already suffering from a reduced demand, employment is looking grim in southwestern Indiana. Some great wise one in some government bureaucracy says, “Aha! We will mandate smaller freezers and dictate that all shall be replaced in the next two years (akin to the digital television boondoggle currently under way). We’ll reduce emissions and jack up the demand at Whirlpool (and other appliance manufacturers).”

You just lost your frozen blackberry storage space and your freedom to hedge the blackberry market. So your choice in the February after you get your new refrigerator/freezer is to (a) do without blackberries or (b) pay a higher price for Chilean blackberries — which will simultaneously reduce your disposable income and increase the U.S. foreign trade deficit (but make some berry pickers in Chile happy).

On the surface, the freezer reduction policy looked like it made sense, but it set off an extremely complex chain of reactions, only one of which I am able to capture here. Likewise, all transactions, even buying blackberries, are complex. However, until someone can come up with a better system, the “free” markets make the best choices for the most people, a much better system than someone sitting around thinking what is “best for us.”