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The divine right of markets

Flickr/tobym

There was a time when absolute monarchies ruled the world, and many learned men praised the supposed blessings that kings bestowed upon their subjects, by giving them clear orders to follow and removing the need for democracy with its complicated, messy, inefficient debates. Then the world changed, and those “learned men” had to transfer their allegiance to a new kind of king: the market.

Even among people who understand the many evils of capitalism, markets are treated with special respect, as if they were the one good thing about capitalism, as if they alone – like the kings of old – were able to give us order and efficiency. It is argued, for instance, that markets solve the problem of economic calculation by giving us a simple price mechanism to follow in making decisions.

Suppose you are trying to decide which material to use for making traffic signs. Should you use iron or steel or aluminum or tin? Or perhaps something else? The market gives you one way to decide: just look at price signals. Which material is cheaper? Which one allows you to produce traffic signs for the lowest cost? Use that one. Problem solved.

Making decisions in this way – based on price alone – leaves out an immense number of other important factors. What if the cheapest material is aluminum, but the production of aluminum causes a great deal of pollution? It may be better for society to use a more expensive, but less polluting material. Or what if the cheapest material is produced using child labor, but another material is produced by well-paid adult workers? It may be better for society to use the more expensive, but more ethical option.

And here lies the problem: The market does not politely suggest that you should use the cheapest material. It forces you to do so. If your company’s traffic signs are more expensive because you do not wish to pollute or to use child labor, then another, less moral company will sell cheaper traffic signs and drive you out of business.

If you care about people, you lose. That is the logic of the market and the price mechanism.

Proponents of free markets talk about this feature of the market system as if it were a good thing. They like to claim that price signals help companies figure out the best way to produce things, and that competition and the profit motive lead to the success of the most efficient firms and the demise of the inefficient ones. But price signals do not “help.” They compel. Obeying them is mandatory. Private companies must produce things in the cheapest possible way, no matter who gets hurt. That is the meaning of market “efficiency.”

At this point, a defender of the market system may object and say that private companies are only doing what consumers want them to do, so it is the fault of consumers if those companies are forced to act unethically. Consumers are just as much prisoners of the price system as the firms from which they buy. We cannot be expected to research every single detail of the production process of everything we buy. For example, I may wish to buy products made by workers who are paid a living wage. But even the simplest product – like a jar of peanut butter – is produced by the effort of many different teams of workers employed by many different companies. Someone harvests the peanuts, someone else makes the jar and so on. I wouldn’t even know where to start tracking down information on all those companies and their working conditions – and that’s just for one product. No matter how much I care about my fellow man, the market forces me to make buying decisions based on the cold, cruel calculation of price.

In fact, the profit motive gives companies an incentive to hide skeletons in their closets and pretend to be ethical. A concerned consumer would not only be required to do a vast amount of research, but also to sift through lies.

The market doesn’t just give us prices as a guide for economic decisions. It shoves them down our throats, and hides away all other information in a dark corner. To be sure, it also makes things easy for us, in the same way that it is easier to obey the commands of a king (“maximize profits, or perish!”) than to think for yourself and debate complex issues in a democracy.

If we had a socialist society, without markets telling us what to do, how could we ever decide what to produce and how to produce it? We would have to carefully consider all sorts of complicated factors, like environmental impact, social equality or workers’ standards of living. We would have to debate things, sometimes at length. It would be messy, and mistakes would be made. But it is better to have all those issues out in the open and argue about them than to blindly follow the orders of His Majesty the Market.

Mike Tudoreanu is a Collegian contributor. He can be reached at mtudorea@econs.umass.edu.

Comments
2 Responses to “The divine right of markets”
  1. N. says:

    of course capitalism doesn’t just rely on ‘the’ price mechanism, it also relies on the cops. oh but wait, so does socialism…

  2. Brian says:

    I assume this was written in response to that column about the calculation problem a few weeks ago. Good job, although you only brought up one of the several arguments that socialists can use to refute the claims of the market fundamentalists. You basically said, “market prices are a horrible and misleading mechanism for economic calculation anyway, so if socialist planners don’t have access to it, that’s not much of a loss.”
    .
    It’s a powerful argument, but you should have gone further. There is a positive case to be made for socialist economic calculation, not just the negative case which explains that capitalist calculation isn’t any better.
    .
    Socialist calculation, in the total absence of markets, can be carried out using labor-time accounting. How many man-hours (assuming a worker of average skill) does it take to produce a street sign out of aluminum? How many does it take to produce that same sign out of steel? The option that requires the least man-hours – the least human effort – is the most efficient. It is also the “cheapest” in a sense, because it uses the least possible amount of our universal resource.

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