Fair Markets vs Anthill Economics

by Eric Balkan

The free market.  The free enterprise system.  Free trade.   All euphemisms for unregulated capitalism.  Anything with the word “free” sounds good, implying both something for nothing and the personal freedom to do what we want.   But we know this is not what unregulated capitalism is about.   So how did “free” become linked with “greed”, and how do we unlink it?   We can start with a quick history trip back to the work of Adam Smith and a throw-away phrase he coined, appropriated by successive generations of economists: “the invisible hand” of the market.

If you have a rancher, a farmer, and a baker, what do you have?  A roast beef sandwich!  (You may not want a roast beef sandwich, but we’ll get to that in a minute.)  It’s a self-organizing system, with each component in the system doing its thing, without any central planning, and the result being something unexpected and more complex than an examination of its components would indicate.   This is an example of Complexity Theory, which essentially asserts that relatively simple elements can combine to produce more complex products.   (If I can be forgiven for oversimplifying.)  Water: two gases, hydrogen and oxygen, combine to produce a liquid with properties unlike its components.   Or an anthill:  inhabited by perhaps only 6 kinds of ants, each of whom has a specific function in the anthill.

From looking at each ant in isolation it would be hard to predict the result is a social system of significant robustness.  It may seem counter-intuitive that “the whole is greater than the sum of its parts”, but the interaction among the parts produces a more complex result.  (A sidenote:  for those readers thinking of entropy, the concept that things become simpler because they break down over time, it has to be noted that entropy only refers to a closed system.  Entropy does not apply to an open system subject to external influences.)

As intriguing and useful as this kind of emergent phenomenon is, one thing that Complexity Theory does not do is assert that the resulting product is optimal or even beneficial.  In the case of the anthill, the worker and soldier ants live for only a few weeks, while the queen lives for years.  The worker and soldier ants apparently don’t mind being expendable, though no one’s asked them.  This doesn’t quite work out as well with human beings, who often have a major problem with a huge disparity in status.  And in fact may object to the queen or king of the hill collecting a 7-figure bonus while the anthill is being washed away in a flood.

So how did Anthill Economics become the rule in the Anglo-American world?   British economic historian Karl Polanyi, writing in “The Great Transformation”, points to England in the 1830s as the turning point — decades after Adam Smith.   Prior to that time, economics and the market were always viewed as part of society, and that in fact is how Smith viewed it.    People engaged in market activities as part of their lives, along with family activities, religious rituals, etc.

But in the 1830s, stemming largely from the work of David Ricardo, the market came to be viewed as something apart from society.  Something with its own laws.  Laws that were universal and independent of culture, ethics, time period….   Rather than the market being constrained by the norms and values of society, society then became constrained in doing anything to break or even bend these laws of the market.  Attempting to emulate the laws of physics, with its studies of closed systems, 19th century economists like Alfred Marshall created mathematical relationships to express these laws.  This attitude culminated in the reported statement of neoclassical economist Leon Walras that if something can’t be modeled mathematically, it’s not worth studying.  And so economists dismiss “soft” sciences like sociology which largely insist on not using math to model human behavior.  Yet, we shouldn’t generalize that applied math isn’t useful, but rather that when used in economics, it could be better described as misapplied math.

In order for economists to make the math work, some assumptions had to be made.  A key one is that people always act in their rational self-interest.  If you prefer one car to another based on gas mileage, that can be quantified and modeled mathematically.  If you prefer one car to another because it’s cool, not only can what’s cool change from day to day, but it’s too subjective to be  measured.  And so neoclassical economics ignores it.   Ditto for the recent investment banking assumption that borrowers would not take on a higher mortgage payment than they could afford.

We know now, from neurological studies using functional MRIs, that both the rational and emotional parts of the human brain are simultaneously involved in decision-making.  It’s unlikely that a human being could even make a totally rational decision if he/she wanted to, because most of this processing is happening unconsciously.  So, in effect, neo-classical economics — still the predominant economic theory of the Angle-American world — does not actually work if human beings are involved.  Rather, it seems designed for androids.

So having created Android Economics, a.k.a. the free market, academic economists tried to implement it in the real-world.  They were met by what Polanyi calls the “double movement”.  That is, for each move to create a perfect market free of societal influence, society responded with a constraint.  Child labor became a no-no, unsafe working conditions got regulated, private fire departments went by the wayside… and so on.  In effect, the free enterprise system is no more than a theory that has never actually been put into practice — because few people would really want to live in a society where only money mattered.  The only way a free market could actually be implemented would be by a dictator overriding the will of the people.  And that would fail as well, as the absence of government in the marketplace simply creates a  power vacuum.  That vacuum would then get filled by those best at expanding their economic power, who would then seek political power so as to ensure their economic dominance,.  And then we’re back to the same old corporate-government partnership.

One facet of Android Economics that society found difficult to constrain was the concept that a firm should maximize its profits.  Not make the best product, not be loyal to its employees, not treat its suppliers and dealers fairly — but just maximize profits.  This tied in well with the basic human emotion of greed – and so we get Anthill Economics.

But does Anthill Economics even work?   Historian Robert S McElvaine, writing in “The Great Depression”, asserts that the underlying cause of depressions is a growing inequality of income, as happened during the Coolidge Administration.  That is, the growth of the income of those at the top of the heap far outpaces the income of the bulk of society.  Because the goal of the investor class is not so much to spend what they make — an observation by J M Keynes in “The General Theory” — but to invest their money to make more money, speculation increases as does investment in producing ever more products that the bulk of society can’t afford to buy.  Urged by investors to keep their stock prices rising, businesses are pushed to keep sales rising by extending more and more credit.   (Installment plans in the 1920s, credit cards and mortgage refinancing more recently.)  Eventually, credit becomes over-extended and the economy collapses.   So rather than thinking that periodic economic collapses are some kind of “black swan” events which can’t be predicted, they’re actually entirely predictable, and in fact, inevitable.

Can this be fixed, just by tweaking the free market concept?   Business writer Bethany McLean, author of  “The Smartest Guys in the Room”, noted in an interview that it’s a mistake to think that just some more regulations could have prevented the current financial meltdown.  When things are going well, no one wants to think about regulations.  New regulations that are needed don’t happen.  Regulations already on the books get tossed aside as being obstacles to the pursuit of profit.   E.g., the Glass-Steagall Act of 1933, written to prevent commercial banks from over-speculating, was shot down in 1999, just when it was most needed.  Closing the barn door and all that.  So in addition to any regulations that sound good at the time, we also need to change the conversational framework — to get away from the concept that free market ideology is what we should aspire to, and that it’s periodic breakdowns must be because of something the government did.  Invariably the ideologue will argue that his ideology can work if people just let it.   When hearing that, we should keep in mind that an ideology, as the E.C. Cuff et al  “Perspectives in Sociology” has it, can be described as “a system of ideas which systematically misrepresents reality.”

What about free trade?  Here “free” again means that multi-national corporations are free to maximize profits, without regard for the consequences.  Economist H-J Chang, writing in “Bad Samaritans”, notes that historically no country has ever gotten free trade to work.  During the heyday of the free trade concept back in the 19th century, the US often had tariffs as high as 30-50%.  Great Britain, often used as the example of successful free trade, did in fact go to a zero tariff in 1860.  But this was after using tariffs – and its military power — to establish a dominant industrial position – and then did what economist Friedrich List refers to as “kicking away the ladder” (quoted by Prof Chang).

In the post-WWII 20th century, the IMF and World Bank required that third world countries adopt free trade policies as a requirement for getting loans.  Yet even World Bank internal memos admit these policies had an adverse effect. (The documentary “Life and Debt” depicts what happened to Jamaica after getting a World Bank loan.)   It doesn’t take much research to note that the financial health of the emerging market countries seems inversely related to how much help they received from the World Bank.  Another Ricardian theory busted.

Despite the cries of blasphemy that academic economists raise when questioned, It’s not hard to conclude that the free market, free enterprise, and free trade have only existed in theory and never in reality. Even in the modern globalized economy that we’re told is borderless and flat, is it reasonable to expect a laid-off textile worker in South Carolina to move to China for a job?  In the “Soul of Capitalism”, William Grieder quotes the Rev. Emil Brunner: “Capitalism is irresponsibility developed into a system.”

So then what’s the answer?  How about fair maket, fair enterprise, and fair trade, expressions only in limited use today.   “Fair” when applied to economics refers to an economy not in its own world separate from society, but an economy subject to society’s values.   A number of writers and researchers, such as James Q Wilson, writing in “The Moral Sense”, have noted that human beings worldwide seem to share a basic sense of fairness, though how it’s implemented varies quite a bit from one culture to another, and from one social group to another.  (Also empathy, and perhaps other traits.)   It can’t yet be said if this sense of fairness is inborn or is simply a cultural adaptation — social psychological lab reasearch indicates that any group where members treat each other fairly thrives more than those that don’t.  But whichever it is, it seems we all have the desire and capacity for making fair decisions.  Some will be simple, others will require evidence presented to a jury or expert panel.

Perhaps as an aid to figuring out what’s fair we can borrow the “veil of ignorance” concept from philosopher John Rawls, author of “Justice as Fairness” among other works.   That is, a fair decision on an issue between two parties is more likely to be reached if the judge doesn’t know to which side he belongs.  That’s not unrelated to a parent’s method of dividing a candy bar between two children by having one child make the split and the other one choose which half he wants.

How would a concept of fairness work out in the “free market” workplace?  The concept of “free” implies that people can do what they want.  But in practice, economic freedom is reserved more for employers than employees.  Talking union at a box store will likely get you fired  — the freedom of an employer to fire “at will” overruling freedom of speech.  Employee freedoms are often limited to showing up for work, or not.  Employer freedoms include the right to control what employees say, what they do, perhaps what they wear….  We spend more hours at work than in any other activity, yet our freedom at work is limited.  Even when on our own time, when we’re told we’re “free to choose” what products to buy, that selection is not only limited by what marketers have figured out they can get us to be unconsciously receptive to, but it begs the larger question:  is a society where the production, or over-production of consumer goods is paramount really the society we want?  Richard Layard, writing in “Happiness: Lessons from a New Science” notes that what people say makes them happy, revolves much more around spiritual/emotional needs like relationships with framily and friends than it does around consumer goods.

Free trade defenders, when questioned about their faith, invariably omit the word “free” in their discusions, trying to turn the issue into trade vs no-trade.  But fair trade is not no-trade. Fair trade could mean simply that we expect imported goods to be made by the same standards of product safety, worker compensation, pollution control, etc — that we have here in the U.S.  So likely anything imported from Canada would qualify, but goods imported from a sweatshop in China would not.   It’s hardly fair, despite the protestations of the academics, to expect US business to be able to compete against imports made in countries that don’t have equivalent standards.

What would a fair economy look like?  (Borrowing that term from the subtitle of economist Jared Bernstein’s book “All Together Now”.)  One thing it likely would not mean is the continuance of an economic system where business is responsible only to shareholders, most of whom are primarily interested in what the stock price will do tomorrow, and not in any long term future of the business, nor any consideration of the public, of employees, of suppliers, or of dealers.  Yet, these other groups all have a stake in the future of the business and its products that they’re involved with.  So a fair thing to do would be to give them a voice, even if this does not maximize profits.  Not that the neoclassical assumption that firms always maximize profits even holds, as there are always CEOs who have discovered they can increase their own compensation by engaging in quick-buck strategies detrimental to the firm’s long-term profitability, or even survival.

Right-wing libertarians, such as inhabit the Cato Institute, which perhaps should more properly be called the Dogo Institute for their defense of dog-eat-dog capitalism, seem blissfully unaware that corporations are creatures of the state.  Corporate charters are granted by state governments.  No government involvement in the economy, no corporations.  An interesting historical note here is that corporations were originally only granted the right to participate in a specific kind of business, for a specific period of time, after which they were dissolved.  But as corporations got larger, they pressed for looser and looser corporate charters.  They also managed, via court decisions by judicial activists, to get corporations the same rights as individuals.  Technically, this could be reversed via the same kinds of laws and rulings.  But, practically, it may make more sense for society, via the government, to try to establish a balance of power between the megacorporations and the rest of society.

The US was founded largely under the concept of the social contract, whereby people agree that in living together they give up some of the things they could do if they were living alone.  This contract, or, as some prefer, compromise, is enforced by the government.   To ensure a fair economy, and a fair society, government policies would have to be fair.  E.g., rather than no regulation, or regulation for the sake of regulation, regulations would have to be subject to a fairness test.

But how reasonable is it to expect that a fair economy can occur?   Fairness has the advantage of already being part of our culture.  Most of us are already inclined to do what’s fair regardless of rewards or punishments. As individuals, as opposed to corporations, we feel unsettled when we see something unfair, and we feel guilty if we’re responsible for it.   That’s a big plus, because sociologists, as well as the U.S. Marines, tell us that shared beliefs and attitudes are a stronger motivator than either rewards or punishments.

This is not to say that a fair option is always obvious.  In the case of health care reform, what would be fair to the public is open to discussion. But what should not enter into the discussion is a quasi-religious belief that medical care needs to be administered by huge insurance companies, because that’s The American Way.  The American Way is actually *not* to let business have a free hand in the market. The history of America is one of ethics trumping profits, though it often takes a while.

Of couse, getting this point across is way harder than it sounds, given that our politics is not typically arrived at rationally, but rather is a product of a socialization process that begins when we’re young, establishing a frame of reference in our heads   As Bruce E. Wexler describes in “Brain and Culture”, our internal representation of the world is built neurologically.  When we’re very young, cultural input via our family determines the neural connections we make.  Then as we get older, this neuroplasticity decreases, but we still try to unconsciously match what’s in our heads with what’s out there in the world — but now we do it by trying to change the world, or at least our interpretation of it.   The upshot is that no two people, even those observing the same thing, will interpret that observation quite the same way.  This is what probably underlies Max Planck’s statement that “a scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.”  I.e., a paradigm shift.  Yet, if a new idea can be made to fit into the comfort zone of its listeners, it may be able to avoid a lot of that knee-jerk opposition.

Much political/economic discussion revolves, unfortunately, around labeling.  Labeling is a mental shortcut that allows people to instantly categorize something without having to think about it:  liberal, socialist, conservative, right-winger….    Free market advocates often paint any opposition as “socialist”.   That’s an especially misleading label for liberals — it’s as if, when you take a shower, you’re required to turn the water all the way to cold or all the way to hot, rather than regulating the temperature.

Nonetheless, labels are a start.  My suggestion then, is that realists stop buying into the polarizing “Socialism vs The Free Market” dichotomy, but rather start thinking/talking about the positive option of a fair market. We can then change the nature of the discussion from being about how much free market ideology we can stand, to a discussion about what’s fair and what’s not fair.   Fair enough?



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