Author: Guest Author

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The twentieth myth — Markets Can Solve All Problems without Government at All — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Can Solve All Problems without Government at All

Myth: Government is so incompetent that it can’t do anything right. The main lesson of the market is that we should always weaken government, because government is simply the opposite of the market. The less government you have, the more market you have.

Tom G. Palmer: Those who recognize the benefits of markets should recognize that in much of the world, perhaps all of it, the basic problem is not only that governments do too much, but also that they do too little. The former category — things that governments should not do, includes A) activities that should not be done by anyone at all, such as “ethnic cleansing,” theft of land, and creating special legal privileges for elites, and B) things that could and should be done through the voluntary interaction of firms and entrepreneurs in markets, such as manufacturing automobiles, publishing newspapers, and running restaurants. Governments should stop doing all of those things. But as they cease doing what they ought not to do, governments should start doing some of the things that would in fact increase justice and create the foundation for voluntary interaction to solve problems. In fact, there is a relation between the two: governments that spend their resources running car factories or publishing newspapers, or worse — confiscating property and creating legal privileges for the few — both undercut and diminish their abilities to provide truly valuable services that governments are able to provide. For example, governments in poorer nations rarely do a good job of providing clear legal title, not to mention securing property from takings. Legal systems are frequently inefficient, cumbersome, and lack the independence and impartiality that are necessary to facilitate voluntary transactions.

For markets to be able to provide the framework for social coordination, property and contract must be well established in law. Governments that fail to provide those public benefits keep markets from emerging. Government can serve the public interest by exercising authority to create law and justice, not by being weak, but by being legally authoritative and at the same time limited in its powers. A weak government is not the same as a limited government. Weak unlimited governments can be tremendously dangerous because they do things that ought not to be done but do not have the authority to enforce the rules of just conduct and provide the security of life, liberty, and estate that are necessary for freedom and free market exchanges. Free markets are not the same as the sheer absence of government. Not all anarchies are attractive, after all. Free markets are made possible by efficiently administered limited governments that clearly define and impartially enforce rules of just conduct.

It is also important to remember that there are plenty of problems that have to be solved through conscious action; it’s not enough to insist that impersonal market processes will solve all problems. In fact, as Nobel Prize winning economist Ronald Coase explained in his important work on the market and the firm, firms typically rely on conscious planning and coordination to achieve common aims, rather than on constant recourse to market exchanges, because going to the market is costly. Each contract arranged is costly to negotiate, for example, so long-term contracts are used instead to reduce contracting costs. In firms, long-term contracts substitute for spot-exchanges and include labor relations involving teamwork and conscious direction, rather than constant bidding for particular services. Firms — little islands of teamwork and planning — are able to succeed because they navigate within a wider ocean of spontaneous order through market exchanges. (The great error of the socialists was to try to manage the entire economy like one great firm; it would be a similar error not to recognize the limited role of conscious direction and teamwork within the wider spontaneous order of the market.) To the extent that markets can provide the framework of creation and enforcement of rules of just conduct, advocates of free markets should promote just that. Private security firms are often better than state police (and less violent, if for no other reason than that the cost of violence are not easily shifted to third parties, except by the state); voluntary arbitration often works far better than state courts. But recognizing that entails recognizing the central role of rules in creating markets and, thus, favoring efficient and just rules, whether provided by government or by the market, rather than merely being “anti-government.”

Finally, it should be remembered that property and market exchange may not, by themselves, solve all problems. For example, if global warming is in fact a threat to the entire planet’s ability to sustain life, or if the ozone layer is being degraded in ways that will be harmful to life, coordinated government solutions may be the best, or perhaps the only, way to avoid disaster. Naturally, that does not mean that markets would play no role at all; markets for rights to carbon dioxide emissions might, for example, help to smooth adjustments, but those markets would first have to be established by coordination among governments. What is important to remember, however, is that deciding that a tool is not adequate and appropriate for all conceivable problems does not entail that it is not adequate and appropriate for any problems. The tool many work very well for some or even most problems. Property and markets solve many problems and should be relied on to do so; if they do not solve all, that is no reason to reject them for problems for which they do offer efficient and just solutions.

Free markets may not solve every conceivable problem humanity might face, but they can and do produce freedom and prosperity, and there is something to be said for that.

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The eighteenth myth — Privatizaton and Marketization in Post-Communist Societies Were Corrupt, Which Shows that Markets Are Corrupting — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Privatizaton and Marketization in Post-Communist Societies Were Corrupt, Which Shows that Markets Are Corrupting

Myth: Privatization campaigns are almost always rigged. It’s a game that just awards the best state assets to the most ruthless and corrupt opportunists. The whole game of privatization and marketization is dirty and represents nothing more than theft from the people.

Tom G. Palmer: A variety of formerly socialist states that have created privatization campaigns have had quite varied outcomes. Some have generated very successful market orders. Others have slipped back toward authoritarianism and have seen the “privatization” processes result in new elites gaining control of both the state and private businesses, as in the emerging “Siloviki” system of Russia. The dirtiness of the dirty hands that profited from rigged privatization schemes was a result of the preexisting lack of market institutions, notably the rule of law that is the foundation for the market. Creating those institutions is no easy task and there is no well known generally applicable technique that works in all cases. But the failure in some cases to fully realize the institutions of the rule of law is no reason not to try; even in the case of Russia, the deeply flawed privatization schemes that were instituted were an improvement over the one-party tyranny that preceded them and that collapsed from its own injustice and inefficiency.

Mere “privatization” in the absence of a functioning legal system is not the same as creating a market. Markets rest on a foundation of law; failed privatizations are not failures of the market, but failures of the state to create the legal foundations for markets.

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The seventeenth myth — When Prices are Liberalized and Subject to Market Forces, They Just Go Up — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: When Prices are Liberalized and Subject to Market Forces, They Just Go Up

Myth: The fact is that when prices are left to market forces, without government controls, they just go up, meaning that people can afford less and less. Free-market pricing is just another name for high prices.

Tom G. Palmer: Prices that are controlled at below market levels do tend to rise, at least over the short time, when they are freed. But there is much more to the story than that. For one thing, some controlled prices are kept above the market level, so that when they are freed, they tend to fall. Moreover, when looking at money prices that are controlled by state power, it’s important to remember that the money that changes hands over the table is not usually the only price paid by those who successfully purchase the goods. If the goods are rationed by queuing, then the time spent waiting in line is a part of what people have to spend to get the goods. (Notably, however, that waiting time represents pure waste, since it’s not time that is somehow transferred to producers to induce them to make more of the goods to satisfy the unmet demand.) If corrupt officials have their hands open, there are also the payments under the table that have to be added to the payment that is made over the table. The sum of the legal payment, the illegal bribes, and the time spent waiting in lines when maximum prices are imposed by the state on goods and services is quite often higher than the price that people would agree on through the market. Moreover, the money spent on bribes and the time spent on waiting are wasted — they are spent by consumers but not received by producers, so they provide no incentive for producers to produce more and thereby alleviate the shortage caused by price controls.

While money prices may go up in the short time when prices are freed, the result is to increase production and diminish wasteful rationing and corruption, with the result that total real prices — expressed in terms of a basic commodity, human labor time — goes down. The amount of time that a person had to spend laboring to earn a loaf of bread in 1800 was a serious fraction of his or her laboring day; as wages have gone up and up and up and up, the amount of working time necessary to buy a loaf of bread has fallen to just a few minutes in wealthy countries. Measured in terms of labor, the prices of all other goods have fallen dramatically, with one exception: labor itself. As labor productivity and wages rise, hiring human labor becomes more expensive, which is why modestly well off people in poor countries commonly have servants, whereas even very wealthy people in rich countries find it much cheaper to buy machines to wash their clothes and dishes. The result of free markets is a fall in the price of everything else in terms of labor, and a rise in the price of labor in terms of everything else.

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The sixteenth myth — Markets Only Benefit the Rich and Talented — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Only Benefit the Rich and Talented

Myth: The rich get richer and the poor get poorer. If you want to make a lot of money, you have to start out with a lot. In the race of the market for profits, those who start out ahead reach the finish line first.

Tom G. Palmer: Market processes aren’t races, which have winners and losers. When two parties voluntarily agree to exchange, they do so because they both expect to benefit, not because they hope they will win and the other will lose. Unlike in a race, in an exchange, if one person wins, it doesn’t mean that the other has to lose. Both parties gain. The point is not to “beat” the other, but to gain through voluntary cooperative exchange; in order to induce the other person to exchange, you have to offer a benefit to him or her, as well.

Being born to wealth may certainly be a good thing, something the citizens of wealthy countries probably do not appreciate as much as do those who seek to emigrate from poor countries to rich countries; the latter usually understand the benefits of living in a wealthy society better than those who are born to it. But within a free market, with freedom of entry and equal rights for all buyers and sellers, those who were good at meeting market demands yesterday may not be the same as those who will be good at meeting market demand tomorrow. Sociologists refer to the “circulation of elites” that characterizes free societies; rather than static elites that rest on military power, caste membership, or tribal or family connection, the elites of free societies — including artistic elites, cultural elites, scientific elites, and economic elites — are open to new members and rarely pass on membership to the children of members, many of whom move from the upper classes to the middle classes.

Wealthy societies are full of successful people who left behind countries where markets are severely restricted or hampered by special favors for the powerful, by protectionism, and by mercantilistic monopolies and controls, where opportunities for advancement in the market are limited. They left those societies with little or nothing and found success in more open and market-oriented societies, such as the USA, the United Kingdom, and Canada. What was the difference between the societies they left and those they joined?: freedom to compete in the market. How sad for poor countries it is that the mercantilism and restrictions in their home countries drive them abroad, so they can not stay at home and enrich their neighbors and friends by putting their entrepreneurial drive to work.

Generally, in countries with freer markets, the greatest fortunes are made, not by satisfying the desires of the rich, but by satisfying the desires of the more modest classes. From Ford Motors to Sony to Wal-mart, great companies that generate great fortunes tend to be those that cater, not to the tastes of the richest, but to the lower and middle classes.

Free markets tend to be characterized by a “circulation of elites,” with no one guaranteed a place or kept from entering by accident of birth. The phrase “the rich get richer and the poor gets poorer” applies, not to free markets, but to mercantilism and political cronyism, that is, to systems in which proximity to power determines wealth. Under markets, the more common experience is that the rich do well (but may not stay “rich” by the standards of their society) and the poor get a lot richer, with many moving into the middle and upper classes. At any given moment, by definition 20% of the population will be in the lowest quintile of income and 20% will be in the highest quintile. But it does not follow either that those quintiles will measure the same amount of income (as incomes of all income groups rise in expanding economies) or that the income categories will be filled by the same people. The categories are rather like rooms in a hotel or seats on a bus; they are filled by someone, but not always by the same people. When income distributions in market-oriented societies are studied over time, a great deal of income mobility is revealed, with remarkable numbers of people moving up and down in the income distributions. What is most important, however, is that prosperous market economies see all incomes rise, from the lowest to the highest.

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The fifteenth myth — Markets Debase Culture and Art — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Debase Culture and Art

Myth: Art and culture are responses to the higher elements of the human soul and, as such, cannot be bought and sold like tomatoes or shirt buttons. Leaving art to the market is like leaving religion to the market, a betrayal of the inherent dignity of art, as of religion. Moreover, as art and culture are opened more and more to competition on international markets, the result is their debasement, as traditional forms are abandoned in the pursuit of the almighty dollar or euro.

Tom G. Palmer: Most art has been and is produced for the market. Indeed, the history of art is largely the history of innovation through the market in response to new technologies, new philosophies, new tastes, and new forms of spirituality. Art, culture, and the market have been intimately connected for many centuries. Musicians charge fees for people to attend their concerts, just as vegetable mongers charge for tomatoes or tailors charge to replace buttons on suits. In fact, the creation of wider markets for music, film, and other forms of art by the creation of records, cassettes, CDs, DVDs, and now iTunes and mp3 files allows more and more people to be exposed to more and more varied art, and for artists to create more artistic experiences, to create more hybrid forms of art, and to earn more income. Unsurprisingly, most of the art produced in any given year won’t stand the test of time; that creates a false perspective on the part of those who condemn contemporary art as “trashy,” in comparison to the great works of the past; what they are comparing are the best works winnowed out from hundreds of years of production to the mass of works produced in the past year. Had they included all of the works that did not stand the test of time and were not remembered, the comparison would probably look quite different.

What accounts for the survival of the best is precisely the competitive process of markets for art. Comparing the entirety of contemporary artistic production with the very best of the best from past centuries is not the only error people make when evaluating markets for art. Another error common to observers from wealthy societies who visit poor societies is the confusion of the poverty of poor societies with their cultures. When wealthy visitors see people in countries that are poor-but-growing-economically using cell phones and flipping open laptops, they complain that their visit is not as “authentic” as the last one. As people become richer through market interactions made possible by increasing liberalization or globalization, such as the introduction of cell telephony, antiglobalization activists from rich countries complain that the poor are being “robbed” of their culture. But why equate culture with poverty? The Japanese went from poverty to wealth and it would be hard to argue that they are any less Japanese as a result. In fact, their greater wealth has made possible the spread of awareness of Japanese culture around the world. In India, as incomes are rising, the fashion industry is responding by turning to traditional forms of attire, such as the sari, and adapting, updating, and applying to it aesthetic criteria of beauty and form. The very small country of Iceland has managed to maintain a high literary culture and their own theater and movie industry because per capita incomes are quite high, allowing them to dedicate their wealth to perpetuating and developing their culture.

Finally, although religious belief is not “for sale,” free societies do leave religion to the same principles — equal rights and freedom of choice — as those at the foundation of the free market. Churches, mosques, synagogues, and temples compete with each other for adherents and for support. Unsurprisingly, those European countries that provide official state support of churches tend to have very low church participation, whereas countries without state support of religion tend to have higher levels of church participation. The reason is not so hard to understand: churches that have to compete for membership and support have to provide services — sacramental, spiritual, and communal — to members, and that greater attention to the needs of the membership tends to create more religiosity and participation. Indeed, that’s why the official established state church of Sweden lobbied to be disestablished in the year 2000; as an unresponsive part of the state bureaucracy, the church was losing connection with its members and potential members and was, in effect, dying.

There is no contradiction between the market and art and culture. Market exchange is not the same as artistic experience or cultural enrichment, but it is a helpful vehicle for advancing both.

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The fourteenth myth — Markets Rest on the Principle of the Survival of the Fittest — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Rest on the Principle of the Survival of the Fittest

Myth: Just like the law of the jungle, red in tooth and claw, the law of the market means survival of the fittest. Those who cannot produce to market standards fall by the wayside and are trampled underfoot.

Tom G. Palmer: Invocations of evolutionary principles such as “survival of the fittest” in the study of living systems and in the study of human social interaction lead to confusion unless they identify what it is in each case that survives. In the case of biology, it is the individual animal and its ability to reproduce itself. A rabbit that is eaten by a cat because it’s too slow to escape isn’t going to have any more offspring. The fastest rabbits will be the ones to reproduce. When applied to social evolution, however, the unit of survival is quite different; it’s not the individual human being, but the form of social interaction, such as a custom, an institution, or a firm, that is “selected” in the evolutionary struggle. When a business firm goes out of business, it “dies,” that is to say, that particular form of social cooperation “dies,” but that certainly doesn’t mean that the human beings who made up the firm — as investors, owners, managers, employees, and so on — die, as well. A less efficient form of cooperation is replaced by a more efficient form. Market competition is decidedly unlike the competition of the jungle. In the jungle animals compete to eat each other, or to displace each other. In the market, entrepreneurs and firms compete with each other for the right to cooperate with consumers and with other entrepreneurs and firms. Market competition is not competition for the opportunity to live; it is competition for the opportunity to cooperate.