Bear with me, this is a long post that takes time to get to the point. It is essentially a way for me to summarize different things I have seen/heard and use them as a means to defend a my own position on capitalism.
The last twenty years has seen the advancement of a single belief with many names: the idea that many average individuals empowered to interact and make decisions can be more intelligent than a single (or even a few) supremely intelligent people. This notion has been proven in many areas and called many names:
-The decline of socialism and spread of market-oriented economies in Russia and even China are testament to the idea that many consumers making decisions can more efficiently allocate resources than a benevolent, omnipotent central planner.
-The rise of open source as a lower cost mechanism for software development. This method entails allowing communities of developers to modify code freely instead of a small team developing for a company.
-The notion of empowering communities to change through community organizing espoused by Obama and used in his campaign field operations for political success. This contrasts with the convention of mass-marketing a political candidate through television and ground efforts.
-The internet leveraging user generated content to enhance the body of knowledge–think Wikipedia vs. Encyclopedia Brittanica (do they even exist)? As a matter of fact, the internet is the testing ground for many decentralizing concepts, including ‘crowdsourcing’ to produce everything from music (Indaba) to scientific solutions (InnoCentive) to T-shirts (Threadless).
-In the field of strategy, Michael Porter teaches about the productivity gains from competitiveness, how several competing companies can be better innovators than a single dominant player despite advantages conferred by scale.
-In a very different way, the field of biology contains decentralized wisdom. Evolution is just the idea of developing a species through repeated transactions (lives of organisms within their ecosystems) with the winners surviving and the loser species going bankrupt/extinct.
The above examples are just a few, and the list of books documenting the wisdom of this decentralized intelligence in its various forms are long and cover many different disciplines. But although we use the “Market” to solve many of our societal problems, we don’t fully understand how it works and can not forecast what its answers will be. In fact, there is much evidence that the “market” does not serve us well in all circumstances:
-First off, the “Market” is a whimsical creature that sometimes does not see clearly. Stock market bubbles arise from systematic misperceptions of an asset’s value. The entire field of behavioral finance has arisen to show how people’s biases can manifest themselves in anomalies in market valuations despite all of our best efforts.
-Second, the market does not efficiently solve the provision of public goods because of free rider problem. For instance, no company wants to pay the entire cost of a national defense though everyone benefits from its presence. Most would agree on the above, but the rest gets dicey.
-American farm yield increases over time have lead to less profitability, because supply increases have led to falling prices. Due to game theory, farmers individually respond to this by producing more. The book Omnivore’s dilemma by Michael Pollan documents how our food production is unsustainable, and how market forces, left unencumbered, would perpetuate this mess.
-Most people value human life first and foremost. Yet as a 2004 paper by Aidan Hollis describes, our pharmaceutical industry is focusing its research on drugs that are not actually extending human lives. This is why we have more Viagra clones and incremental improvements on Lipitor than malaria cures or cures for neurodegenerative diseases like ALS.
-Sticking with healthcare, we as a society would benefit from focusing on healthy living to prevent diseases rather than products and services to cure them. And yet our healthcare system does not focus on this most efficient way of improving the quality of our lives.
-This is harder for me to prove, but our human capital does not flow to areas where it can be most valuably deployed, merely where it is most rewarded. This is why a tax accountant gets paid more to help navigate a confusing tax system than the person who creates tax law and could make it simpler. Or how people working in industries that create jobs (see any growing industry) get paid less than industries that do nothing of the sort (see, law and finance). In light of the above, do you believe that the free markets lead to the proper allocation of human capital? The same thing can be argued for financial capital.
-The market reaches the wrong conclusions if left to its own devices across several industries: predatory lending practices in financial services (extending beyond the sub-prime mortgages to other areas of consumer finance); pollution-emitting chemical manufacturers; textile manufacturing encouraging shady labor practices in our own country one hundred years ago and the developing world today; our farming industry reliant on migrant and illegal labor, particularly for certain labor intense tasks like strawberry picking.
In light of this evidence, the 20th century thinking has generally fallen into one of two camps. Either the Market is god or the Market is the devil.
The believers in the market believe that free markets can solve all of our problems, and that problems only arise when the market is distorted by government, or even sometimes the imperfection of its own participants. Believers align along similar lines regarding several issues: pro-globalization, for small government, anti-union, incentive-based pay for public servants, etc.
The anti-markets tend to believe that the market leads to a race to the bottom. That the market encourages otherwise good people to be evil and that there needs to be strong safety nets and intervention to counterbalance its effects. They tend to align along the opposite side of most of these issues and believe that the combination of government intervention, more regulation, and a larger non-profit sector are the better way to solve the problem.
In my opinion, both are wrong.
The anti-markets cannot ignore how terribly inefficient the public sector is. Look at our public education system. Or any program initiated by the UN. Or the fact that yesterday’s government intervention encourages tomorrow’s crisis. There are some who believe that pro-housing policies such as the Community Reinvestment Act helped contribute to the sub-prime mortgage crisis. And Bush’s requirements for using corn-based ethanol are what contributed to our food price increase given the fact that our food supply is mostly relies on corn to feed our animals and create our sweeteners. Similarly, what kind of distortions will our current push for subsidizing solar technologies yield that could hurt us tomorrow? Even worse, what will the nationalizing of our banking system end up doing to its efficiency?
The free-marketers are a tougher species to argue with because they are more willing to be blind to their counterfactual. For instance, when discussing the pharmaceuticals example cited above, a free marketer might say, “People might say that they value human lives, but the market is proof that Americans actually value sexual functionality for Americans over the lives of the poor. I know, its sad, but its true.” If this was the case, then why would these same Americans elect to pour millions and even billions of dollars to charity to save the poor (for which they receive nothing)? And even if we are as selfish as is made out to be, then why would we perpetuate a healthcare system which does not encourage more cost-effective mechanisms to save our own lives?
My answer is that the market is neither good nor evil, but an amoral agent operating within the context surrounding it to maximize the value that can be extracted. Consumers are not omniscient buyers, nor are they rational or organized enough to force change quickly, so they often act against their own best interest.
So if the market is imperfect, then how to solve it without government intervention? I don’t fully know. For me, the best answer rests in evolution. As an aside, I personally view evolution as God’s blueprint, not proof of lack of existence.
Evolution manipulates species by context. Little changes in a species’ environment can have profound changes on its genetic makeup.
Similarly, what small change to the context of the markets is required to make it work in the manner that we’d like? Here is where I’m trying to develop my thinking.
For instance, we can encourage a more long-term approach to healthcare by devoting billions of taxpayer dollars to tax incentives for people to be healthier. But the reason that this is not done by private payers is that they only have to pay the cost of someone’s healthcare for a limited time frame. The reason that this is not done by consumers is that they are not properly educated about the costs borne by not changing, nor do they even bear the costs for not changing. If for some reason, payers had to cover a portion of the lifetime cost of healthcare for a patient, they might be more holistic and long-term. Similarly, if patients bore the cost and received the education, they might be as well.
Similarly, our pharmaceutical industry’s portfolio of drugs is a product of a couple features within its market context: its extremely expensive to conduct R&D for drugs (due to the expense of field testing as well as a necessarily cumbersome approval process), and very profitable once the drug is proven (given strong intellectual property protection). Are there ways to manipulate these two elements of context in a manner that might encourage more enlightened R&D investment?
This is where my thinking stops, but hopefully I will have more up here over time. Unsure how different this is from the thinking being applied to regulation today. But it feels like an extension of this framework (assessing misalignment between industry function and its best functioning for societal benefit as a product of contextual features and then working to address those) might yield better regulatory results than our current thinking.










