Mixed thinking about markets

I was enjoying my Xmas break too much to deal with the silliness of the Institute of Public Affairs. But Chris Berg was hard at work, writing a piece in which he claimed all the technological progress of the past two centuries as products of the “the market economy and consumer society”, and I guess I should respond.

Berg points to a comparison between a 19th century Xmas picnic in the outskirts of Melbourne, involving arduous and expensive travel, and costly communication, and the ease with which people in wealthy countries can travel, communicate and enjoy plentiful food today.

This would be a reasonable line of argument if Berg were defending the status quo. But of course he is not. He wants to argue that all the good things that have happened in the last two centuries are the product of the “market economy”, and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.

In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.

All of this reflects the fact that a pure market economy doesn’t work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I’ll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good: making it available to one person doesn’t reduce its usefulness to others. And while it’s possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn’t provide much of a reward to people who come up with new ideas.

All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. These interventions played a crucial part in most of the innovations discussed by Berg. Most notably, the university sector developed the Internet, which makes debates such as this possible.

Berg’s argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future.

I guess it’s possible to find symmetrical kinds of fallacies on the left, but I’ll leave that to commenters.

48 thoughts on “Mixed thinking about markets

  1. There is no market free of rules -they can have more or less rules but not none. The IPA wants the level of rules set where it enriches their mates the most. These free market extremists do seem to love police ,jails ,surveillance, and the military.

    T Davies ; Most companies are run like dictatorships (FIFO -Fit In Or F*#* Off), many are bigger than many countries .When such companies fail they dont always disappear .For example Murdochs News has been failing us for a long time but isnt going out of business .Depends what you mean by fail.

    China has converted from pathetic command economy to undemocratic pathetic mixed economy over the last 30 years . I think if you take that out of the calculation world poverty rates havent changed much. Lets see what happens to Chinese poverty rates in the long run from here if it goes down the IPA road.

    In Melbourne Govt debt built the city rail loop (in the 70’s I think) .Apart from that, the Regional Rail link (currently Australias biggest infrastructure project) will be the first train line built here since the 1800’s. There always seem to be untold billions available for roads tho.

    D Oats ; The Humanities have been slowly crushed for several neo-lib culture war decades now ,this looks likely to continue as there is little support for free market extremists there. Never mind that Western civilisation would not have been possible without this sector now deemed unprofitable .

  2. @may

    G4S and Serco fleeced UK taxpayers for at least 70 million pounds and probably somewhere in the billions.

    Gillard liked Serco so much that she doubled the amount we pay them to run our concentration camps.

    Only a zealot could argue that this version of a “free market” is somehow a good thing.

    By the way, Serco’s ‘punishment’ appears to be that some other private company will complete their contract.

  3. Firstly, Fran, the idea that culture does not affect how economies are structured or companies work is simply and shockingly wrong. Even Francis Fukuyama wrote about the importance of culture in economic systems and Max Weber’s “Protestant Work Ethic and the Spirit of Capitalism” was written to try and understand the cultural and sociological reasons behind the industrialisation of the Protestant and Roman Catholic nations in Europe. Also from personal experience having done numerous deals in the Nordics involving both corporates and private equity firms I can more than assure you that this broad sweeping generalisation is backed by more than personal anecdote.

    Secondly, while you may think that I have been simplistic so too has Professor Quiggin and yourself in forgetting that the very reason why blogs like this exist is because of the free market taking the education and gov’t R&D and converting it into goods and services that people actually want to use. Do you honestly believe that if we had consistently restrictive economic practices a la 1973 that we would have nearly the technology and multiplicity of uses that we have today? It is one reason why the R&D spend in the US on NASA for instance drove more patents and future technological innovation than that spent in the former Soviet Union.

    When people say that the IPA wants the free markets because it “enriches their mates” that is exactly the type of statist capitalism that Professor Quiggin wants. The free market is by nature disruptive whereas Statist/Corporatist capitalism wants existing companies to benefit from government largesse. If you want today’s fat cats to go out of business then the best route is to allow disruptive companies the opportunity to expand and grow and not strangle them at birth.

  4. @Brett

    I don’t think that is a fair characterisation of the pharmaceutical industry. The “final mile” isn’t necessarily the innovative part of the process, it’s the expensive clinical trial process. Pharma companies have a great deal more experience in solving potential issues in the clinical trial process, which is why they’re so much better at completing the final mile over academia.

    Also, I would argue that we make a decision to set up Pharma in that manner, not because it Pharmaceutical companies are more innovative. The history of CSL, in my opinion, demonstrates that in the pharmaceutical industry a Government entity can most certainly be as innovative as any private company.

    Then again, if we break down pharma into different fields, we are likely to draw very different conclusions. In the case of antibiotics or cancer, big pharma has done extremely well for public health. In the case of anxiolytics, big pharma has traditionally done very well for itself, but much more mixed for public health. In the case of obesity, big pharma has pissed up so much money up a wall for nothing it might as well have ceased to exist. That doesn’t mean pharma isn’t innovative, it’s that biology is the problem here. For obesity, Government planning, education and regulation is likely to be more influential than the actions of big pharma for a long time to come.

    Anyway, all I’m really saying is you could use the pharmaceutical industry to back up whatever argument that you wanted in the free-market context.

  5. Pr Q said:

    In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.

    Of course, most major modern human achievements are due to the dialectic of individual autonomies (liberalism) and institutional authority (what I have dubbed “corporalism”). But we are in the fanatic and degenerate post-modern liberal phase of human evolution where individualistic narcissists want to take all the credit and say to hell to the team.

    In fact most of the bad stuff that is happening is down to individual actors doing their own thing and taking a free-ride on the group (global warming, commercial copywriter lock, terrorism, LBOs, rogue traders, rogue states, people smuggling, “multiculturalism” pre-emptive wars, obesity, drug addiction, divorce, etc are all forms of individual self-indulgence).

    The answer is to roll-back post-modern liberalism to a more reasonable compromise between the institutional authority and individual autonomy. But po-mo liberals are not interested in reasonable compromise. Having hit on a disastrous strategy and finding that it is failing they do what any fanatic does and re-double their efforts whilst losing sight of the goal (human well-being).

  6. @Ikonoclast
    I like your blend of “not-so-free market” and socialiast democtratic government provision by category. Although I cant express it as well! A balance between the 2 seems ideal, although I am still in favour of less rather than more government intervention. Perhaps my own personal bias.

    I also think it is inevitable that the powerful few will always manipulate to hold power and privilege, typically at the expense of those who do not have power. I am sure there are many examples of this in socialist, socialist democratic and capitalist states (and everything in between). This seems too deeply ingrained in human nature for any government / lawmakers to change. Which is the more inequitable is more fitting question.

    Faust, it is always refreshing to read a different point of view (from the norm on this blog) expressed far more eloquently than I could. However, being a blog with a socialst democratic perspective it is only natural that the group-think here is left leaning, and not about to be changed. Much like the right leaning comments elsewhere, no better, no worse. If anyone changes there argument based on the comments of others here it would be quite incredible.

    The crux of the argument for me is that I prefer that the will of many (sometimes reflected in an almost free market sometimes best provided for by government) shapes things better than the will of the ruling elite who know what is best for all of us. Which ruling elite do we prefer?

  7. And where did Mosaic come from? Publicly funded research work gave Marc Anderseen the opportunity to create this browser for NCSA, while he was an undergraduate. Many of us adopted Mosaic, and from within the academic system came the very first of the web pages with inline graphics and text displayed in Mosaic. It was quite some time before commercial groups woke up to the new reality. Netscape and Internet Explorer were both born of Mosaic, just as Mosaic had as its starting point the excellent work of Tim Berners-Lee (and others, of course), who created the WorldWideWeb browser in 1990, while working for CERN, a publicly funded research facility for particle physics.

    Innovators like google came out of the academic environment by way of start-up funding, and the rest is history.

    Point is, the academic community recognised not just the need, but the potential of these new tools for exploring and exploiting the IP networking technology, and in so doing brought a population of ready-prepared websites and webpages of useful stuff, giving innovators something to get their teeth into. Without the webpages put up out of the sheer excitement of this new freedom to share, more or less for free, I doubt start-ups like google would have had much of a chance. BTW, google was not the first page finding search system, not by a long shot; their extension to existing search engines was the realisation that a good page-ranking algorithm could be based upon user behaviour itself, thus reflecting what users actually want to see in the results section of a search. A small, but very significant observation, and one that re-shaped the entire search engine tech space.

    Arguments that private does it better than public, in all situations, are just plain delusional; the evidence in front of your eyes demonstrates that. If anything, the interplay between the public and private spheres is a synergistic one. The careers of people like Tim Berners-Less certainly demonstrate that, especially the way in which knowledge gained in one sphere can bring about greater opportunities and potential in the other sphere. To claim that is not so is more about planting a flag for ideology rather than about the acceptance of reality.

  8. @Donald Oats

    “If anything, the interplay between the public and private spheres is a synergistic one” is a very eloquent way of explaining what happens in the pharmaceutical industry.

  9. @faust

    “the idea that culture does not affect how economies are structured or companies work is simply and shockingly wrong. ”

    I agree and so can you explain what Margaret Thatcher meant when she said “there is no society”?

    AFAICT neo-liberals and libertarians don’t have anything to say about how culture and society develop. It is all about economics is it not?

  10. the very reason why blogs like this exist is because of the free market taking the education and gov’t R&D and converting it into goods and services that people actually want to use

    Would you care to spell this out? I’m using open-source blog software to access the open-source Internet, using a telecomm network that was built by the public sector, then privatised and left to stagnate by its new owners. It’s true that I’m using a commercially produced computer (derived originally from govt R&D, as you say), but that’s a relatively minor part of the process.

  11. Pr Q said:

    All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. These interventions played a crucial part in most of the innovations discussed by Berg. Most notably, the university sector developed the Internet, which makes debates such as this possible.

    The false statement that “academics created the internet” has been endlessly retailed, particularly by Pr Q on this site, despite being endlessly refuted, particularly by me on this site. For the umpteenth time, the internet, indeed pretty much most of the modern IT industry, was pioneered by the military-industrial complex. The greatest boost to research & development came when Ike sponsored a sci-tech revolution after the Sputnik hit the fan.

    The first industrial scale computers were sponsored by the British MoD at Bletchley Park where Alan Turing deciphered Nazi enigma codes. The nuclear industry was sponsored by Pentagon at Los Alamos where physicists developed nuclear weapons against the Axis powers. The first digital computer was knocked together by von Neumann, the model for Dr Strangelove. International rockers were developed by Hitler to throw war-heads at London. ICBM rockets were developed to throw warheads at Soviet Russia. Space satellites were designed to spy on Soviet Russia.

    The first protocols for the internet was commissioned by the Pentagon: DARPA stands for Defence Advance Research Project Agency. Undoubtedly academics and entrepreneurs were critical parts of the team. But the initiative and financing came from the military. Wikipedia reports:

    The Internet protocol suite is the networking model and a set of communications protocols used for the Internet and similar networks. It is commonly known as TCP/IP, because its most important protocols, the Transmission Control Protocol (TCP) and the Internet Protocol (IP), were the first networking protocols defined in this standard. It is occasionally known as the DoD model, because the development of the networking model was funded by DARPA, an agency of the United States Department of Defense.

    And of course AI was originally designed to deal with the management of fighter planes (heads up display) which operate at speeds much greater than human action.

    I know that Pr Q, a pacifist academic, would rather die than give intellectual credit to the M-I complex. But there alot of branches of human thought that are a bit hard to stomach. He shall just have to be brave about that.

  12. International rockers were developed by Hitler to throw war-heads at London. ICBM rockets were developed to throw warheads at Soviet Union.

    Wow. I didn’t know acts like the Rolling Stones were around that early. 😉

    It does explain Sympathy for the Devil of course.

  13. And of course AI was originally designed to deal with the management of fighter planes (heads up display) which operate at speeds much greater than human action.

    Heads up displays are not AI, Jack. AI originated as a fantasy of the boffins who developed digital computers, and its use in military aviation is relatively recent.
    Despite having a growing number of practical applications, AI is still highly influenced by the boffins’ fantasy perspective even today.

    That said, I agree with your point that many major technological advances of the 20th century were driven by government-funded military research.

    I don’t see the point as opposed to what Prof Quiggin is saying though (and you acknowledge yourself that much of the relevant research took place in universities). It’s just a difference in emphasis.

  14. Darnit – messed up the emphasis tags. If only there was an AI that could anticipate which words and phrases I want to italicise and do it for me. Get on with it, Kurzweil! I was expecting this stuff decades ago. Also, where’s my flying car?

  15. Patrickb @ #46 said:

    Who released the Strocchi monster?

    Pr Q, Tim Macknay and anyone else who makes elementary howlers about the history, current status and plausible prospects of digital technology.

  16. Jack, this kind of gigantic screed absolutely belongs in sandpits, and nowhere else. I am deleting the lot – hope you remembered to save it.

  17. The defence of free markets begins with the name. I mean “free” must be good, mustn’t it?

    “Free” sounds like some absolute set of values, as if “free markets” are fully defined by the name. Ordained by God, none the less.

    Yet in practice what people call free markets just refers to one particular type of regulation. And of course the “free marketeers” don’t have to define to clearly exactly what they mean by free markets. For example, should property rights be extended to cover the atmosphere and the sea? Is it obvious that patents should exist? Or how long should copyright last for (if at all)?

    So if Chris Berg wants to be taken seriously, he might point out exactly what sort of regulated market economy he believes is best at creating better picnics. Its not likely to be precisely the sort found in 19th century Victoria.

  18. Apologies to all and sundry for my role in the (deleted) thread derail. But I must insist that any “elementary howlers” were external to my own remarks. 😉

  19. I think the most widespread market-related fallacy, perhaps more prevalent on the left than the right, perhaps not, is that having identified a market failure you can design a regulatory solution and predict whether its net consequences, intended and unintended, will improve the situation.

    That all stems from the rather flawed assumption that people behave ‘rationally’. Once you have any sort of error in the base units of a chaotic model, any predictions from such a model will be substantially flawed. If you accept that empirical observations are far more useful than theoretical models then its obvious that experimentation and refinement would be a better method for developing regulation/policy than attempting an ideologically based design.

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