Equality and the Market
Tackling the myth that markets are the key to productivity.
I like and loathe Twitter; it draws you into debates with all sorts of interesting people and challenges you to make your point as sharply as possible. But it is also frustrating when something seems really obvious, but you can't convert its truth into 140 characters. There is also a danger that you will be pulled into making ad hominem attacks on people’s character - attacking someone for their failure to understand you - rather than focusing on being clear and truthful.
One recent enjoyable, but also rather difficult, conversation was on the topic of inequality and the market. The challenge began with a video from Mark Littlewood of the IEA who made what I think is actually a fair point: charities who are against poverty should avoid treating inequality as the primary cause of poverty. Western charities can quite often score easy points in this way; yet the actual causes of poverty in a specific country may be influenced by any or all of the following factors:
- The state’s failure to uphold the rule of law, including property rights
- Inadequate physical and social infrastructure to enable exchange and cooperation
- Exploitation by corporations, stealing resources and underpaying people
- The failure to invest in talents, skills of local people
- Dependency on Western charitable institutions that don’t create local capacity
- Too much state control, incompetence or corruption
- Trade regimes that protect Western farmers or others from competition
This rather random list already reveals that it is a significant mistake to think of poverty as merely a matter of redistribution. It is not. Poverty is also a function of our productivity, of our ability to get stuff done, and this is influenced by many different factors.
This list also reveals how important the role of the state is, even before we come to any question of redistribution. The state, in partnership with the institutions of civil society, is the institution that protects rights, develops and protects vital infrastructure, protects people from exploitation, negotiates trade deals and ensures that markets can function. It is a foolish liberal who underestimates the critical role of the state in protecting the economic institutions they cherish so much.
However in my Twitter debate three false claims also emerged:
- Taxes (and benefits) do nothing to reduce poverty,
- Poverty is only tackled by the Market, and
- The state is essentially unproductive.
These three interconnected claims perhaps mark the point at which liberalism tips into the extremes of neoliberalism. Each claim is untrue, and dangerously so.
Let’s take them in reverse order:
There is no doubt that the 20th century advocates of state socialism were far too confident of the state’s ability to do too many things very well. There are limits to what the state can do well. But there are also many things that we need the state to do and which are essentially productive. The state and its institutions (e.g. the creation of a valid currency) have been essential to social and economic development. This is demonstrated by examining the causes of poverty outlined above: economic development relies on effective state action. The state and the rule of law it guarantees are fundamental to most forms of human productivity in complex human societies.
At its core neoliberalism seems to be a form of idolatry - the worship of false idols. The market, which is essentially a useful tool (and like all tools its value is constrained by appropriate use - i.e don't take a hammer to a screw) has been converted into a false god - The Market. Markets make poor gods for many reasons, but primarily because they don’t exist. A market is a space, not a thing; it is a vacuum; it is a space within which human beings trade stuff. Trading stuff is also useful preparation for doing other stuff, like making, healing, building, growing and creating. The market does not do any of those things - people do - but the market helps people because people can use trade to get the useful things they need from others. In other words, markets can help people be productive, but they are not productive in themselves.
Worshipping Markets is a a bit like worshipping banks. We forget about human effort and ingenuity, we forget about the amazing natural processes that create things, instead we worship the middle-men, the priests and the temples of liberal economics.
What is more we forget that, even at their best, markets are rather inadequate and imperfect institutions. We may all rather disagree about the extent and nature of those imperfections, just as we tend to disagree about what perfect means. But some of these ‘market failures’ are pretty obvious. I’ll just give two examples.
First, markets are very bad at organising a sensible and fair distribution of healthcare; because when it comes to healthcare humans are rather irrational. The fundamental problem is that we want to live, and we will pay almost anything to someone who promises to extend our lives, even to the point of impoverishing ourselves. So a free market in healthcare leads to lots of exploitation. That’s why the US system is twice as costly, but no better, than the UK system. Doctors are richer, healthcare companies make more money, but there is no real benefit for US citizens.
Second, markets inevitably increase levels of inequality because the winners increasingly dictate the outcomes to the losers. Anyone who has played Monopoly understands why monopolies are a bad thing. If you start to lose, you’ll probably keep on losing. That’s why we need tax and benefits; that’s why the state cannot avoid being drawn into trying to regulate or control the market for incomes.
Famously, in the 1970s, John Rawls argued that a limited degree of inequality might be justified if it gave people a better incentive to strive in ways that benefited the worst-off. Today this argument has been turned on its head. Some now seem to believe that any degree of inequality is justified because some inequality could provide better incentives. This is bad logic and bad ethics.
Poverty is a function of a failure in both productivity and justice. We need both to flourish in order to end it.
Figuring out what degree of inequality is acceptable and what practical mechanism are necessary to reduce inequality is also one of those practical things that we need the state to do. And this takes us back to the initial worry about extreme inequality. The fact that a small number of people control a great share of our wealth is worrying because it seems those people increasingly define what the state does. The election of Donald Trump as President of the USA reflects a further decline in the quality of our democracies and the growing influence of the wealthy oligarchs who may well believe that their own extreme wealth is good for everyone.
Well they would, wouldn’t they?