Three Defenses of Markets
posted by Nate Oman
Broadly speaking, I think that there are three families of arguments that can be made in defense of markets. Most commonly within the legal academy markets are defended on the basis of efficiency. The central question is distributive: How do we move resources to agents in such a way as to maximize the aggregate welfare? Markets, so the argument, do this very well. Expressed preferences are the coin of the realm in market transactions, and we assume that expressed preferences are the best guide to welfare. Indeed, on some theories welfare simply IS the satisfaction of expressed preferences. Provided that we can have a regime that insures that transactions are voluntary, externalities are internalized, and transaction costs are overcome, markets will allocated resources better than any competing social institution. Thus the efficiency argument.
The second defense of markets is libertarian. This looks a lot of like the efficiency argument but is actually quite different, notwithstanding the fact that libertarians frequently confuse the two. In the libertarian argument what matters is not welfare but freedom. Freedom is taken as a good in and of itself, even if choices might result in reductions of welfare for the chooser. Paternalism is bad because is shows a disrespect for the autonomy of market participants. Depending on how one conceptualizes welfare the libertarian and efficiency arguments very nearly merge with one another. If welfare simply IS the satisfaction of expressed preferences then choice and welfare are very nearly synonymous. Notice, however, that there is nothing about the structure of the libertarian position that requires that one take such a position on the meaning of welfare. One might acknowledge the reality of welfare-reducing choices, while prioritizing choice over welfare normatively. Notice that in this argument there is nothing special about markets. They are simply a locus of choice, but so are many other institutions and practices from love affairs to soccer clubs. Thus the libertarian argument.
The third argument is a defense of markets as markets.
Both the efficiency and the libertarian defenses of markets are reductionist in the sense that they see the good of markets in a unitary way. Markets are good because — properly constructed — they move resources around to maximize welfare. Alternatively, markets are good because they are a lcous of choice and freedom. One might also defend markets on pluralistic grounds. Going back to Plato and Aristotle there is a long running aristocratic critique of commerce. On this view there is something seedy and disreputable about commerce. It may be necessary but it is somehow “lower” than other activities and presents the danger of hollowing out one’s soul. It’s an attitude, I think, which is alive and well among law students (and some law professors) who speak of “selling out” when they opt for corporate practice rather than “public interest” law. There is, however, an alternative tradition that sees commerce as a fount of virtues and socially desirable habits. On this view, traders are not cowardly, greedy, souless parasites (see, e.g., Shylock) constantly tempting the virtuous away from the path of justice with filthy lucre. Rather, commerce encourages courage, honesty, and fidelity. It encourages cooperation rather than predation. It allows people with widely disparate views of the ultimate ends and purposes of life to peacefully cooperate with one another. Commerce rewards the frugal and the farsighted, while punishing the wastrel and the spendthrift. Commerce produces wealth that then allows the pursuit of good things otherwise not possible. (On this last one, don’t think “economic efficiency.” Think Venice and the beautiful art and architecture that its commerce made possible.)
Private law scholarship is largely concerned with thinking about the legal infrastructure of markets. It is remarkable to me, however, how impoverished the view of the good of markets frequently is within this work. We talk a great deal about efficiency. From time to time contract theorists will talk about autonomy in libertarian ways. The third, pluralist view of the good of markets gets scant attention, it seems to me. It’s not entirely neglected, of course. Jules Coleman, for example, offers a market-centered (as opposed to efficiency-centered) defense of contract law, but even his view of markets, which is grounded in a kind of rational choice liberalism, strikes me as exceedingly flat. Markets are good because they provide cooperation in the face of disagreement over the definition of the good and “social stability.” Lost in Coleman’s vision is a sense of what markets do for communities and what markets do for souls. I think that there is an interesting research agenda in there for private law scholarship.
July 28, 2010 at 10:48 pm
Posted in: Contract Law & Beyond
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Responses (20)
Russell Arben Fox - July 28, 2010 at 11:08 pm
The third, pluralist view of the good of markets gets scant attention, it seems to me.
There is McCloskey, of course. But you’re talking primarily about legal research, I suppose. Good piece. I disgaree with significant portions of your proposed defenses of markets (particularly with number two, but to limited degree with numbers one and three as well), but your summary of them is concise and persuasive all the same.
Nate Oman - July 28, 2010 at 11:43 pm
RAF: While I am a lot more sympathetic to the second argument than you are, I actually don’t find it an entirely persuasive defense of markets, in part because my libertarianism is political rather than philosophical, if that makes sense.
I actually think that the efficiency arguments in favor of markets are extremely powerful. Well-functioning markets allocatw resources far more efficiently than any competing social institution in my view. On the other hand, while I think that efficiency has a lot to be said in its favor, I think there is more to be worried about in the normative universe than efficiency.
One could add Adam Smith and other folks who extolled the virtues of commercial republics to the list of people advancing the third argument. It is remarkable to me, however, how little influence this stuff has private law scholarship. We’ve got economists, libertarians, a smattering of demoralized critical theorists, and a bunch of behavioralists who are doing cool experiments but haven’t — as near as I can tell — offered any new position to the meta-issue.
Chad - July 29, 2010 at 1:07 am
I’m confused as to why the third view gets the name “pluralist.” It seems better called a virtue-centered justification (or something like that).
Jeff Lipshaw - July 29, 2010 at 8:34 am
One nit. Wouldn’t markets reflect revealed rather than expressed preferences? I might express that I prefer Coke, but my purchase reveals that I prefer Pepsi.
Marc DeGirolami - July 29, 2010 at 8:35 am
Nate — I think you’ve got it exactly right with the Republic of Venice. In fact, even the mode of government that they selected (highly unusual in feudal Europe) reflects a conservative attitude toward the nature of their society and the thought that business and the republic would prosper best by avoiding autocratic entanglements. The efforts of Venetians to maintain their republic (efforts which were sometimes quite byzantine-looking, at least to us — e.g., some of their arcane electoral procedures) was directly connected, I think, to their sense of the intrinsic worth of commerce.
Jeff Lipshaw - July 29, 2010 at 8:45 am
Also, more substantively, I’d defend a pluralist approach in a Kantian way, which is to separate our heterogeneous needs (to which markets, as constructs or institutions of the physical world, respond) from our duties which emanate from our autonomous (i.e., literally “self-law”) agency. A market is no more or less moral than uranium atom. We can approach the uranium atom, or the market, cognizant of and responsive to our moral duties. The mistake, it seems to me, is carrying over the reductive models of the “is” of the markets themselves to the “oughts” of moral decisions that market participants have to make.
Jeff Lipshaw - July 29, 2010 at 9:22 am
Sorry for the seriatim comments. One last thought. A simple example is minimum wage laws. Do we agree as a matter of theory and empirical observation that, per Microeconomics 101, the imposition of a legal floor on wages means that there will be under-employment (i.e., the market will not clear efficiently because there are people who would have had employment at the wage levels now prohibited by law)? That’s one of the “is” questions. Assuming we can agree on the “is,” the ought question is whether the market, rather than the law, more appropriately sets wage levels. (I know there are exceptions to minimum wage for seasonal and other kinds of jobs). How would you assess minimum wage legislation as a matter of what markets do for communities and what markets do for souls?
A.J. Sutter - July 29, 2010 at 10:28 am
1. Maximizing aggregate welfare is not necessarily to concern oneself with distributive issues. That’s one of the well-known problems with Pareto efficiency.
2. The discussion to this point also conflates markets with the neoclassical/capitalist theory of markets. Markets need not be capitalist institutions, nor run on Microeconomics 101 principles. See especially the recent work, much of it available in English, by Luigino Bruni, Stefano Zamagni and their colleagues concerning the Italian tradition of civil economy — you might look at their Civil Economy and at Cooperative Enterprise by Stefano & Vera Zamagni. Bruni’s L’impresa civile is also excellent, albeit not yet available in translation. Karl Polanyi also wrote on this topic.
Frank Pasquale - July 29, 2010 at 11:18 am
Just to back up AJ’s point on aggregate welfare: “in the United States between 1976 and 2007 the top 1% of income recipients received almost 60% of … real income growth.” In the 2000s it was more than 70%.
I worry that the term “market” may be used to justify that allocation. However moral “doux commerce” makes its participants, we have to worry when a tiny sliver of them seem to be taking an extraordinary proportion of the gains from trade. In a wide variety of cases, that’s attributable more to the elite’s raw power than to its productivity. To put it more bluntly: at what point does praise for the moral consequences of market interactions miss the larger picture of social division the market is accelerating?
I also think these images of “GDP man” belie the doux commerce school’s emphasis on the moralizing effect of trade:
http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html
Why is it more moralizing for someone to hire a babysitter for their kid in the market rather than watching the kid himself? Efficient, yes, but the moral valence for adherents of traditional family values might point, if anywhere, in the opposite direction.
Nate Oman - July 29, 2010 at 11:25 am
Chad: I say pluralistic because I want to lump in the sort of arguments for markets that Coleman makes, arguments that cannot be characterized as virtue arguments.
Jeff: I am not sure how I would think about the minimum wage in the context of the third kind of argument. For what it is worth my goat-hacking article, which is not about minimum wages, is an attempt to think about contract law in some way other than through the lens of efficeincy or autonomy theory. (Notice how good I am at working self-citation into my comments.)
A.J.: You are correct that various notions of efficiency are indifferent to traditional, egalitarian ideas of distributive justice. They are distributive, however, in the sense that they identify desirable social states by looking at the distribution of resources within society. They are thus distributive in the Aristotelean sense of having a geometric rather than an arithmetic conceptual structure. I completely agree with you that there are many ways of thinking about markets beyond the confines of neoclassical models and that private law theorists would do well to spend more time thinking about them. (Although I don’t think that this justifies an outright rejection of neoclassical economics or its insights. I actually think that a kind of chastened rational choice theory is a pretty good way of thinking about many of the consequences of legal rules.)
Nate Oman - July 29, 2010 at 11:35 am
Frank: My point about distribution and efficiency was meant as a conceptual point about efficiency arguments rather than a claim about the proper content of distributive justice. For what it is worth, I am far less concerned (which doesn’t mean unconcerned) than you are about inequality. I tend to be much more concerned about poverty. They are related but not identical issues.
Finally, to say that commerce is condusive to certain kinds of virtues is not to say that commercial transactions are always more virtuous than their alternatives. What I reject is the notion that commerical transactions are somehow always or inherently morally compromised by greed, etc. For example, I have a garden in part because I think that it is conducive to certain habits and ways of thinking and is a good way of teaching my children certain habits and ways of thinking, even though it is more economically efficient to simply buy my fresh vegtables. On the other hand, I do think that people who seek to improve their lot in life through commerce in the marketplace are more virtuous than those who seek to improve their lot in life by lobbying for the state to redistribute more wealth in their direction. When bankers go to the government for tax bailouts they are considerably less virtuous than when they seek to earn profits by finding under valued investments.
Patrick S. O'Donnell - July 29, 2010 at 1:09 pm
It may be unrealistic if economically mistaken to be concerned with poverty over and above (or by way of crowding out) a concern with inequality, given the apparent causal connections between between the two in today’s world, especially the richer countries (all the more so if we appreciate the notion of relative deprivation: as Amartya Sen notes, being relatively poor in a rich country can be a great capability handicap, even when one’s absolute income is high by global standards). Adam Smith himself appreciated the fact, for example, that poverty is hard to eradicate just by raising the level of income, without also addressing issues of inequality of incomes.
Nate Oman - July 29, 2010 at 1:49 pm
Patrick: Yes and no. I think that poverty and inequality are related, although in some societies I think that this is largely because of third factor such as government predation rather than because one causes the other. Also, in western societies inequality is skewed by the way in which wealth scales. Hence, observed inequality may is magnified by the presence of a few mathematical freaks. I am not sure how socially important it is that Bill Gates’s wealth is thousands and thousands of times what my wealth is. Also, I am not yet sure what to make of Sen’s arguments about relative levels of wealth. My suspicion is that his philosophical acolytes tend to massively discount the value of absolute increases in one’s standard of living.
Finally, I think that there is a similar danger of letting concern for equality crowd out concerns for the creation of wealth, particularly in light of the fact that economic growth seems to be the single most effective way historically of moving large numbers of people out of poverty. For example, the liberal policies implemented by the BKP in India beginning in the early 1990s seem to have done a better job alleviating poverty than did the more formally egalitarian Fabianism pursued by the Congress Party up till that point.
Michael S. Langston - July 29, 2010 at 2:45 pm
I agree with the idea that free markets actually promote more moral behavior than centralized control & I am a libertarian. I think the only small nitpik I have is with that.
Some libertarians are that way because they think it’s the best, IE most efficient way. Others, like me, because freedom is paramount.
I think however, all “three” things work on each other.
Not only does freedom maximize individual welfare by giving the individual the most chances possible, it also naturally results in efficiencies and incents moral behavior.
The moral behavior is the issue most people might disagree with, but I think one of the main lessons we should learn from the recent financial crisis is that government incentives lined up perfectly with immoral behavior.
& those playing the game immorally…. lost very little, because they rightfully believed the government would bail them out since the government was perverting the market with quasi-agencies Fannie & Freddie.
Indeed, smaller local banks (few of which exist anymore) who never sold their loans to anyone & therefore had much greater incentive to care about risk, are doing just fine. Not great mind you, but they aren’t worried about their loans defaulting at the clip of the larger companies who sold them to a government who didn’t seem to care much about lending standards.
Either way – interesting post.
Patrick S. O'Donnell - July 29, 2010 at 3:18 pm
Nate,
I hope to be able to respond in more detail later but I think the Bernie Sanders article in The Nation that Frank linked to shows that the problem is more than the “presence of a few mathematical freaks.” Sen’s acolytes, as you call them, are far more “economic” in training and temperament than they are philosophical. In any case, the ones I’m familiar with have a deep appreciation of the historical and absolute increases in the standard of living (although today they prefer indices that attempt to capture ‘quality of life’ variables that are less dependent on conventional economic measurements, especially those focusing solely on income), much as Marx did.
I’m not sure of which economists you have in mind, on the Left or otherwise, who express aversion to economic growth or let their concerns for equality crowd out same. Indeed, the post-war economic boom among welfare states often occurred among democratic regimes with a fairly robust egalitarian ethos (yes, even in this country). But, again, I’ll have to address this at a later time.
Finally, there were problems aplenty with the economic policies of the Congress Party, in part owing to its focus on (Soviet-style) rapid industrialization and its later reliance on Keynesian-like or inspired nationalist oriented economic policy instruments that were less effective from about the 1970s forward given the global economic conditions, including and most prominently, far higher rates of capital mobility (of the sort Keynes sought to more or less to insulate from national economies). I trust you meant the “BJP” party.
The very real successes of the state of Kerala within India is testament to the fact that at least some forms of egalitarianism can indirectly motivate wealth creation inasmuch as the preconditions for same are achieved when elementary capabilities of human beings are addressed through reductions in premature mortality, significant undernourshment, widespread illiteracy, for example, thus contributing to the conditions necessary for meaningful participation in modern markets.
Nate Oman - July 29, 2010 at 3:50 pm
Patrick: BJP. Thanks for the correction. I certainly hope that you’ll be able to put something more substantial together. Your last is a bit short for a respectable blog comment ;->
Patrick S. O'Donnell - July 29, 2010 at 4:12 pm
Point well taken!
A.J. Sutter - July 30, 2010 at 3:03 am
Nate, thanks for the reply.
1. If you look at Pareto’s Manual d’économie politique (Paris: Girard & Brière 1909), Appendice, § 89 @ 617-618, you’ll see that his original definition for maximizing the “ophelimity” of a collectivity is also geometrical, being expressed with reference to an equation of the form 0 = Σ(1/ψ_i)δΦ_i, where (1/ψ_i) are positive constants and δΦ_i is the variation in the ophelimity of the ith individual. (This is an equation for a tangent to a surface.) So by your criterion, Pareto’s idea is distributive as well.
2. “On the other hand, I do think that people who seek to improve their lot in life through commerce in the marketplace [call these group A] are more virtuous than those who seek to improve their lot in life by lobbying for the state to redistribute more wealth in their direction [call these group B]“: Suppose Group A are laissez-faire capitalists who force their workforce to enter into oppressive contracts (or even just Microsoft, say, who, before the IRS caught up with them in the late 1990s, used to force workers to sign “independent contractor” agreements whereby they worked full-time without benefits) and Group B are the same workers, who complain to the government seeking to have health care and other protections of full-time employees, the winners in the virtue sweepstakes are …?
3. The deployment of emotionally-loaded phrases like “creation of wealth” and opaque ones like “standard of living” in connection with economic growth hides the fact that economic growth doesn’t have the same impact in all countries, or at all times of a particular country’s history. The US isn’t the only country to be experiencing a decline in median income during a period of growing per capita GDP. Despite economic growth, the US infant mortality rate has stopped declining since around 1996, while it’s continued to decline in France, where the rate was already well below America’s. Although the US and France had about the same rate of deaths from respiratory illness around 1980, the US rate today is not only about 2x the rate in France, but also higher in absolute terms than it was 30 years ago. And despite economic growth, rates of diabetes are increasing in the US, as well as in other developed countries (and fast-growing countries, like China). To the extent household income and health are relevant to the “standard of living,” the benefits of continued economic growth in developed countries are at best equivocal.
A.J. Sutter - July 30, 2010 at 3:16 am
Patrick, do I correctly understand your 03:18 pm comment to mean that you’re not aware of any economists who express aversion to economic growth, even under some circumstances (e.g. for wealthy countries)? Or do you mean rather that you’re not aware of any who oppose it categorically, for all countries and under all circumstances? There are a number, even in the Anglophone world, who oppose economic growth in the first sense above.
Matt - July 30, 2010 at 7:18 am
Many of these points (both in the post and in the comments) are discussed in a helpful and fun way in Joseph Heath’s recent book, _Economics without Illusions_. I highly recommend it. (It was first published in Canada under the better title, _Filthy Lucre_, but apparently the US publishers were afraid that too many people here didn’t know what “lucre” was.)
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