Free Market Liberalism

There was a game around when I grew up called the ‘Game of Life’.  I used to go to a friend’s house down the road and we would play it on the weekends.  The object was to get to the end of your life with the most amount of money.

Unknown to me, every time I played I was given a subliminal message about the value of my two brothers. Neither of these brothers of would ever earn a lot of money.  One is schizophrenic.  After leaving university with an unfinished degree he spent several years in cheap boarding houses, brushing shoulders with alcoholics, drug addicts and criminals. Eventually, after a breakdown, he sought treatment, and today lives on a pension.  

Another brother had a tragic birth when his umbilical cord wrapped around his neck.  He suffered brain damage from oxygen deprivation and deep scarring by forceps.   When I was a teenager he worked at home building garden furniture for a miniscule wage, with help from my heartbroken mother.  

Free Market Liberalism, with its emphasis on flexible (free) prices operating in deregulated markets, is the preferred choice of most nations since the end of the Cold War

How could these people win in the ‘Game of Life’?  Yes, they have my love, but that is not enough to reach retirement with a barrow full of notes. Indeed, how would I fair in this ‘game’?  It wasn’t long before I had a chance to find out.  After I left school I wasn’t playing anymore – it was time for the real thing.  In the West, the real thing is played under rules called ‘Free Market Liberalism’, sometimes known as Economic Rationalism.

Playing the game – Free market liberalism

Much to my surprise and dismay, I got dealt a bad hand. I was unemployed in the 1982 economic recession and found myself on a treadmill of constant rejection, desperate searching and depressing failures. If I hadn’t had savings, or cheap housing, I don’t know what I would have done.

So, I became a key ring salesman driving around to pharmacies selling commemorative key rings in honour of the Matilda the winking Kangaroo – the mascot of the 1982 Commonwealth Games in Brisbane. It has to be said it wasn’t a high point of my life! This episode does however lend itself to an explanation of how Free Market Liberalism works.

Every society somehow has to produce goods and distribute them to consumers. Free Market Liberalism, with its emphasis on flexible (free) prices operating in deregulated markets, is the preferred choice of most nations since the end of the Cold War – the old Soviet block economies not being up to the task.

The core belief of free market liberalism is that prices effect consumption and production in a way that stabilizes the system.  If everyone suddenly wanted to buy Commonwealth Games key rings, my boss’s key ring stocks would have run low, and he would have raised the price.  So far, it sounds like a story of ‘profiteering’ and indeed it is.  But, over time, the increased price would have two effects.  It would encourage consumers to buy some other brand of key ring that might give them a similar amount of satisfaction.  The higher price would also be a signal to the producers that doing another factory run of our key rings would be profitable. 

The point is that both my boss and consumers would act in a self-absorbed way (acting to increase profits and to buy a ‘reasonably’ priced key ring), but the social outcome is that more of the ‘scarce’ key ring is produced, and some consumers find a close substitute.  This is the famous invisible hand of Adam Smith.  The system, as a whole, acts in a sensible manner to meet the needs of consumers; but the actors themselves need neither extensive information nor goodwill.
 

Some Drawbacks of Free Market Liberalism

Naturally, critics of the price system object that it can give the wrong messages.  Indeed, prices can lie about ultimate value.  Every part of the argument I just advanced about free market liberalism ‘working’ to satisfy the wants of key ring hungry consumers would still be valid if I had been selling the services of a child prostitute.  If I may be permitted to use a forbidden word, the problem is that people sometimes want evil things.  

And critics also point out that prices fail to do their job for goods that are not intrinsically evil.  A classic problem is the failure of prices to reflect so called ‘externalities’.  These occur whenever someone’s self-interested decision creates a knock on effect for someone else. 

Decisions made in selling a novelty key ring make an impact on the other side of the world, adding to higher rainfall and more flooding for the people of Bangladesh

An example of an externality in the production and sale of key rings would be the amount of driving around to try to distribute them, adding to traffic, and when they are eventually thrown out, to landfill and ultimately greenhouse gases. Decisions made in selling a novelty key ring make an impact on the other side of the world, adding to higher rainfall and more flooding for the people of Bangladesh.  In a rational world, my boss should have faced petrol prices that somehow factored in the effects on Bangladeshi farmers of his innovative selling scheme.

But it is hard to imagine this.  It is very difficult to model the impact on the livelihood of Bangladeshi farmers of a change in the atmosphere twenty to thirty years in advance. Furthermore, many people do not care about the future beyond a relatively short time.  My boss, for instance, had a short sighted planning horizon.    

And it is hard to find people who will empathise with your struggle when you happen to be at the bottom of the heap in this ‘game.’ I think genuine empathy is almost as scarce as work for the unemployed and the incapacitated.  Free market liberalism doesn’t offer that empathy.  In a ‘perfect world’, so the saying goes, everyone is paid their ‘marginal product’ – the value of their individual contribution to production.  If you are unemployed, your contribution must be less than the minimum wage.  Just like the ‘Game of Life’; if you are not making a lot of money, you are thought of as a loser.  Some people fight and scramble to avoid that stigma, and others give up. The rules of the game don’t just help you play, they categorize you.

These problems of the price system are real, but the success of organizing production and consumption in a highly complex modern society should not be overlooked.  It also has to be admitted that some other systems have neither dealt with these problems nor escaped others.  I have used extreme examples too, from the frivolous (key rings) to the evil (child prostitution).  Many of the goods produced effectively in the Western system are neither frivolous nor wicked.  After all, I am sitting on a chair, and writing on a computer. 

Assessing Free Market Liberalism

The good news about free market liberalism is that it is an effective way of organizing production and consumption – in economics jargon prices have an allocative role.  But prices also have implications for people’s incomes – their so called distributive role – and here the picture becomes more complex.  

If there was a surge in demand for key rings, the increase in price would have caused my boss to have higher profits for a time, at the expense of his customers.  So there would have been a redistribution of income as a result of the changes in prices – from the consumers of key-rings to my boss.  In theoretical economics, the allocative and distributive roles of prices can be neatly separated.  Prices can be free to motivate  production and consumption decisions that are good for society, and then winners can be made to compensate the losers. 

If free market liberalism is one of your core beliefs, you tie your personal worth to all the factors that buffet your wage

In our example, the government could have taxed key ring distributors to compensate the consumers who have suffered a price increase.  But in reality, these transfers hardly ever happen.  This is particularly the case in recent years, when free market liberalism has become associated (unnecessarily) with a small role for government.

Thinking about the distributive role of prices takes us all the way back to the Game of Life, my two brothers and my experience of unemployment.  For the price of labour – your wage – is subject to the rules of free market liberalism.  Suddenly, this particular price takes on a whole new significance.  As well as an allocative and distributive role, this price delivers what many people take to be a personal valuation. If free market liberalism is one of your core beliefs, you tie your personal worth to all the factors that buffet your wage.  

This was brought to sharp relief at a seminar I attended on crime and punishment while studying for a Masters degree in Economics. The speaker advanced a view that people on higher incomes should spend less time in prison than those on lower incomes, for the same crime.  His argument?  Those on higher incomes are more socially valuable, because they have a higher market wage.  Their time is worth more, so it makes for an equal punishment to keep them in for a shorter time. Whatever the motivation of the speaker, I was again left feeling the awkward implication that those with lower wages are ultimately less valuable.
 
The Christian worldview on the other hand, suggests that every person – being made in God’s image – is of incalculable value. That includes the unproductive, the unemployed and my damaged brothers. This is not a value that can be reduced to the level of supply and demand, no matter how much the free market might wish to do so. To be human is to bear a quality of such immense complexity and mystery, that it cannot be measured using economic parameters. Further, the key Christian ethic is found in love for God and neighbour. This is the ethical umbrella under which all other Christian ethics take their place, including care for the weak and oppressed. Such an ethic, if taken seriously, has profound implications for economic and public policy.

I think Friedrich Nietzsche, the philosopher who most eloquently advocated the virtues of power over weakness, would have loved the kind of dynamic and changing society that free market liberalism promotes.  He may also have approved of the relentless struggle among firms and workers, resulting in the weak and unskilled ‘condemned by life’ – to use his words – staying at home and keeping out of everyone else’s way, while the healthy, beautiful, powerful and selfish thrive.

Economists defending free market liberalism’s implicit under valuing of the weak could admit that this is a problem, but then claim that free market liberalism has been the most successful system for attaining ever-increasing incomes, including the incomes of the most disadvantaged.  

There is a lot of truth in this.  In fact, Western governments offer a substantial safety net that shields the weakest from deprivation.  And the wealth has to be created before it can be redistributed.  As I said, both of my brothers draw a pension.  When I compare the situation now to most of recorded history, I am grateful for the provision of their basic needs, and for the wealth generation required to do this.  Very occasionally, you even see redistribution on an international scale, with movements like Jubilee 2000 campaigning successfully for the reduction in third world debts.  

Are ever increasing incomes really the ‘main game’ for countries that are already fairly affluent?  Do I really need three CD players?  

However, I am unsure how much of this to attribute to the current focus of Western culture, and how much it reflects the influence of other belief systems, notably Communism, Socialism, and Christianity.  Certainly, elements of the welfare system came from all three, while the Jubilee 2000 campaign commenced as a Christian initiative.

Certainly I see a significant role for free market liberalism as a device to organize production and consumption in developing countries, which desperately need to escape the kind of poverty that leaves them grasping for basic nutrition, health and housing.  Recent economic gains in places like China and India have undoubtedly lifted a lot of people out of desperate poverty – notwithstanding the at times devastating environmental costs associated with development in these economies.

My question revolves around what happens when a country moves out of desperate poverty? Are ever increasing incomes really the ‘main game’ for countries that are already fairly affluent?  Do I really need three CD players?  

In other eras, greed was considered to be a kind of addiction, or idol.  
 

An implication of this line of thinking is that even though greed may be a powerful motivator, the third CD player is somehow not very satisfying after it is attained.  

There is ample evidence to support this.  For the past half-century, incomes in Britain, America and Japan, adjusted for inflation, have more than doubled. Yet surveys of happiness indicate that, once a country has lifted itself out of poverty, further rises in income don’t increase the proportion of people who say they are happy. And that is just focussing on feelings of the people, without taking into account the environmental degradation that the externalities of growth have caused.  

one reason for the lack of increase in happiness is that people are concerned with their wage relative to everyone else, not just their absolute wage

According to Prof. Richard Layard from the London School of Economics, one reason for the lack of increase in happiness is that people are concerned with their wage relative to everyone else, not just their absolute wage.  This makes a lot of sense if we accept that the wage is sometimes taken as a kind of personal valuation.  If Layard is right, then there is an externality (the effect on others you don’t take account of) every time you get a pay rise.  Suddenly everyone feels worse off, and they work hard – too hard – to catch up.   They then complain that they don’t have enough time to spend with their families.

What about Relationships?

Another possibly negative outcome of affluence is that it has the potential to poison relationships.  When one is affluent, gifts become relatively costless, so that it becomes harder to communicate to someone – at least by the giving of a gift – that they are esteemed highly.  Again, as your access to resources grows relative to others, there is always the suspicion that people form friendships with you to gain access to those resources.

The Bible frequently warns against the dangers of wealth; the love of money being presented as the ‘root of all kinds of evil’ (1 Timothy 6:10), and riches being fleeting and potentially destructive (James 5:1). In each case it is not wealth per se that is the problem, but its tendency to lead us away from the key relationships in life – with God and each other.

It is sometimes said that free market liberalism promotes a ‘dog eat dog’ or ‘law of the jungle’ world.  Sometimes this happens, but not always.  Quite often, what you see is a well organized system which displays a very high degree of unconscious co operation.  This is, after all, what the invisible hand is all about. 

But perhaps it is an invisible sleight of hand. A more subtle effect of free market liberalism is that it promotes a Nice Day world.  When you go to McDonalds, a well-groomed youngster might say to you ‘have a nice day’.  These fine words might fill you with what the US administration calls the ‘hope’ of free markets, but you would be a fool to get too excited.  Perhaps the words are genuine, but perhaps it just means ‘we know how to be nice; come back here again’.  

I am not meaning to single out a particular company, or culture − the same meaningless greetings are used everywhere where relationships are essentially functional and instrumental.   Two executives might be friendly at lunch, or at drinks after work, yet they burn with competitive resentment towards each other.  They won’t say ‘have a nice day’ – but they have more sophisticated equivalents. 

When relationships suffer because of transactions in the market place and when people are given primary value according to their ability to contribute materially to society, it may be that we are getting off track

The point is that in their attempts to make headway in the free market system people are often angling to manipulate you to act in certain ways, and you them.  If you are a consumer, you face an army of psychologists and advertisers that would have made Goebbels proud.  Nothing is sacred for them, so any human emotion or longing, no matter how sensitive and private, will be appealed to.  It may work at the time – after all if it didn’t make you feel good they wouldn’t say it – but the net result is the promotion of thousands of meaningless interactions with people, real or imaginary.  

The effect of Free Market Liberalism on relationships might give us cause to pause and lead us to ask where it is that we find true meaning and purpose. When relationships suffer because of transactions in the market place and when people are given primary value according to their ability to contribute materially to society, it may be that we are getting off track.  A Biblical worldview takes leave of the free market and Adam Smith at this point and instead offers a vision where each person is valued as a unique creature of God; where the weak and the broken are afforded dignity and care, and where relationships are not merely functional but given the highest value.

In the real game of life, I would argue that we all stand to benefit when our communities and relationships are based on a firmer footing than the shifting sands and vagaries of the unhindered market that so dominates the West today.

Dr Gordon Menzies lectures in Economics at The University of Technology in Sydney.