Coercion of Free Markets

Inequality is a market failure. We do pick this up in A Levels but then there’s little discourse on that. Not only do we dwell little on the solutions – which ranges from progressive taxation to welfare handouts – we ultimately ignore how inequality undermines the ultimate roles of markets, which is the efficient allocation of resources. I’ve always grasp the idea rather intuitively but then fail to deliver it in a philosophical and economics framework. I’ve pointed out the lack of philosophical musings in today’s study of Economics when I introduced Michael Sandel’s lecture on Markets and Morals.

I’ve always pose the question to my Economics student, if a person earns $1000 a month and another who earns $1 a month both needs a glass of water. The rich guy is willing to pay $10 for the water while the poor one is willing to pay $1. The market thus allocates the water to the rich man. We all know that this allocation is problematic and it doesn’t seem efficient; how is it that, in terms of willingness to pay, a person who is only willing to part with 1% of his monthly income gets the good when another is willing to part with 100% of his monthly income for it? So what exactly is the problem of inequality?

Once again, Michael Sandel points this out in the second lecture presented in this video. You don’t exactly have to watch the lecture in order to grasp the point but the idea is that when inequality (in terms of unequal distribution of income) exists, effective demand cannot properly reflect the ideal sort of demand signal transmission that would allow the market to allocate resources efficiently. In extreme cases, free markets becomes not entirely free. In other words, people are not transacting out of their free will but coerced by their own economic circumstances. We see this very often in the case of poor people in developing countries who are forced to sell organs, resort to prostitution, act as surrogate mothers, become a runner for crack.

Gary Becker is not wrong about the rationality of these people. They’re making rational choices but it is often that their choices is very much limited. That unfeeling market processes coerce us into certain decisions is something close to the hearts of all of us. Often, however, we can’t quite work out what is so unjust about that because we believe that to a large extent, we determine our riches. Somehow, deep in our hearts we know that some other decisions that we made caused us to be in the state we are in such that we are coerced into making that next decision. The fact that this argument comes back to us shows how each and every decision made in the marketplace by us are not independent. This makes for a determinism argument in a market setting where free will is supposed to reign.

There are much wider implications of all these arguments and I shall explore them if I get the chance.

6 Comments

  1. Adam says:

    Inequality is not market failure – it’s the process of demand and supply trying to reach an equilibrium. So I understand that you argue for necessary goods to be public goods (ie. water should be supplied at a low price regardless of its price on the open market), this isn’t indicative of market forces failing to run the economy efficiently. Large corporations need labour to exist, by definition, so it is perfectly rational for these organisations to provide the minimum amount of water to its workers at a price lower than that of the open market.
    You conflate economic justice with moral justice when you mention that the market is ‘unfeeling’. Well of course it is. The market operates on individual self interest which in sum, forms capitalist logic.

  2. Kevin says:

    Well, I personally believe that markets exist as a solution to serve an imperfect sort of justice. I do not hold the notion that there’s this distinction of economic justice and moral justice. Within every single market, inequality might be a result (I’m not sure about treating it as a process) of demand and supply reaching equilibrium. Let’s ignore the idea of necessities, so substitute diamonds for water in the example I gave. Does it make the market allocation more efficient? I can’t quite be sure of that. I’m trying to point out that consumption decisions are not independent like the way we consider a single market, our valuations of goods are also functions of our individual economic circumstances (given that inflation do exist) and not something truly intrinsic (like the way we assume when analyzing a single market).

    Alas, inequality is a market failure if you truly grasp what the markets are expected to deliver. When you accuse me of conflating ‘economic justice’ with ‘moral justice’ you forget that markets exists for a purpose higher than its internal logic. In any case, you seem to become too wrapped up with the logic of markets to appreciate what price signals are supposed to do in terms of transmitting demands and as Geoff Riley mentions in this article on Tutor2u.net:

    The market system will not respond to the needs and wants of those with insufficient economic votes to have any impact on market demand because what matters in a market based system is your effective demand for goods and services.

    Essentially if you can’t compare the demand objectively in the scenario I provided in the article, and that being a result of extreme inequality, goods are not allocated properly/efficiently (in the sense it maximizes welfare) thus resulting in a market failure. Check out Sandel’s lecture if you need more convincing and do critically consider the purpose of markets for mankind.

  3. Calvin says:

    I think most of us would concede that inequality is somewhat a 2-faced bitch. That is, true, it results in some distributive inefficiency which ultimately reduces overall utility in any market; but a certain amount of income inequality also provides an incentive to rise up in society.

    The IMPORTANT question for any policymaker or economist, then, is what level of inequality is acceptable (most often vis-a-vis the Gini co-efficient). IMHO, Asian societies are generally more susceptible to the behaviour you describe in your last paragraph – failure to attain social and economic position is purely individual responsibility – as opposed to the collective West. That accounts for why, in general labour unions in the West are so much more powerful. That said, even Asians have their limits (READ: Thailand and its poor masses).

    You write:

    “In other words, people are not transacting out of their free will but coerced by their own economic circumstances. We see this very often in the case of poor people in developing countries who are forced to sell organs, resort to prostitution, act as surrogate mothers, become a runner for crack.”

    I think that these examples belong to a different argument – the one on whether the “exploitation” of developing countries / poor migrant workers etc. by developed nations and multinationals is acceptable (economically and morally). Both debates are just as old as one another.

  4. Kevin says:

    I must concede that what I’ve outlined here is a mesh of arguments at different levels and I’ve failed to elaborate sufficiently on the subtleties of each of them. I hope I’d find some time to develop each of them further here next time.

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