Business and Society Economics Philosophy

Socialism, Free Markets, Capitalism and Christopher Snowdon

Receive Email Updates on New Posts

A bustling market in Xi'an, China. ©
A bustling market in Xi’an, China. ©

Why do I consider myself to be of the ‘left’ rather than the ‘right’, despite the tendency for each term to be converted to a straw-man for all the pet hates of those attaching to the opposing label? For me, to be of the left designates a prioritisation of co-operation over competition. It is to believe that human satisfaction and happiness depends more on the former than on the latter and it is to believe that co-operation comes logically and practically before competition. Co-operation should therefore be actively promoted. How much competitive superstructure is to be placed on the co-operative base is then entirely up for debate, much of it empirical in nature.

Free exchange of goods, services and labour is the essence of co-operation, and as such genuinely free markets, which being an expression of ‘the propensity [in human nature] to truck, barter, and exchange one thing for another’ (Adam Smith) are completely compatible with maximum co-operation and thus, I would argue, with any viable conception of socialism. The competition that arises from free exchange, to provide better quality goods at lower cost, is on the face of it, also pure social benefit. This can be misleading, however, if reliance is placed on the abstract economic concept of perfect competition – where all market participants are equal in access and power, fully informed, infinitely lived and have perfect foresight. This concept requires isolation of the market from the human, the social and the physical world. To harness markets for benefit therefore requires a huge degree of co-operation in terms of setting up the infrastructure and regulation of market institutions.

Of course, this is a largely consequentialist approach – and if one’s political philosophy is based on the inviolability or ‘sacredness’ of pre-existing property and position then none of this may cut any ice. But a pragmatic view of politics must be that ultimately what we have a ‘right’ to will be that which we can obtain by physical force, the threat of physical force, or the dissipation of such threats by offering through co-operation that which physical force cannot obtain. That physical force is central to this reasoning explains why a co-operative society depends on a strong state (and in many cases strong bodies above the state) that monopolises that force and uses it from time to time to enforce co-operation. Is ‘enforced co-operation’ a contradiction, as libertarians and free-market fundamentalists would argue? I would say not, as long as one of two conditions hold. Firstly, the state can guide in situations where more than one option exists while the specific choice of options are of little advantage to anyone, yet it is important to choose only one. The classic example would be on which side of the road we drive – it generally doesn’t matter to anyone whether we drive on the left or the right, but it matters to everyone that it is clear on which side we should be driving and that this is enforced. Secondly, all benefit where enforcement is reciprocal. I may be mildly inconvenienced by certain regulations which greatly benefit others, but I am also greatly benefitted by regulations which cause mild inconvenience to others. Without enforcement of all the mild inconveniences, none of the great benefits can be obtained. The classic statement of this idea, which also encompasses changes in life circumstances over time, is John Rawls’s concept of a ‘veil of ignorance’ that forces us to choose a preferred regime without knowing what our own role is to be within it.

If free markets, by which we mean those that approximate to perfectly competitive markets, are essentially socialist, where does that leave capitalism – with which free markets are often lazily equated, yet which is apparently the antithesis to socialism? The most elegant definition of capitalism, is that of Marx in the formulation M-C-M where M stands for a sum of money and C for a quantity of goods. The role of the capitalist is to acquire a sum of money, purchase goods (physical capital) with that money, and after some transformation usually involving labour and time dispose of goods in market exchange for a further (hopefully larger) sum of money. Two features of this process should be immediately apparent. Firstly it involves the existence of money and of finance (obtaining money prior to acquisition or production). The existence of money and the institutions to support its valuation and circulation are extensive; the institutions to support finance even more so. Secondly, the process does not necessarily provide any benefit for anyone other than the capitalist. A net social benefit requires a transformation process (production) that in its entirety enhances human welfare.

Thus the main critique of capitalism is that the incentive for the capitalist to expand his or her possession of money (and thus his control of a larger quantity of existing and future goods) over-rides his or her interest to expand welfare in production – so that labour may be exploited, health and environmental consequences of production ignored and the false selling of output perpetrated. A secondary critique is that individuals or small groups of individuals can thereby acquire great economic power which they can then leverage into other spheres, particularly the political.

As human social constructions, there is nothing fundamental about markets. They are only one way of distributing goods. They are attractive because they seem to rely on individual unmediated decisions both on the seller’s and the buyer’s side. Since buyer and seller choose the exchange voluntarily both must be better off and so no complex analysis is required to calculate costs and benefits for each participant. As markets are an artificial human contrivance however, we cannot assume that all goods are ‘market-shaped’ in the sense that they can slot neatly into this structure. For a good to fit the market mechanism it must make sense for it to be both provided and purchased by a number of exclusive providers and purchasers in transactions that are separable from each other, and where the nature of what is being exchanged is clear and unambiguous.

The reasons why goods might not match the market template are many and various. They may involve ‘externalities’ where benefits and costs of supplying or consuming the good are borne by others than the seller or buyer. A good whose benefit is not confined to the purchaser will be under-priced and undersupplied in the market in relation to its overall desirability. A good whose costs fall on others outside the transaction will be overpriced and oversupplied in relation to the harm it does. Some goods simply are not divisible in the way that allows them to be exchanged in individual transactions. Provide them to one customer, and you have provided them to everyone – such goods are ‘non-rival’ in the sense that the use by one person has no or little impact on use by another and ‘non-excludable’ in the sense that the seller cannot limit their use to whoever has paid her. Lighthouses, clean air, national defence and public safety are the typical examples of such ‘public’ goods, but there are many others that fall to a greater or lesser extent into this category. Some goods are problematic for markets because of their intrinsic nature – they may be complex, opaque or unique to individual transactional circumstances and so difficult to evaluate in advance of their consumption (‘experience goods’), and sometimes even afterwards (‘credence goods’) by which time the price has been paid, or at any rate the costs that govern prices have been incurred. Consumers may find themselves overpaying or receiving low quality; suppliers may be unwilling to provide high-quality goods because these cannot be identified accurately and the appropriate higher price obtained. Healthcare and other expert services frequently fall into this category.

Human failings also play a factor. Goods with addictive qualities or whose benefits or costs take some time to develop (inducing ‘myopia’) or whose benefits are strictly relative (‘status goods’) may be wrongly priced in markets. It’s important to note that none of these problems are the ‘conspiracies or contrivances depend[ing] on merchants persuading legislators to regulate in their favour’ identified as the main cause of capitalist exploitation and rent-seeking by Christopher Snowdon in his IEA pamphlet Selfishness, Greed and Capitalism. There may often be structures that can be introduced to involve market mechanisms in the supply of these goods, but these run the risk of introducing further layers of complexity, opacity and administrative cost to their provision. These all increase the chances that the market mechanisms so invoked are open to capitalist exploitation as described above. With these goods there is no ‘first-best’ solution, only varying and often uncertain degrees of ‘second-best’.

Those who fetishise ‘free markets’ to the extent that they would allow capitalism free rein despite its potential for harm tend to be guilty of two particular sins. Firstly, they emphasise government failures (without ever bothering themselves too much over how these might be addressed) over market failures, without recognising that more marketization of society inevitably requires its own bureaucracy to make non market-shaped goods fit into their desired template. Secondly, they confuse criticism of the exploitation of markets to gain economic and social power through capitalist processes with criticism of the existence of market institutions themselves.

These errors occur frequently in Snowdon’s pamphlet. He argues that ‘Individuals rarely have perfect information, but collectively they have vastly more information about local circumstances and personal wants than any government agency could hope to gather.’ All this is true, but he betrays his own case by the use of ‘collectively’. To act on this information we need to collect it; for some goods markets do this perfectly well, but for many they do not as we have seen above. There is no a priori case for imposing a market mechanism where it doesn’t naturally fit. That ‘we are incentivised to gather information and choose carefully when making a purchase in the marketplace’ is no doubt true, but it is of no help when there are market failures such as those mentioned, and ignores the fact that those with market power are themselves incentivised to enlarge that power and to convert it into social and political power. In this latter sense it is not clear that ‘Capitalism is good…because it works even when people are greedy.’ Is seeking mutual self-interest in a fair exchange greed? I don’t believe so. But is seeking to best others in a deal on the basis of market power or an information advantage? I think it is. The former is a feature of markets, the latter of capitalism as we know it.

Are governments naturally inefficient and hopeless as Snowdon argues? ‘The government is made up of the same flawed men and women who are supposedly so irrational in the marketplace…Their incentives to seek the best outcomes for the electorate are weaker than the incentives individuals have to advance their own interests themselves.’ To the extent that this is true, it is incumbent on us to improve our mechanisms to elect disinterested, unencumbered and capable individuals to political office. We see little encouragement for this from the mouthpieces for capitalism in the modern media. Their distorting influence and control of their many placemen and placewomen suit them just fine. Moreover, however flawed our politicians may be as individuals, government has a critical role in a market economy. It both establishes the framework that allows the market to exist, and it has a bird’s eye view that allows it to see and respond to the multitude of areas where the market alone will not and cannot provide satisfactory outcomes. It is not the judgement of government that is superior to the individual in the marketplace, but its access to the information and power without which judgement is ineffectual.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.