The Inevitable Unfairness of the Free Market

I just finished reading Milton Friedman’s book Free to Choose: a plea for the free market. Friedman has some compelling claims against government intervention in economic transactions. Price is – as he claims – the most informative entity there is in communicating individuals’ demand and supply of goods and services, and, in a capitalistic society at least, provides people with the incentive to utilize this information, thereby satisfying the needs of those that demand the goods/services. Furthermore, by acting upon the information, individuals provide themselves with the resources required to live a decent life. But although the free market – as Friedman describes it – seems a beautifully simple and elegant construct, there are some ‘side-effects’ of the system that might run against our intuitions about the notion of fairness.

It seems clear that the free market is the most efficient medium there is for maximizing the value of each of the individuals involved. And that (the ‘maximizing of value of each person involved’) is, according to libertarians, what makes the free market a fair system. After all, if you want to sell a computer, and another person is prepared to pay you the price you charge, then it’s only fair to let this deal take place, isn’t it? There is mutual consent between the parties involved, so what – if anything – could give a third party the right to intervene in this seemingly flawless transaction?

While there indeed might be nothing wrong with the free-market mechanism from the perspective of exchanging value, it might be doubted whether it is fair to make this mechanism the only mechanism for exchanging value. For while it’s no problem – and might even be beneficial – for those parties in a free market that possess the means to participate in the ‘game’ of exchanging value, it might be harder for those that – by nature or environment – have been unfortunate in acquiring the means required for satisfying their needs.

Because what if you’re not as intelligent as the average person, therefore getting a relatively low-income job, such as being a plumber, because of which you are unable to satisfy your needs to the same degree as – let’s say – a banker or lawyer? Of course, a libertarian might say, the plumber can still participate in the free market, just like the banker or lawyer can. But, even though the three parties might have the same needs (for luxury or otherwise), the plumber cannot satisfy as many of his as the banker and the lawyer can of theirs: only because nature happened to endow him – in contrast to the banker and lawyer – with capabilities that apparently are less appreciated (since less demanded) in society. So the question is: is it fair to let nature – and thus chance – play such a drastic role in the ability of any person to satisfy his needs?

A libertarian can answer this question in either of two ways. Either he admits that the extent in which we’re able to satisfy our needs is indeed – in principle – determined by nature’s authority over our capabilities, or he must come up with an ingenious invention for how to solve this negative side-effect of the free market without thereby endangering the libertarian heart of his plan. The first option, although this appears to be mostly ignored by libertarians, seems to imply a notion of ‘fairness’ that I – and I assume many others – find highly questionable. On the other hand, it at least is a notion, and – given that this truly is the libertarian’s view of a fair world – should be accepted for what it is.

The latter option – on the other hand – provides more room for discussion. Because how – if ever – could it be possible to solve nature’s capability-casino by means of a libertarian solution? There are of course many plans one could come up with, all of them mitigating the negative effects, but all of them being either (1) in conflict with the libertarian aspiration of a free market or (2) don’t get down to the root of the problem (that is, the unequal distribution of capabilities over mankind). It seems fair to say that (2) is a kind of unfairness that is inextinguishable – not by socialism nor by libertarianism. We after all cannot redesign our beings in order to endow everyone with the same capabilities. And even if we could do so, it’s high questionable whether this choice would be beneficial to society as a whole. So it seems we’re stuck with (1), pointing us to the possibly unfair consequences of the free market.

The above reflection shows that there seems to be an intuitively unfair side-effect of the free market; a side-effect that is unsolvable by means of the free market-paradigm itself. It either requires us to adopt the libertarian notion of ‘fairness’, or requires some sort of (government) intervention in order to compensate for nature’s ‘unfair’ distribution of capabilities.

What do you think?

The Changed Nature of Money: From Gold to Digital

What is money? In the Middle Ages and before, money was a physical entity. Something you either had in your pockets, or not. Whether it was cows or gold, it was something you could touch, something of which you knew it couldn’t just be created “from thin air”. Although gold coins could be made by the government, the government still needed gold to make the coins. And since getting gold wasn’t easy, you could trust that the amount of money in a society – whose value was based on the amount of gold being in circulation – wouldn’t fluctuate that much. You had certainty, just like you could be certain that the tree in your backyard couldn’t grow new apples every day. It was a gradual, natural process. And this was a calming thought, ensuring you that the value of your money would be rather stable of time.

But now – a couple of centuries later – we’ve got the internet, and everything has changed. Money no longer is gold, but is replaced by a string of digital numbers on your computer. We no longer pay the butcher by handing him over a few tangible units of gold, but we put our plastic card into a digital machine and our digital string of numbers gets digitally reduced. The comfort that this brought us is enormous. We don’t even have to carry gold around anymore.

But although the “digital era” brought us many comforts, it also brought uncertainty – and vulnerability – into our lives. Because who ensures us that the amount of digital money that is in circulation will be a stable amount of money over time? Who ensures us that, whenever the government feels it’s losing in popularity, it cannot just put an extra zero-digit behind the digital number on its bank account? Who ensures us that – like cows and gold – the value of money is based on stable, natural entities that cannot be created from thin air, and not merely upon our perception of the value of money, which is an entity susceptible to the whims of those with monetary power? In other words: who guarantees the value of our money? Who besides ourselves, besides our perception of money? And if the value of money is merely dependent upon our perception of it, then how easily can this perception – and thus the value of our money – be adjusted by means of external intervention? How much certainty do we have regarding the value of our future money?

Because what is the value of money if we can just hand over an 8-digit number to Greece, knowing that it will never come back, and not even worrying about it never combing back because we know we can create more money whenever we want to. Who can ensure us that the money we’re working for is really worth the value we expect it to be worth over time? What is the value of money if new money can just be printed over and over again? Or even worse, when it requires nothing but the adding of an extra digit in the server space of the government. Is that still money? Or is it a 21th century substitute for money, created as a logical consequence of our fetish with digital technology and its “benefits”?

Let’s stay realistic. One thing we can reasonably say is that money – instead of possessions like gold and cows – has become more of a means for exchanging rights and less of a means for exchanging property. Rights of obligation, rights of someone to do something for another person in change for an increase in that someone’s right to legitimately claim something from others. I know it sounds abstract, but that is because it is abstract. The non-abstract gold- and cow time is over. Mutual obligations are all that remains. A problem? Maybe. A change? Definitely.

But what do you think?

Financial Markets: Keeping Up the Illusion of Confidence

Financial markets are trading grounds on which not products but ‘packets of confidence‘ are exchanged. Do you dare to face the uncertainty, or do you rather pass the opportunity to some guy more manly than you? Who is the 21th century knight, galloping over the battlefield of fallen companies, always leaving just in time not to get hit by the sweeping sword of bankruptcy, but just long enough to receive the fortune and fame? Who has got the balls to take the risk? That’s the question.

A financial market is a special market. In contrast to ‘normal’ markets – markets at which tangible goods like tables or computers are traded, or services like car-washing and theater – this market is build on top of confidence, or at least the perception of it. Surely, through such things as valuation techniques, financial considerations play a more than average role in deciding whether or not to buy stocks, derivatives, obligations or other financial products. However, just as it is in science, there is always a leap of faith required to take the final step: no matter whether it is in jumping to the conclusion on the basis of data, or making the purchase of a stock based upon a ‘reasonable’ level of confidence. No absolute truths and absolute values exist.

Thus – given that confidence plays such an important role in financial markets – you might expect that regulators overseeing these markets will try to do anything in order to keep this fragile little entity up and running. Just like a friend might gloze over the truth in order to keep you – and therefore himself – happy, so a regulator might tell investors that everything is going according to plan; that there’s nothing to worry about. And although lying might be immoral – according to Kant’s Categorical Imperative at least – that’s exactly what he (the regulator) should do, right? If not, the whole house of cards will collapse; investors become (more) insecure and run away as fast as they can. So you need a Santa Claus kind of figure; someone who, above all, should be trustworthy; someone who, no matter how naughty you have been, will always be there to comfort you. Of course: it wouldn’t mind if he or she would have at least some understanding of financial markets, but that’s just only a bonus (you get it? That was a joke).

So, what would happen if, instead of Santa Claus, you would put a politician in charge of regulating the financial markets? A guy like, let’s say, Jeroen Dijsselbloem? A guy who says that, ‘If the banks can’t do it, then we’ll talk to their shareholders and bondholders, we’ll ask them to contribute in recapitalising the bank, and – if necessary – the uninsured deposit holders.’ Then shit is getting messy, right? The insecure investors, longing for a pat on the back, or at least a little sympathy, start running; like Forrest Gump, the investors get the sign to ‘Run, investors, run!’

Honesty is not appreciated in financial markets, so don’t even try it. Lie as hard as you can. Do everything to keep the rat-race going. Do all that is required to ‘restore the confidence in the financial markets‘; be the 21st century Machiavelli. Don’t listen to the crowd yelling that the banks must bleed for their sins. Just assure that they – the crowd – will get their money back. Illusion leads to confidence, and confidence is king. So lie as hard as you can mister regulators; Go for it!

But what do you think?

Elections and the Duty to be Genuine

Voting: the only legitimate manner in a democratic society for distributing power. The question is: how do we want to distribute this power? Do we want liberals in charge and hope for the government to back off? Or would we rather see our state becoming more social; helping those that have been unfortunate? In this relatively long article, I want to make claim in favor of being anti-social, or at least not being disingenuously social. But why would that be a good thing? In order to see that, we first have to understand a little about free markets and prices.

Maybe you have heard the name of Friedrich Hayek. He was one of the, if the not the most, prominent economists of the 20th century. Hayek was a leading figure in the battle for free markets. He condemned intervention by the government in the market, and he condemned central planning by the government even more. By “central planning” I am referring to the state deciding where its resources should be allocated to. The reason Hayek objected against central planning was as follows: Hayek believed that the economy was incredibly complex; that there is an infinite amount of interests that have to be dealt with. And, Hayek said, it is impossible for a state to get to know all the interests and all of the individual preferences of its citizens. That is, it is impossible for a state to know that John likes shoes and that he is prepared to pay a lot money in order to buy some, and that Susan absolutely hates shoes and doesn’t want to pay any money in order to buy some.

The only manner, according to Hayek, by which to get a clear insight into the tremendous complexity of people’s preferences is through the market. Or, to be more specific, through the price that comes about in the market. Only by taking a look at the price that comes about through totally unhindered supply and demand, we would be able to come to grips with the (possibly) conflicting preferences of society’s members. And it is not just that the market informs us about the value of goods: it also regulates buyers’ and sellers’ behaviors.

You can see why central planning doesn’t provide this opportunity to extract all the relevant information from its citizens: there is no price mechanism that can take care of the interplay of individual preferences, and make sure that goods (or services) are distributed in a fair manner. Thus, it is only when the state starts messing around, when it takes control of the market process, that the only source of tremendously valuable information get’s ruined.

I want to take a look at Hayek’s explanation of the price as being the most perfect indicator of the individual preferences of the members of society. That, through the market mechanism, each member of society can obtain all the information (s)he needs in order to make a reasonable decision. Thus, and I am sorry if I am repeating myself, if every member of society would act according to his or her set of desires, the market would take care of the rest; the prices will come about in such a manner that everyone’s interests are taken care of. This is the closest we would be capable of getting to know all the relevant information required to allocate resources perfectly.

Now, let’s imagine that we would apply Hayek’s free market idea to the election process in a democratic society. The process in which the citizens of a state decide who they want that represents them in parliament. We could interpret the number of votes a party receives to be equal to the notion of price in a free market, and the parties people vote for to be an expression of their individual preferences. But this is not “just” an expression of their individual preferences; it is the most complete expression attainable. Parliament is, given that all of society’s members act in line with their true beliefs about how society should be, a direct representation of the preferences of society. And it this representation that could have never been attained by even slightly deviating from a fully genuine voting system. The only difference between an economy and politics seems that, instead of the price, the resulting equilibrium is the distribution of seats in parliament.

So, what are the implications of this observation? First of all, a rather obvious implication is that dictatorial regimes can impossibly posses all the relevant information in order to distribute its resources (the seats in parliament and thus, indirectly, the state’s money) in perfect harmony with the complexity of the preferences of the state’s members. Another, less obvious, implication is that each member of society should be completely genuine in expressing his or her individual preferences in the election process. That is, we should not vote according to the preferences of our mother or daughter, or not even because of our “empathy” with the sick, unless this empathy is genuinely meant by the voting person. If not, the ideal of a perfect representation of society has become unattainable.

Thus, the moral of this story is, don’t be disingenuous in expressing your vote. Don’t vote for a party if you don’t genuinely consider this to be the best possible option. Don’t vote for a party because society finds this the “most decent thing to do”. Because it is only by being fully genuine about what you believe to be right or wrong that all individual preferences can be listened to and processed in the market mechanism called election.

But what do you think?