Free Markets: Do they work?

Posted on January 11, 2012 at 11:15 am,

This is the next post in the series critiquing Wayne Grudem’s book Politics According to the Bible. We’re currently in the middle of his section on the aims of economic policy. Today we focus in on his arguments about free markets.

Grudem begins by marking out some fairly widely agreed common ground – there needs to be some level of government regulation of the economy, if only to ensure that we have a consistent system of weights and measures. He also agrees that it is good for government to provide some goods and services – he mentions roads, traffic regulation, the military, the police, the fire department, and possibly a postal service.

He then says that there are three main approaches to the rest of economics, the “free market” approach, the “socialist” approach (which he defines as the government owning most of the means of production), and the “communist” system (where the government owns all property). This is, at best, an oversimplification, and arguably a misuse of terms. Communists don’t aim for state ownership of property – Marxist theory views such an arrangement as a purely transitional one. A better term for what Grudem calls communism would be “state socialism”, and what he calls socialist is really just a lesser form of this. Also, his terms of reference leave no room for Social Democracy (government steps in to mitigate the human cost of free market policies – most notably in the form of a welfare state), which is the dominant approach taken in rich-world countries.

Does the Bible teach free market economics?

Grudem argues that the Bible supports a broadly free-market approach. Based on his (highly flawed) view of private property and human liberty Grudem argues that the concept of government owning property is not Biblical, and that government control of the economy is an infringement on human liberty. What Grudem doesn’t offer here are any arguments based directly on scripture. He is building on conclusions he reached in other sections of the book (and ones which I have already argued are somewhat flawed). In particular, he bases his arguments on claims that state-owned property is not taught in the Bible (which he extends to cover businesses as well as property), and on an overstatement of the principle of human liberty.

Do free markets work?

Grudem argues that free markets have, historically, brought better results than systems where the government intervenes in economy. Let’s look at the claims he makes:

Are they better at producing goods and services?

This argument is that free market goods are of better quality and lower price than produced in alternative economic systems, and that they are goods that people actually want. As evidence, Grudem offers fairly subjective impressions he had from visits to Eastern bloc countries during the Cold War.

This argument has a couple of somewhat fatal flaws. Firstly, it assumes that any differences are due to differences in the economic system, rather than the political one – the Eastern bloc countries were repressive dictatorships, something that isn’t a necessary part of a state-run economy. Secondly, similar comparisons could be made in reverse – citizens of (communist) Cuba have a better standard of living, and are probably happier than those in nearby (capitalist) Haiti. Thirdly, and most importantly, it’s anecdotal evidence – and hence it’s somewhat risky to base important policy decisions on it.

So what does the evidence suggest? As far as I can tell, it’s fairly neutral. The state-controlled Chinese economy produces far cheaper goods than any of the rich-world Western nations, as does the South Korean economy, where the government intervenes heavily in the economy. Quality is somewhat more subjective, but there is an overwhelming amount of evidence that private businesses, if left to their own devices, will trade in quality (or ethics) for greater profit whenever they feel they can get away with it. There are, of course, exceptions to that rule, but it’s certainly true of the vast majority of large companies. There are a wide variety of factors that affect the price and quality of goods, but state control (or the lack of it) is unlikely to be at the top of any objective list.

Do they allow freedom to choose your job?

Grudem argues that free markets allow everybody to choose what job they work at, encourages better training for your job, and allows you to know you will be rewarded for better quality work. He contrasts this with the government picking you a job, which is at best a simplistic portrayal of how jobs are allocated in a state socialist system – by my understanding, people can still have an influence on their job in such systems.

My problem with this approach is that it is somewhat naive. Some people don’t get any choice of job in a free market system. Long-term unemployed people rarely choose to live that way – although they do sometimes give up on ever getting out of their situation. Other people have their careers railroaded by their company, or find themselves stuck in a dead-end job. There are plenty of careers where there are fewer jobs than there are people who want to do them. Other careers need lots of workers, but are things almost nobody would choose to do if they had a choice. And being rewarded for doing your job well in a free market system depends on you happening to have a good employer. In some companies good work does go unrewarded, and the way to advance your career is by being good at office politics, rather than by being good at your job. Finally, even if you want career-related training it may not be available.

In short, whilst the system might work that way for some, it doesn’t for everybody.

Do they allow companies to hire the best?

This argument directly conflicts with the previous argument in favour of free market systems. Freedom to choose your job is in direct conflict with freedom to choose who to employ. Because wanting to do a particular job is not the same thing as being good at it (or, more importantly, as being seen to be good at it), a system that does one well will necessarily do the other one poorly. Finally, there is research that shows that random promotions are more effective than promotions on perceived merit – which goes to show that employers are often very poor judges of who will be a good employee.

Do they produce goods that people actually want?

Grudem is almost right on this one. In a free market, a firm that produces things that nobody wants to buy goes out of business. The goods still get produced, but not for long. But it’s worth noting that this isn’t a zero-sum game. Many good companies thrive not on making things we want, but on convincing us to want the things that they make.

The most obvious example of this is Apple. Before they brought out the iPod, the iPhone, or the iPad, nobody particularly wanted those things. If these had been standard product launches from a generic company, maybe they would have sold and maybe not. But you wouldn’t have seen them become instant “must have” items. And once there are competing products on the market, Apple’s products tend to be the most expensive, but nowhere near the most capable, products on the market. And yet they usually still outsell their competitors by a massive margin. And this phenomenon can be found to some degree with almost every major brandname product. People buy it not because it serves their needs better than the competition (if at all), but because advertising has persuaded them that they need it.

Does a free market system accurately predict our economic wants?

This one is straying very firmly out of the realms of observable effects and into the realms of ideology. Grudem claims that, unlike government agencies, the free market is able to predict the economic wants of millions of people at any point in the future and then plan effectively to meet those wants. He claims that the system routinely provides each neighbourhood with just enough of a product to meet consumer demand for a day.

This is, of course, not true. Shops do run out of stock, shops do order too much – even a casual look at the amount of food UK Supermarkets throw away each day would prove that the free markets often get things wrong. There are cases where there are genuine demands that aren’t met (e.g. TV shows which fans would pay good money for but are not available to purchase), price fluctuations that are caused by gambling on commodity markets, and bear no relationship to the actual supply of or demand for a product, and overproduction of products which nobody actually wants. It’s perfectly possible that there is usually a better match between supply and demand in a free market system than in the alternatives, but the assertion has never been proven.

What happens when government runs a business?

Grudem claims that free market competition improves productivity, quality of products, and keeps prices low and that, therefore, it encourages economically beneficial activity. He disparages Christians who view economic competition as “unspiritual” or “unchristian”, but doesn’t attempt to engage with the reasoning behind such views. He contrasts this with government, claiming that because government is in a unique position it necessarily has a monopoly, and that it is, therefore, a poor creator of wealth.

This leads me to wonder whether Grudem has heard of “natural monopolies” – goods or services which naturally lend themselves to being run as a monopoly. Public transport, for example, is an industry where direct competition is pretty much nonsensical – two bus companies running the same route would be ludicrous. Other obvious examples include policing, the fire service, the postal service (what private company would offer same-day delivery to remote rural areas for the same price as urban ones?), basic utilities (the infrastructure for gas, electricity, and water is necessarily a local monopoly), and healthcare (which we’ll be devoting a whole post to in a couple of weeks time). He also ignores the fact that state-sponsored companies often have competition. For example, the existence of the NHS has not prevented BUPA from offering private healthcare and the Royal Mail exists alongside courier companies who compete for services.

In conclusion

My arguments in this post should not be taken to mean that free markets are a system with no benefits. In some industries, free-market systems seem to work perfectly well. However, insisting that they are the best possible system for all industries is to veer into a form of economic fundamentalism. In his arguments, Grudem often appears to assume that government-run companies would necessarily get it wrong, even if they had the same people making the same decisions.

Finally, there is no indication in any of Grudem’s arguments that there are times when the pursuit of economic goals conflicts with social ones. The slave trade was a very profitable industry which helped grow British, American, and African economies. However, it was hugely destructive to both American and African society and was morally abhorrent. A truly free-market society would never have contemplated abolishing it, and yet we now agree that doing so was the only morally justifiable option.

In his defence of free-market economics, Grudem either forgets or marginalises such issues. If the state directly takes control of some areas of the economy it at least has the potential to put social issues front and centre. Which is something that private businesses, who are legally obliged to put shareholder profits first, are often unable to do.

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