Am I a Market Fundamentalist?
I’ve noticed a growing tendency for economists and others to critique “market fundamentalism/neoliberalism/free market dogma.” If you ask these critics, they will say that people in these camps have a naive faith that “markets solve all problems.”
But what does that mean exactly?
In the straw man version, it means that I supposedly believe that government is unnecessary for markets to work well or that I supposedly believe that markets are the best way to deal with every problem including pollution or inequality.
In fact, I’m not an anarchist nor are any of my free-market fundamentalist friends or colleagues. I am fine with laws against pollution even while recognizing that they often are slanted to reward a politically powerful advocate or crony. When it comes to inequality, I recognize that market forces create unequal outcomes. I am against inequality created artificially by cronyism such as past and recent bailouts of the financial system that allow financial folks to play with other people’s money.
Redistribution to reduce inequality created by non-crony market forces is a little more complicated. But I certainly accept the idea that if you think market-based inequality is a problem, markets have only a limited ability to “solve” that problem at a point in time. Over time, maybe it’s different, but not right this minute.
So where is the real disagreement? I think it’s over legislation like California’s recent bill requiring Uber and other gig economy companies to treat its drivers like employees rather than contractors. Or the view that rent is too high in some cities and so we need rent controls. I think these policies are a mistake. I think market forces will unravel the intent of the legislation and end up hurting the people it is designed to help. I believe that not because I am dogmatic about markets but because I see evidence that market forces are often in play in determining say compensation or rent, even when markets are not perfectly competitive.
There is a reason that rent is high in San Francisco relative to say, Houston, and it’s related to markets and how they are currently regulated, not the greed or “market power” of landlords. It’s a big demand of potential renters and a limited supply due to various regulations. It’s regulations in San Francisco and cities such as New York that make it hard to build apartments and that require minimum sizes of the apartments that do eventually get built:
Similarly, life can be hard for an Uber driver. But that’s not because Uber is greedy or mean or has market power in the labor market. It’s because the drivers have limited skills and alternatives. If I am right, rent control or requiring Uber to hire employees rather than use contractors doesn’t help the people we would like to help. These policies have unintended consequences borne by the people we are concerned about.
Of course, this is also how I view increases in the minimum wage. So yes, I do have faith in markets, but it is based on the evidence I have seen over and over of how markets determine compensation and rent. And yes, I know that there is evidence that minimum wages are harmless — I find that hard to square with evidence that finds the opposite and evidence that labor markets do respond to market forces in other ways. So I find it hard to believe that the minimum wage is an exception. It’s a “faith” based on the idea that you when you make something more expensive than it already is without changing its value to you, people look for alternatives. That idea does not seem to me to be dogmatic.
The fundamentalism of the market fundamentalists like myself is a belief that the feedback loops and skin-in-the-game of the participants works to offset policies leading to inferior outcomes to leaving things alone. When those feedback loops are missing as they are in the case of pollution, legislating outcomes often leads to superior outcomes from “letting the market solve things.” Otherwise, I have what Dan Klein calls a “presumption of liberty.”
Those who would legislate outcomes in the market for labor and housing presume there are forces outside of those feedback loops that allow workers and renters to be exploited. I don’t see it as exploitation. I see it as the result of market forces that if interfered with, will have consequences that we will not like.
To help workers we need to make it easier for them to acquire skills and put them to uses that people value. That means a better public school system and getting rid of licensing restrictions that protect service providers from new competition. To help poor people who’d like to rent in beautiful cities, we need to unleash market forces rather than constrain them. We need to make it easier — not harder — for landlords to make money renting to poor people. We need fewer zoning restrictions and minimum square footage regulations.
One other caricature of us market-loving types is the claim that people who like free-markets are pro-business or that we want to solve all problems through the profit-and-loss commercial sector — like making all K-12 schools for-profit enterprises. That’s absurd.
There are three ways we work together — through government, through commercial activities, and through charitable non-profit organizations. That last one is very important. So it’s about bottom-up (the last two) vs. top-down (government) collective action. Some things (pollution control, defending the United States from invasion, police, courts) are best done via the State and coercion from the top down. But most things work better for most of us when they emerge from the bottom up through voluntary interaction.
The right word to describe my view of policy is liberal — I have a presumption in favor of liberty that usually wins out, but not always, in how I look at policy. Unfortunately, the word “liberal” has come to mean the opposite of what it once did. So the right way to define what I am is a classical liberal.