Freeman

ARTICLE

The Market Didn't Do It

Why Do People Blame Bad News on the Market?

DECEMBER 01, 1996 by DWIGHT R. LEE

Critics of the marketplace are often both appallingly ignorant of why markets are so valuable, and anxious to believe that markets possess powers that they simply don’t possess. The marketplace is an extraordinary social institution, but if it caused as many problems as its critics claim, it would be even more extraordinary than it is. Few problems have not been blamed, either directly or indirectly, on the neglect, the callousness, or the greed of the market. People tend to discuss the market as if it had a will of its own, made its own choices, and generated its own outcomes. It doesn’t. As James M. Buchanan states, “Choices are made only by humans rather than by personified abstractions such as `the market.’”[1] By arguing that the market causes poverty or that the market lacks compassion, one misunderstands the important role the market plays, and encourages policy recommendations that aggravate rather than solve problems.

As F. A. Hayek informed us in 1945, the advantage of the market is that it allows us to communicate with each other in a way that motivates each of us to consider the interests of others. We must look at the price system as . . . a mechanism for communicating information if we want to understand its real function. . . . The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. . . . It is more than a metaphor to describe the price system as . . . a system of telecommunication.[2] So when people blame the market because baseball players earn more than teachers or because more is spent on bowling than on ballet (as if these were serious problems), they need to be told, the market didn’t do it. These critics are really blaming other people for having and communicating objectionable preferences. When people call for government to solve the problems caused by the market, they are commonly calling for government to censor those with whom they disagree.

Of course, the market often seems responsible for problems more serious than differences in preferences. The market is commonly blamed for layoffs and bankruptcies that shatter the hopes and disrupt the lives of diligent workers who play by the rules. But again, such problems result from people’s communicating with one another in ways that motivate a cooperative response. Layoffs and bankruptcies result when people are allowed to inform suppliers that the resources used to produce some products would create more value if used to produce other products. This information is communicated through prices, profits, and losses—forms of communication that get attention and motivate appropriate action.

Of course, no one enjoys being told that consumers would prefer that he or she go out of business or get a different job. Those who receive such market messages are understandably upset with what is easily seen as the ruthlessness of the market. But even they are better off living in an economy in which both good news and bad news can be transmitted through market communication. No matter how unpleasant the news, blaming it on the market is misguided. And using the bad news conveyed through the market as justification to impose political restrictions on markets is even worse.

Blaming the Messenger

If you got a call informing you that a good friend had died, you would not blame the telephone system for your friend’s death. And certainly no one would argue that the friend’s death could have been prevented if only restrictions had been imposed on telephone communication. But it makes as much sense to impose restrictions on telephone calls to prevent death as it does to impose restrictions on the market to prevent bankruptcy and unemployment.

Unfortunately, the market and the telephone system differ in ways that explain why people clamor for so many harmful restrictions on market communication. In the case of bad economic news communicated through the market, one group can use government to distort the message so as to deflect the bad news and improve its situation at the expense of others. For example, a firm about to go bankrupt can insulate itself against the negative communication of consumers by securing a government subsidy. Consumers, having less after-tax income to spend, now signal that other, more productive firms should lay off workers or go bankrupt. To continue the analogy, imagine that by imposing restrictions on telephone communication you could directly prevent the death of your friend (and receive all the credit that goes with such a noble accomplishment) by causing the deaths of two other people in such a way that no one would connect those two deaths with your actions.

Poverty is another item of bad news commonly blamed on the market. But this problem too would be worse than it is if it were not for the efficiency of market communication. People are poor not because of the market, but because they have little of value to communicate through the market. Blaming poverty on the market is analogous to blaming freedom of the press for the inability of some people to write well. No serious person would argue that the best way to help the inarticulate would be by discouraging people from communicating, or by restricting their ability to do so. Unfortunately, this approach is equivalent to what many government policies do in the name of helping the poor. Programs that provide transfers to people earning less than some specified income certainly discourage the type of market communication involved in developing and exercising productive skills. The minimum-wage law, union restrictions (sanctioned by government), and the Davis-Bacon Act prevent those lacking productive skills from communicating their desire to develop those skills by working at wages agreeable to both them and employers. The poor would be better served if we reduced the restrictions on market communication instead of blaming, and further restricting, the market for the message of poverty it allows the poor to deliver.

The Market and the Environment

Another common complaint against the market is that it causes excessive pollution. Again, the problem isn’t the market, but the lack of markets and the need for more market communication. Markets are said to cause excessive pollution because negative externalities are created by some market transactions. When I purchase gasoline, for example, I pay the oil company for the cost of obtaining, shipping, and refining the petroleum, and then distributing it to my local gas station. But I pay nothing for the cost I impose on those who are exposed to the pollution generated by my use of gasoline. Therefore, gasoline consumption and air pollution are excessive. Such externalities are used to justify government action to correct a market failure. In fact, most market failures are testimonials to the success of existing markets at giving a clear voice to people. The best policy approach would emphasize extending the benefits of market communication instead of distorting the communication occurring through existing, successful markets.

Pollution externalities result when people are effectively communicating the value they place on products through existing markets but, because we have no markets for the use of airsheds and waterways, cannot communicate the value they place on the environmental amenities lost as a consequence of producing and consuming those products. Unfortunately, government tries to correct excessive pollution by imposing restrictions on markets that are working well. The government approach to environmental protection has been to mute, or censor, market communication with bureaucratic restrictions on a host of business practices. Many of these restrictions are intended more to protect special interests than to protect the environment. These restrictions on market communication, even when they have reduced pollution, are one-size-fits-all mandates that insure pollution is reduced at far greater cost than necessary. A better approach is to expand the communication network by creating markets for the use of the environment with policies that emphasize property rights and such market-based approaches as transferable pollution permits.[3] I acknowledge that some of these approaches create a less-than- ideal market and are subject to manipulation by organized political interests. But by enhancing communication, rather than stifling it, a market-based pollution control approach is superior to the existing command-and-control approach, which appeals to those who believe that the market causes pollution.

The market is the world’s most effective means for moderating the problems of scarcity by allowing people to communicate and cooperate with one another. Because it necessarily transmits a steady stream of information about scarcity, much market information will be seen as bad news. The temptation is to blame the communication system for bad news, and this temptation is exploited by interest groups constantly seeking justifications for manipulating information and censoring those with opposing views. So problems are worse than they need to be, because we restrict the market communication that is essential in responding appropriately to the inevitable consequences of scarcity. Until people understand that the market didn’t do it every time a problem is communicated through the marketplace, we will continue to be taken in by self-serving interest groups espousing policy recommendations harmful to the general public.


1.   James M. Buchanan, The Metamorphosis of John Gray, Constitutional Political Economy, Vol. 6, No. 3 (1995), pp. 293-95.

2.   Friedrich A. Hayek, The Use of Knowledge in Society, American Economic Review, Vol. 35, No. 4 (September 1945), pp. 519-30.

3.   See Terry L. Anderson and Donald R. Leal, Free Market Environmentalism (Boulder, Colo.: Westview Press, 1991) for an excellent discussion of ways to utilize market arrangements to protect the environment.

ASSOCIATED ISSUE

December 1996

ABOUT

DWIGHT R. LEE

Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.

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