The Standing Invitation

Corrosive — Apply With Caution

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In a recent post I said I thought markets are ‘corrosive’. I would like to be explicit about exactly what I mean by this.

In his excellent book The Undercover Economist, Tim Harford calls a perfect market “the World of Truth”, in which free competition always allows the price of a thing to be what people are willing to pay for it. It is impossible for a commodity to be overvalued, because competitors who are willing to sell it for less will do so, driving prices down as a result.

There are many reasons why perfect markets cannot exist in the real world – cartels, for example, or information asymmetry. Nevertheless, they are often seen as ideals to aspire to. They provide easy, non-coercive ways in which the creativity of thousands of people can be harnessed to solve problems. There are even people ­– scary anarcho-capitalist Walter Block is one – who would go as far as to say they can solve all problems.

His solution to sexual harassment in the workplace, for example, is not to inflict a moral code on people and tell them that sexual harassment in wrong. Rather, your wages should reflect the amount of sexual harassment you are willing to receive. If you are unhappy with being harassed a lot at £20,000 a year, you should quit and find a job with less harassment, or keep the level of harassment and ask for a raise. Acting in this way subjects harassing bosses to market forces; and if bosses find it hard to employ people at the wages they are willing to offer, maybe they ought to tone down the amount of harassment. In this way, a free market can arrive at a solution that is optimal for everyone involved, without an authoritarian moral code imposed on us someone who claims to know better.

Implicit in this is the theory that markets are morally neutral. Markets do not make judgements of right and wrong; they deal only in prices. Unfortunately, things are not so simple.

A study of childcare centres is revealing. Late pickups of children from childcare centres is a major inconvenience for the carers, requiring them to stay after work at a cost to themselves. Many centres decided to impose a fine on parents who were late. The cost was meant to disincentivise lateness through the power of markets.

The result was the exact opposite: late pickups increased. Why? Because parents stopped being ashamed of lateness. They saw the money they paid, not as a fine, but as daycare.

If there is no sense of shame to accompany it, fining people for littering has the power to turn beautiful scenery into expensive rubbish dumps. And fining construction companies for on-site deaths has the power to let the companies decide how many lives they can reasonably afford to lose.

Markets are not neutral. The decision to commoditise something is a moral judgement. And sometimes it is the wrong one to make.

REFERENCES

http://mises.org/journals/lf/1975/1975_09.pdf

http://www.nytimes.com/2005/05/15/books/chapters/0515-1st-levitt.html

http://downloads.bbc.co.uk/rmhttp/radio4/transcripts/20090609_reith.pdf

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Written by The S I

July 16, 2011 at 9:58 pm

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