Brad DeLong asserts that saying "let the market take care of that" is an "empty slogan."
I disagree. As I argue here, in this reprised post from March 2006, saying "let the market handle it" is quite substantive. It is a recommendation far richer and wiser than saying "let the government handle it."
A Simple Rule for a Complex World
Don Boudreaux
"’Let the market handle it! Let the market handle it!’ Don’t you tire
of muttering this simplistic formula?" So ended an e-mail that I
received from a reader.
It’s true that all of us sometimes are tempted to avoid thinking
hard about complex issues and, instead, to fall back lazily upon
simplistic mantras. We should guard against this weakness, in ourselves
and in others.
At the same time, though, we shouldn’t confuse consistency with
simplicity. The two are different. Just because I instruct my
eight-year-old son to be always truthful does not mean that I’m a
simpleton
offering simplistic advice; it means, instead, that truthfulness is a
virtue that should be pursued consistently — even if in a handful of
instances my son might be made better off by telling a lie.
I admit that my proposed solution for many public-policy
problems is to say "Let the market handle it." But this response is
neither naive nor lazy. It’s realistic. It reflects my understanding
that almost any problem you name — rebuilding the Katrina-ravaged Gulf
Coast, providing excellent education for children, reducing traffic
congestion on highways — is most likely to be dealt with efficiently,
fairly and effectively by the market rather than by government.
Saying "Let the market handle it" is to reject a one-size-fits-all,
centralized rule of experts. It is to endorse an unfathomably complex
arrangement for dealing with the issue at hand. Recommending the market
over government intervention is to recognize that neither he who
recommends the market nor anyone else possesses sufficient information
and knowledge to determine, or even to foresee, what particular methods
are best for dealing with the problem.
To recommend the market, in fact, is to recommend letting
millions of creative people, each with different perspectives and
different bits of knowledge and insights, each voluntarily contribute
his own ideas and efforts toward dealing with the problem. It is to
recommend not a single solution but, instead, a decentralized process
that calls forth many competing experiments and, then, discovers the
solutions that work best under the circumstances.
To recommend the market is to understand, or at least to cooperate with, the wisdom of James Buchanan’s important insight that "order is defined in the process of its emergence." It is to understand, at some level, Vernon Smith’s awareness that "ecological rationality" is greater than individual or "constructivist" rationality.
This process is flexible and it encourages creativity. It also
denies to anyone the power to unilaterally impose his own vision on
others.
In brief, to advise "Let the market handle it" is a shorthand way of
saying, "I have no simplistic plan for dealing with this problem;
indeed, I reject all simplistic plans. Only a competitive,
decentralized institution interlaced with dependable feedback loops –
the market — can be relied upon to discover and implement a
sufficiently detailed way to handle the problem in question."
None of this is to say that getting the government out of the way is
sufficient to create peace and prosperity. Markets require a rule of
law to ensure that, among other blessings, property rights are secure
and exchangeable. At their best, governments can help to protect our
rights. Markets also require a culture in which commerce flourishes.
Unfortunately, no recipe exists to create the legal
institutions and commercial culture required by capitalism. If these
prerequisites are absent, there can be no market to handle any problem.
So saying "Let the market handle it" is not the same as saying "All
will be just dandy if only the government gets out of the way."
But when these prerequisite institutions are mostly in place,
as they are in the United States and other developed countries, markets
are amazingly creative and reliable. Calling on markets to deal with
problems is then the wisest course.
Alas, though, foolishness frequently triumphs over wisdom.
People too often suppose that large social problems can be solved only
by deciding ahead of time which particular group of people and
procedures hold the key to the solution.
While declaring "Let the government handle it" comes across as
a solution, it’s no such thing. Instead, it is merely a sign of a
simple and baseless faith — a simple and baseless faith that people
invested with power will not abuse it; that political appointees
possess or will find better answers than will millions of people
pursuing solutions in their own ways, and staking their own resources
and reputations on their efforts; that only those ‘solutions’ that are
spelled out in statutes and regulations and that have officials paid to
implement them are true solutions.
So yes, show me a problem and I’ll likely respond "Let the
market handle it." I’ll respond this way because I know that not only
is my own meager knowledge and effort never up to the task of solving
big problems but that not even the Einsteins or Krugmans or Bushes amongst us can know the
best solution to any social problem.
Solutions to complex social problems require as many creative
minds as possible — and this is precisely what the market delivers.
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Paul Craig Roberts recently dove, head first, into 9/11 conspiracy theory land. About three decades before he did that, he wrote a book called "Alienation and the Soviet Economy" where he painstakingly outlined exactly why Oskar Lange’s “planned market economy” is stupid (a better job, I think, than Hayek of Mises did). Basically, to be better than the market, the central planning committee must have more information than all the participants of the market. This is, of course, impossible. So, at best, the CPB tries to take the place of the market by setting prices through trial and error, making it redundant to the market.
It’s interesting that people have throughout history fought to free themselves of bondage only to ask for bondage again in a different form. If people fought to free themselves from the oppressive and arbitrary rule of kings, why would they ask for the same oppressive and arbitrary rule from another government? This has always puzzled me.
If people fought to free themselves from the oppressive and arbitrary rule of kings, why would they ask for the same oppressive and arbitrary rule from another government? This has always puzzled me.
Because they haven't acknowledged the systemic flaw of power hierarchy.
It is easy to comprehend the selfish motive of a rotten king, but much more difficult to perceive the complex of selfish motivations in the hypothetical "collective".
So they have rejected the idea of being subjected to the selfish rule of kings, but not the idea of being ruled. Or rather, they believe that others must be ruled to restrain their selfish impulses.
What is the market?
It is the venue where people satisfy their selfish needs and desires by satisfying the selfish needs and desires of others through trade.
…
Sometimes, though, when you let the market do its job, you can get unfavorable results (child labor, starving old people, etc). The social cost, which are notoriously difficult to quantify, rears its ugly head. These are political problems, problems which many are concerned with. Even though laissez-faire would be the best solution out of all the alternatives, it's better politically to have someone who realizes the potential problems and has worked those problems into her argument.
The people who gather in this "Cafe" understand those problems. Sometimes, however, people say "let the market handle it" in a manner that is too cavalier, having not understood the full power of spontaneous order – a power I don't think I'll ever be able to comprehend.
I like that explanation, Sam. It's still puzzling that some people can't figure it out faced with so much evidence.
(child labor, starving old people, etc).
These are problems the market pretty much solved. Child labor only became a perceived problem when people left behind subsistence living and began to improve their lot. Prior to industrialization, most everyone worked dawn to dusk just to survive.
Robin Hood illustrated just who took from the poor.
Sean,
Markets neither produce nor promise utopia. A market economy is just the better alternative among available alternatives. Those things that people call "market failures" rarely are, though.
Let's take your example of child labour. First, child labour does not result from a market economy but rather from poverty. Second, it's only an unfavourable outcome if the child has a better alternative and is prevented from it. The kind of extreme poverty that leads to child labour implies that the child's opportunity cost is low indeed. If the alternative is not school and playtime but starvation, suddenly child labour isn't so bad. This is, in fact, the case for many children in impoverished countries. Once a country's economy develops, its labour becomes productive and its wealth grows enough to enable children to go to school rather than work, that is exactly what happens. No sustainable economic model is able to achieve this with the speed of a free market economy. Incidentally, child labour still exists and has always existed – especially on farms – it's called "chores". We need to keep perspective.
Starving old people are also not a natural outcome of a market economy. In what way does a market economy produce starving old people and, if so, in what number? Were Americans starving in large numbers before welfare? On the contrary, collectivism produces more starving people, more materialism and more greed than any other economic system I've encountered. When people have less of everything, they are far less willing to share and they become obssessed with what they don't have – material wealth. Worse, people don't even have the ability to save for the future and become completely dependent on others to feed them in their old age. Who will you feed first from your meeger earnings, your child or an aged neighbour? A free market impedes neither wealth creation nor saving for future consumption. Thus, it doesn't make sense that starving old people are a natural outcome of free markets.
I think we say "let the market take care of it" precisely because we understand that we don't understand the power of spontaneous order. Those who seek to interfere with spontaneous order are implicitly claiming that they not only understand it but that they have all the answers necessary to produce a consistently better outcome.
ooops. Sam beat me to it.
But markets produce outcomes like: some restaurants serving food that contains trans fats, or allowing smoking, while others cater to a different clientele.
We'll have none of that! We must be uniform in diet and in thought if we're to be a community!
I watched a interesting documentation some time ago about Charles Goodyear, the inventor of modern rubber. In 1860 his daughter died because Charles was indebted and could not pay for medical treatment. The absence of basic social security, that is the presence of the perfect market, therefore provided for the death of a child. Charles Goodyear died shortly after that, after suffering on the bedside of his dying daughter.
But, of course, no one knows the 'complex' answer to the problem of health-care. Just let the better of several worse mechanisms work it out, i.e. Let the market handle it.
Daniel,
Meanwhile, on the collective, people regularly die on waiting lists to get onto other waiting lists for a third waiting list to even see a doctor. The laws of supply and demand are tricky that way. The cost happens naturally while the price is set artificially low, so the quantity and quality of the supply declines and rationing ensues (welcome to the waiting list). In socialist Europe, people regularly die in greater number from cancer while waiting for government agencies to negotiate down the price of medicine – meenwhile, the medicine is not available to them at any price. Complicated life-saving surgeries are also not available – too expensive. For those, the super wealthy come to the United States and the not so wealthy just die. I'm sure you noticed that the guy who was diagnosed with drug resistent TB went out of his way to leave socialist Europe to come to the United States because he was sure he would die in Europe. To get what is considered STANDARD medical care in the UK, people are forced to pay out of pocket. THOSE things are just a sample of the outcome of a socialist system. While some people may die because they can't afford to extend their lives with very expensive medical care in a free market, they die in larger numbers in countries where that medical care is simply not available because of the welfare state.
On a related note, I don't know why people think medical care is different from any other consumption. If you want medical care, you must pay for it. If you aren't willing to pay the amount that it costs plus some normal profit to the provider, the provider won't provide it. Simple. What's better – available at a high price or not available at all?
Bottom line, cost is somewhere — someone pays. All I was trying to say was that people often talk about markets as if they COULD produce utopia, which they clearly can't. If you're advocating markets just as a polemical tactic and don't account for costs in general, you're sure to find yourself in a sticky situation.
While I'm not a big fan of DeLong, what he said about "let the market handle it" rings kind of true. People are out there who will present the market as a kind of panacea. They're appealing to our desire for certainty, a desire to escape the inherent limitations of the human condition.
All I was trying to say was that people often talk about markets as if they COULD produce utopia, which they clearly can't.
Of course there is no utopia, even utopia has a fatal flaw…it would be boring.
The question is whether free people operating out of their own self interests are more capable of solving problems than a political system that relies upon extortion to accomplish anything, AND, IN THAT CONTEXT, still is motivated by human self interest.
Why do people think the government is like some kind of magic wish machine?
Just because it is licensed to kill?
There are NO "magical" solutions.
"They're appealing to our desire for certainty, a desire to escape the inherent limitations of the human condition."
It's interesting that you see it that way. I read it entirely differently. I always read the enthusiasm for free markets as a kind of wonderment of the power of human ability to solve problems. I mean, just look at all the innovation we take for granted – all courtesy not of some government direction but springing from the ingenuity of free human beings.
I've often said that the United States will be difficult to bring down as a super power because it's power is derived from the aggreggate of all the individual power of free human beings innovating for themselves, not for the state, increasing the wealth and power of the entire country in the process. It is the opposite of the soviet union and the opposite of the nanny states of Europe. There, people are not empowered and the pathetic rent seeking that ensues is truly heartbreaking when you consider the productive activity these people could be engaged in instead.
"People are out there who will present the market as a kind of panacea."
Human beings are relative creatures. Compared to the alternative, the market is a RELATIVE panacea. The market is a marvel but it won't solve all our problems. Unlike government, though, it won't stop us from trying either.
Perhaps I should clarify a bit. In my experience (somewhat limited; I have a BA in Political Science) I've seen very idealistic people – usually on the left – who want to eradicate all the world's problems with one centralized plan. I hold (and I think you'd agree with me) that such solutions never work, and that anyone who proposes those solutions probably doesn't understand how individual interests coalesce, spontaneously, into an order.
When you study thinkers like Hayek, you start to understand that this spontaneous order WORKS, even if you don't always understand HOW it works. Critical to understanding these ideas is to understand that sometimes markets don't yield "favorable" results, depending on what your definition of "favorable" is.
Unfortunately, everybody isn't so thoughtful. Sometime politicians, in order to go "against the liberals" make sweeping generalizations about free markets without understanding the market's shortcomings when judged against certain outcomes. When the market doesn't deliver "what we want," we call this an externality. I can't think of examples of these politicians off the cuff but they're the same ones who preach free markets one day, then turn around and levy steel tariffs and put up and immigration wall the next.
I'm not railing against free markets at all. However, I think that having people who oversimplify damages the reputation of free market thinking. Just look at what DeLong wrote. He lumps people in together – so Don Boudreaux and Ted Stevens might both say "let the market handle it," but I don't see Don Boudreaux trying to send cash to Alaska every time he turns around.
When I say some people look at markets as a panacea, I think they have it wrong. I think they don't understand what markets fundamentally do (and, more importantly, what markets don't do).
Last year, while I was still a student, I worked in the French Green Party (not exactly my first choice, but it was educational). They HATED markets, and you could see why. They had very concrete ideas of what the ideal world looked like, and they would pursue any policy that worked towards that world. You can't blame them. They didn't have a mean bone in their body. But, in my opinion, the just didn't get how human beings worked. They possessed Sowell's "unconstrained" vision, and couldn't understand how things worked from the other side of the aisle.
Part of our development as human beings is to be comfortable with UNCERTAINTY. As Buddhism holds, everything we grow attached to will pass away. Therefore, if you say the markets will yield certain results (as I believe the people DeLong was referring to infer), you're appealing to a desire for certainty. But you'll never be satisfied.
Your thoughts?
It may be helpful to think of political systems as part of the market. Hence, anyone looking to government to deal with problems are in fact saying the (political) market can handle it.
What people need to understand is that you can have a market distorted by the exortive process of politics, or you can have a market free of extortion.
The pretense of politics is that extortion is not extortion when the government does it.
It may not be an EMPTY slogan, but it is a slogan.
I've not been aware of anyone using such a slogan all by itsself to explain anything. Most libertarians I have known are all to eager to go into great detail how the market can solve various problems.
It has solved the most fundamental problem for humankind, the evidence is quite abundant.
Interesting, Sean. Of course a single plan does not work because human beings are different. In fact, all social engineering fails because people have different wants, needs and preferences and – perhaps even more importantly – free will. However, I find the people who want to foist their particular vision on the rest of humanity incredibly arrogant andeven if they are not mean. They seek to enslave people to their vision and I find that more unforgivable and more dangerous than meanness.
You seem to imply that we don’t understand how markets work. I don’t agree with that. We know very well how markets work. We understand that markets are zillions of individual voluntary transactions between individuals. What we can’t do is predict the outcome of zillions of these transactions and the decisions that go into these transactions are also unknowable to us. We can’t because to predict with accuracy we would have to be privy to all the little bits and pieces of information that is in the possession of billions of people. These interactions are made more complex as information is almost always asymmetric and people’s decisions change when new information relevant to their decisions presents itself. When I say that I don’t understand this spontaneous order, I mean that I can never have enough information to know what’s going to happen next nor do I necessarily understand why people have chosen to behave the way they did in a particular instance. When would-be social engineers say that they don’t understand the market, they literally just don’t understand transactions – not that they know that they lack the information to understand zillions of decisions. And these people are arrogant enough to believe that their ignorance constitutes are reason for messing with this mechanism.
As for “favourable” results…as you say, “favourable” is subjective. I think it’s favourable that markets allow people to fail because failure is a good teacher. Further, we now have a lot of empirical evidence of both socialist and relatively free market economies. What we can conclude from this evidence is that markets are capable of producing favourable results and socialism isn’t. As I’m sure you have observed, for all its egalitarian instincts and utopia-building, France is a mess. Free markets, on the other hand, allow people to continue to work toward a better outcome. Government intervention ensures that your search will always be hampered.
It is, in fact, socialism which promises certainty, not free markets. Unfortunately, the only certainty produced is the certainty that things will never be better because people are prevented from the interactions necessary to find and test solutions. Life produces bad outcomes, not the markets. The markets can’t prevent a bad outcome but they are the best place to look for a solution. Socialism can’t prevent bad outcomes either but it can and does prevent solutions. Relative to what’s available, markets are a panacea (keyword: relative). They provide no certainty but they provide you the best chance for a solution. Can we really hope for anything more?
The politicians of whom you speak have nothing to do with markets. They speak of free markets to get votes and they vote for tariffs to get votes. The politician who has been the most consistent in his view of free markets is Ronald Reagan.
Incidentally, I should confess that I am a trader by profession (staying in econ would have meant teaching or government – yuck). I make my living in volatile financial markets. I can never be certain of what the market will do next (and I don’t try) but I know that I can always manage my risk with either insurance or by simply staying out of highly volatile assets. In markets, people can manage their own risk according to their preferences, in the alternate system, someone else decides how much risk you may or may not take. I’ll take the uncertainty of the markets over the certainty of being trapped in someone else’s vision any day.
Methinks and I share the same profession, and consequently agree.
His point is this:
No amount of funneled information, directive, framework, law, or tenured expertise can compete or provide influence as millions of disparate participants seeking the best outcome for their own interests as the market. It is comically arrogant for people like Brad DeLong to insist that “the right people” will somehow achieve a better outcome, when many of these people cannot even decide for themselves the better option.
Modern liberals (and now many “conservatives”) seek to fight against every single element in this paradigm.
But one correction: Barry Goldwater was most likely the staunchest free-market liberal, not Reagan.
We miss both.
Why do people think Brad DeLong is an economist? A college degree in economics doesn't automatically make you into an economist.