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Who Are the Free-Market’s Winners?

Continuing now, after this first pass, with my response to Bret Wallach’s comment on this earlier post….

The second mistake Mr. Wallach makes is to too narrowly define “winners” from innovation.

Whether Mr. Wallach means by “winners” what I in my earlier post inferred him to mean, or if he instead means those people who benefit today and in the future from particular identifiable innovations, he misses the larger picture.  Over the long run – to which Mr. Wallach rightly refers – market-driven innovation produces only winners.  There’s not a person alive today – not a single one – in a market economy who is not a huge beneficiary of market-driven innovation.  Even the poorest American today enjoys a longer life expectancy, along with a host of material amenities with which to fill that longer life, than he or she would have enjoyed had market-driven innovation not occurred.

The above isn’t meant to suggest that life is ideal or perfect for anyone, or that life for today’s relatively poor Americans is no worse than is life for today’s relatively rich Americans.  The above, however, does point to a reality that is often missed – again, the reality that each of us alive today in market-oriented economies is a huge net beneficiary of market-driven innovation, including innovations (both technological and institutional) that expand the scale and scope of trading patterns.

In one of my earliest posts here at Cafe Hayek, back in May 2004, I explained a fact that is well-known to all sound economists, namely, key to modern prosperity is the rule that producers respond to the preferences of consumers as those preferences are expressed by consumers spending, and refraining from spending, their own money.  In short, key to modern prosperity is a commitment to consumer sovereignty.  The patterns of resource allocation that emerge from market-driven efforts of producers to profit by satisfying consumer demands constantly change, yet these patterns change in ways that result in higher and higher living standards for everyone.  (A few years later, in January 2007, I made this point differently, using a lovely analogy. 😉 )

A market-driven change that occurs at time t of course makes some people at time t worse off than they would have been at time t had that change not occurred (or, reckoned differently, worse off than these people were at time t-1).  But the people who are made worse off at time t by market-driven changes are made worse off from positions that were themselves made possible and desirable by the very process – market-driven innovations and changes in patterns of resource allocation – that the people who are made worse off at time t now resist and curse at time t.  Put differently, almost any job lost today to innovation or trade was itself created by innovation and trade.

So for Jones to plead at time t for government-supplied protection from the innovations and trades that threaten to make Jones worse off than he would be in the absence of these particular innovations and trades is for Jones to plead for a special exemption from the very rules that enabled him to have the very economic position that he now seeks to protect.

Jones’s plea, in short, is hypocritical (although, because Jones likely knows no economics, Jones is unlikely to be aware of his hypocrisy).  Indeed, Jones’s hypocrisy runs even deeper than the previous paragraph reveals.  The reason is that for government to successfully protect Jones from suffering, from time t forward, any diminution in his material standard of living requires not only that government prevent consumers from reducing the amounts that they spend to buy whatever it is Jones sells, but also that government not extend the same protections to Smith and other producers.  Jones’s real income (be it labor income, entrepreneurial income, or investment income) depends upon the continued market-driven activities and adjustments of hundreds of millions of his fellow human beings.  To the extent that government extends to other market participants the same protections that it extends to Jones, the value of market output falls and the purchasing power of Jones’s nominal income declines (or does not rise by as much as it would had those protections not been extended to others).

In an economy of hundreds of millions of people, these ill effects of the relative handful of protections doled out to workers and other producers by a government in a market-oriented society are invisible.  As long as the bulk of society’s economic affairs are conducted according to free-market rules – with prices, producers, workers, and patterns of resource allocation adjusting through the market to changes in consumers’ spending – overall economic output will be high and typically rising.  The relatively small handful of protections doled out to the likes of Jones will be seen (accurately) to make Jones at time t better off than he would have been without such protections.  But because the costs of granting such privileges to Jones are spread over multitudes of people, the costs aren’t palpable.  It is, of course, a mistake to conclude from Jones’s observed good fortune and from everyone else’s unobserved bad fortune that a sound principle for society is for government to treat everyone as it treats Jones.  Were government to attempt such an extension to everyone of the privilege that it bestowed on Jones, the economy would collapse: everyone, including Jones, would become destitute.  And this reality holds even if Mr. Wallach is correct (as he might well be) when he writes that

[t]he ideology that it’s perfectly okay, indeed a wonderful thing, to allow and encourage serious destruction of some people’s lives for the greater good is not widely shared by your fellow americans.

(People might well want X to be true, but such a desire, no matter how intense and widely shared, does nothing to make X true if X is false.  And the belief that Mr. Wallach in his comment ascribes to most Americans is indeed false.  Also note: while I here quote Mr. Wallach verbatim, I dispute his use of the term “serious.”  Everything is relative, and the question of whether or not the market-led “destruction of some people’s lives” truly is “serious” can be answered only by asking – and answering accurately – ‘Compared to what?’  One of the fine features of modern markets is that when people’s economic fortunes wane, their lives – unlike many lives in the past and in some of today’s non-market economies – are not literally destroyed.  Not even close.)