Jack: The Self-Correcting Market

Hi Greg--

I must compliment you on the quality of your challenges.  As far as I know, you just took the one humble econ course--which I got sick and couldn't even complete for you--and yet you're asking really good questions.  They mostly seem to come from one school of thought; but here you are seeking an alternate viewpoint to see if my iron can sharpen yours.

You ask:  "Is it possible for free markets to truly remain free without at least a minimal amount of regulation?"  Your word "minimal" seems to be where we would have to explore; how much is that minimum?  I'm arguing for something like a system of laws applying to all, and forbidding anyone from interfering with another's life, liberty, or property.  This would apply also to government, except where necessary to protect these rights.  So the government can GOVERN [Think of a gas engine's governor, preventing it from generating more power than it should] but REGULATING is another story.  

A government has no special wisdom or insight about the efficient operation of a productive business.  People in government do not have the same interest or intimate knowledge of a business's function; so it makes no sense that government can improve what a business does in serving its customers or owners.  But that's not the heart of your question.

You want to use government to restrain a business from using its very efficiency to exploit its customers and workers, to their disadvantage, due to its bargaining power and freedom to do as it chooses.  To do that, you want to limit or dictate the terms of business contracts, including labor, and reduce the bargaining power of firms that acquire too much of it.  Generally, I don't see the need for that, and in fact find it, in most cases, counter-productive or even destructive.

Here's a historical example:  the trust-busting you referred to.  In the latter 19th century there were indeed some powerful monopolies.  But for the most part they did not get that way by stealing or defrauding.  They did it by competing very efficiently, slashing the costs of energy, transport, and communication.  In the cases where they achieved impenetrable monopoly, however, they did it by using government influence.  Government, posing as "regulators," used force to violate the rights of new competitors by keeping them out--often with limited licensing rules or requirements for high-priced procedures that kept them out.  This did of course allow the monopolies to keep their prices and profits higher, for a longer time, before competitors inevitably broke through.  The railroads tried to keep the trucking industry out, but ultimately couldn't.  More recently phone companies tried also to use government to keep competition at bay, but that system of competition-killing also broke down.  Market pressure erodes monopolies, but more slowly if the government helps defend them.

But note:  When the Sherman Act was passed in 1895, the motivation was not to serve consumers.  They had already been served by these big-efficient companies as they cut prices to take over markets.  No, the support came from smaller businesses that were unable to produce as efficiently; so they pressured their representatives to break up the big companies and reduce their big-scale efficiency.  Better overall if the government could have remained out of it altogether, except as referee. But you can only get government to stay out if you have a carefully-written constitution.

Now, what would we do without OSHA, and the FDA, and others?  Can consumers find any protection, outside of government, from dangerously sloppy services?  Well, yes.  For example, when you moved:  How did you know that the vehicles you used were safe and clean?  When you stay in a motel, how do you know they gave you fresh sheets?  When you stop for some fast food, how do you know the kitchen was cleaned that day?  You can't expect government inspectors to hang out at all those businesses and supervise them.  No, instead you rely on their own self-interest.  They benefit from a good reputation--it adds to their profits!  Consumers are not ignorant; they learn and they talk to each other.  Also they seek out information.  Same with workers.  If a business cuts corners in ways that harm customers or workers, they'll have a harder time making contracts with them; and they'll get very publicly sued.  Henry Ford didn't get rich selling lemons, or by injuring his workers.

Other regulations you cite have in many cases resulted in harm to the very people they ostensibly were supposed to help.  For example, minimum wage laws prohibit work contracts that pay less than a certain amount.  This of course means that any worker whose productivity level falls below that can't have a job.  So unemployment increases among young, unskilled workers, especially among minorities.  These aren't the people who pushed for the laws, though; that came from labor unions who gain a partial monopoly in the labor market, eliminating competition from young, unskilled minorities.  Child labor laws:  parents in general don't want their kids to have to go to work; they'd rather have them in school or on a playground.  But in societies where child labor is common, those are not the true alternatives to child labor.  If you forbid child labor for a family that poor, the alternative is either prostitution or the most dangerous kind of unsanitary agriculture work.

I first ran across these discussions many years ago when I read Milton Friedman's "Capitalism and Freedom," and was astounded.  After that I had to reconsider my very-"liberal" position, and eventually I had the privilege of formally studying economics.

Surprisingly enough, I even came across a strong argument, a few years back, against the prohibition of payday-loan companies.  Since these loans are voluntary, you have to look at the alternatives that await the customers if the payday loan companies are closed or hamstrung.  They get their power shut off, and have to pay big penalties to get hooked up again.  This situation is the typical motivation for getting these loans--much more common than covering drug and gambling losses..

I'm out of time now, so let me send this to you.  If I've omitted some of your favorite points, bring them up and I'll try to address them on the next go-round.

Best wishes,

Jack

Greg: The Sin of Usury, or Why Credit Card Companies Are Evil

Hi again Jack,

We are finally fully moved in here in Evanston.  Courtney put the last box away last night.  So I'm happy to have the time and energy renew our conversation.

I found it very insightful for you to point out that one of my examples of a dysfunctional society is actually due to the fact that "a free market has been eliminated."  You state this about my argument concerning the collapsed building in Bangladesh and other similar tragedies that befall poor laborers who work in nations with no or very minimal labor laws.  So perhaps I can ask a similar follow-up question:  Is it possible for free markets to truly remain free without at least a minimal amount of regulation?  Labor laws protect the rights of workers to be able to use their mental and physical abilities to attain the full worth of what they create.  Trust-busting and anti-monolopy laws improve competition driving down prices for the consumer and reducing the practice of price gouging.  OSHA makes sure that the hamburger I buy at Joe's Sandwich Shop doesn't kill me.  Financial regulators ensure that large banks don't cook the books so that our nation is led into a terrible recession (2008).  I could cite many others laws and regulations such as the minimum wage, child labor laws, worker safety protections, etc.  Do you see where I'm going?  If you agree that the conditions I have describes are actually examples of free markets malfunctioning, then do you also accept proposals for regulations of the free market to ensure its viability?  If so, you will sound very close to my own position (and the position of more left-leaning economists like Paul Kruegman and his "Conscience of a Liberal," among others).  You have suggested the necessity of a "constitution" to safeguard against the natural tendency of the strong to oppress the weak, but I suggest that we must go beyond a mere constitution and be proactive about addressing social problems as they arise.  Or perhaps I'm misunderstanding the meaning of how you are using "constitution."

I have been thinking recently about a business practice ubiquitous in the inner city which I always found particularly angering -- the practices of loan sharks.  On almost every street corner you find places that will give you cash today for a "small fee" and provided that you sign over your paycheck to them later.  (I'm referring to businesses like "Check N to Cash," for example).  Now the medieval Christians as well as the long Judeo-Christian tradition dating back to Moses has always condemned this practice and termed it the sin of "usury."  Interestingly, the church has largely fallen silent on the issue (in fact, in the 32 years of my life, I have never once heard a sermon on the subject of usury).  I interpret this as one way in which the church has accommodated to (and capitulated to) the American capitalist ethos.  In short, do you find it morally reprehensible for businesses to take advantage of the poor who desperately need cash right away for basic necessities like food, healthcare, water, shelter, and clothing?  I do.  Do you agree with the vast majority of the Christian and Jewish tradition (and I believe Muslim as well) that usury is a sin?  I would suggest that the Christian Church must actively oppose such systematic abuses of power since they keep the poor in poverty and, in fact, exacerbate their plight.  You could apply this to credit card companies and their 39% interest rates as well.  For this reason, I applaud the Obama administration, for example, for setting restrictions on credit card companies for the fees and interest rates that they are allowed to charge.  I once met a man (a janitor and maintenance worker at Greenville College, actually) who foolishly racked up thousands of dollars of debt on his credit cards shortly after graduating from high school.  He told me that he was just about to pay off the last of his debt, but as a 35 year old man it had taken him over twelve years to do so.  I suppose the conservative might say that this man deserved to basically work as an indentured servant (let's call a spade a spade here) for over a decade since he made such rash decisions.  I, however, don't take that line.  I find fault in a credit card system and a society that allows such an injustice to take place legally.

To boil down this post (and I realize I'm only touching on a fraction of what we have been discussing), I'll state things this way:  You claim that there are three ways to get money (creating it, stealing it, or receiving it as a gift).  I believe that many businesses in our nation such as the loan sharks, pawn shops (some of which are attached to liquor stores so that you can go right in, sell your stuff, and come out with your whiskey all at once), and banks/credit card companies are actually STEALING rather than creating wealth.  What say you, good sir?  Ought Big Brother step in and meddle with the lassie-faire free market to prevent such theft?  I vote yes.

Yours,

Greg