Thursday, July 26, 2007

Free markets and philosophy

Philosophy is always a tricky subject. I remembered hearing John Stuart Mills' views on utilitarianism expressed as "the greatest good for the greatest number". I then heard it rephrased as "a philosophy that suggests one must question whether it's better to save a life, or push a button that gives a warehouse full of bunnies an orgasm." Obviously, this isn't suggesting that Utilitarianists really reflect on such matters, but it points out that there's some real questions that must be faced when moving from the theoretical world to the real world.

Free market people like to claim that the free market will solve all of our problems. "You see, if someone is gouging on the price of peanut butter sandwiches, someone else will compete with them; competition will lower the price!"

That's true. And when one person starts selling sandwiches on cheaper (and less nutritious), the other one is likely to do so as well. People will note that you can't really get a more nutritious peanut butter sandwich, and peanut butter sandwiches will become less healthy (not that they were super healthy in the first place), and free market folks will say "well, that's what the public wanted; they voted with their dollars."

It's all based on a philosophical idea that the free market will respond to demand. It does, in a general way, but when moving to the real world, you need to look at some real questions.

The free market, acting alone, is a purely indifferent force. (Regular readers may know that I consider "indifference" to be the root of almost all evil. Even malice can't cause harm until the malicious person has enough indifference to cause harm to another.) It encourages people to do what people want in order to make money, but it also encourages people to make money without having to do what people want... if they can get away with it. So, while the free market will create an abundance of cheap peanut butter sandwiches, if a person finds a way to skimp on the ingredients, a way that most people won't recognize up front, the free market dictates that there will be skimpers.

Of course, people will argue that peanut butter buyers will learn to recognize the skimpers, and refuse to buy from them a second time... what can be thought of as "small town forces". Sure, if J. Random Sandwichier stiffs you on a sandwich, you'll avoid buying a sandwich from the Sandwichier store again... assuming you recognizes the Sandwichier, and assuming that you're not so hungry you're willing to be cheated slightly, just to get something now, and assuming that the Sandwichier doesn't just move on to the next town to start stiffing people there.

If you insist on an unregulated free market, you're essentially assuring that people will cheat others as much as they can get away with.

And that means there are some things that the free market just shouldn't be involved with.

One of my favorite examples stemmed from a recent discussion I saw... insurance.

The idea behind insurance is that the insurer pools risks; a million people give a hundred dollars each, and the insurer can pay out up to a hundred million dollars in claims. The investments made by the insurer while holding the money can pay for the costs of distribution (or the insurer can charge slightly more than the expected number of claims to cover expenses). It works out well, if viewed as a public service... but what if it's viewed as a business whose sole goal is making money?

Well, then there's an impetus to maximize profits, and that means to avoid (or delay) paying claims as much as you can. Oh, it doesn't mean being an outright cheat, not in such an obvious way that it leads to lawsuits... but it means that you're better off writing complicated contracts and, when a claim is made, conduct investigations and look for loopholes, etc., so long as doing this costs less than immediate payment of the claim. That's how you maximize your profits... by not doing your job, except when doing your job is what nets you the most money.

The market must be regulated, either by the government, or by conscience, and if conscience was a good regulator, we wouldn't need the government.

Comments:
" ...if J. Random Sandwichier stiffs you on a sandwich, you'll avoid buying a sandwich from the Sandwichier store again... assuming you recognizes the Sandwichier, and assuming that you're not so hungry you're willing to be cheated slightly, just to get something now, and assuming that the Sandwichier doesn't just move on to the next town to start stiffing people there."

... and assuming that Sandwichier doesn't decide to buy up or crowd out all those other sandwich-makers so you no longer have any choice but to get your sandwiches at Wal-, er, Sandwichier MegaGlomerate Unltd.
 
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