Morality and markets
Gerard Jackson
Critics of the market frequently complain that it is based on impersonal market forces that take no account of so-called ‘justice’ or the social consequences of profit and loss calculations. (That this is something to be welcomed seems to be beyond the understanding of these critics). These complaints are invariably made by people with no economic training and little or no understanding of economic history.
Under free market conditions everyone benefits who is party to an exchange. It ought to be remembered that it cannot be any other way when all transactions are voluntary. Of course, there have been many occasions when all of us have regretted a particular exchange, either because we had insufficient foresight, acted on impulse, or an unexpected change to our finances altered our preferences, etc. But markets exist because of human imperfections, not despite them. If humans had perfect foresight markets would literally disappear.
People often complain of retrenchments caused by changes in demand or improvements in technology. Understandable as this feeling is, any government that yielded to it would severely damage living standards. Unfortunately the impression is frequently given that everyone immediately benefits from changed market conditions because exchange is voluntary. That holds true for those engaged in the exchange. It is equally true that the changed conditions might immediately worsen someone else’s condition by rendering him unemployed.
What has to be stressed is that nearly everyone benefits in the longer term. Obviously, for example, candlestick makers were not that happy with the advent of gas and kerosene lighting. But even they benefited in the longer run. The process by which this happens is rarely self-evident. If the demand for cars, for example, rose to the extent to that car companies needed to purchase additional factors of production this would mean that some factors are now under priced while others are overpriced in relation to the value of their products.
This is another way of saying that the car companies are now making profits while some other companies are making losses. These companies now use their profits to attract factors, including labour and land, away from those lines of production in which they are under priced. Now profits and losses are vital signals that help direct resource to where they are most valued by consumers.
Clearly everybody benefits: the factor owners are paid more and the consumers get more cars. And it was the shift in consumer demand that brought about this situation. It is possible that the goods that were produced by the loss-making companies might rise in price if production is curtailed because the complementary factors used in their production have been bidden away. However, several things must be borne in mind:
• It is no fault of the producer if most of his customers suddenly develop a change of taste.
• Consumer goods are still going to those who value them the most.
• Changes in demand also stimulate entrepreneurs into adopting new technologies.
• Any attempt to prevent factors from being reallocated could only be achieved through subsidies and allowing losses to accumulate.
• Surpluses and shortages will appear.
• A small number of consumers and producers will be penalising everyone else.
• Trapped factor owners will suffer an injustice.
• This policy would eventually lower everyone’s welfare, with the possible exception of those who get the subsidies.
• Markets always strive to create more and better goods as well as new goods.
Let us take the example of a number of consumers who can no long afford a product because an increase in demand has caused its price to rise. Naturally, they’ll complain, but the root of cause of their complaint is that the product is not a free good, it has to be produced.
If the increase in demand creates profits the eventual result will be an increase in output which will exert a downward pressure on prices anyway. As for unemployment emerging from contracting firms or industries, under free market conditions permanent widespread unemployment would not develop, and so long as capital was being accumulated the demand for labour would continuously rise.
The market has always had its moral critics, or should I say moralising critics, who assert that markets undermine moral standards. This is particularly rich coming from socialists when we consider how morally corrupt and oppressive socialist states turned out to be. In any case, one should never assume that everyone will uphold the strictest morals under the best of conditions, human nature being what it is. Free marketeers merely assume that the rule of law will be upheld and that those who cheat and steal will be dealt with.
Regardless of what self-righteous moral posturing leftists argue, free market advocates place great store on moral frameworks and sound social institutions. Never forget that Adam Smith was first and foremost a moral philosopher.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 24 January 2005