Sunday, May 15, 2005

What are free markets not good for?

In a comment to this post by Yazad, I said something to the effect that free markets probably do not have much of a role in areas such as national defence, internal security (aka police), education, social security, healthcare, etc. [I don't have access to the full post, so I am paraphrasing what I wrote]. Gaurav asked me in a follow-up comment what criteria one may use for deciding where free markets do not work well.

Now, I am not an economist to worry about such deep questions, nor am I a philosopher to ponder them for a living. This is my excuse for not being able to give a coherent answer to Gaurav's question. So, what can I do? Outsource the answer, that's what!

For a serious analysis, I will just refer you to two recent columns by Paul Krugman on healthcare, where he compares the largely private insurance based system in the US with the universal, publicly funded -- and less expensive and more effective -- systems in some West European countries. Universal access may be the reason why education and social security could fall in the same category as healthcare, so Krugman's arguments probably apply to them too.

As for internal security, I remember this debate in Reason in which the participants agonized over its place in an ideal libertarian society. You've got to read it to believe the kind of hand wringing that is required for reconciling libertarianism with the need for an internal security force (State Coercion!). In fact, it is so surreal and other-worldly, that it almost begged to be whacked. And, whacked, it certainly was, in this Belle Waring post, declared by Brad DeLong as "the best weblog post ever". Let us look at the key portions of this post (with emphasis added by me):

Reason recently published a debate held at its 35th anniversary banquet. The flavor of this discussion is indescribable. In its total estrangement from our political and social life today, its wilfull disregard of all known facts about human nature, it resembles nothing so much as a debate over some fine procedural point of end-stage communism, after the state has withered away.
Allow me to summarize.

Richard A. Epstein: even in the libertarian utopia, some forms of state coercion will be required. If we must assemble 100 plots of land to build a railway which will benefit all, and only 99 owners will sell, then we may need to force a lone holdout to accept a fair price for his land. Similarly, the public enforcement of private rights and the creation of infrastructure will require money, so there will have to be some taxes. [Note to self: no shit, Sherlock.]

Randy Barnett: Not so fast! Let's cross that bridge when we come to it rather than restricting liberty in advance. We'll know a lot more about human liberty in the libertarian utopia, and private entrepreneurs will solve these problems somehow without our needing to grant to governments the dangerous ability to confiscate our property in the name of some nebulous "public good." And as for rights enforcement -- look it's Halley's Comet!

David Friedman: Epstein places too much confidence in his proposed restrictions on government power. Rights could be enforced privately, and imperfect but workable solutions to the holdouts in the railway case could also be found. "To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset."

Now, everyone close your eyes and try to imagine a private, profit-making rights-enforcement organization which does not resemble the mafia, a street gang, those pesky fire-fighters/arsonists/looters who used to provide such "services" in old New York and Tokyo, medieval tax-farmers, or a Lendu militia. (In general, if thoughts of the Eastern Congo intrude, I suggest waving them away with the invisible hand and repeating "that's anarcho-capitalism" several times.) Nothing's happening but a buzzing noise, right?

Now try it the wishful thinking way. Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer. Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.) Awesome huh? ...

I am sure there are other online sources that present cogent arguments against free markets in some segments of the economy. As and when I find them, I will update this post. In the meantime, if you know of any, please feel free to add them in the comments. Thanks.


  1. Anonymous said...

    Small technical point. Each comment on my blog has it's own permalink. The comment you refer to is here

  2. Anonymous said...

    Hi Yazad,

    Thanks for your comment. The links to my comment, Gaurav's comment and his website have been added.

    Thanks again.

  3. Anonymous said...


    I applaud your slinky side-stepping of the question. You do agree then that you really have no specific parameters on which you divide sectors into private and public? Your approach then is very unscientific, because you do not arrive upon your opinions starting with your first principles, and then using logical reasoning. It is just intuitive, isn't it?

    Universal access may be the reason why education and social security could fall in the same category as healthcare, so Krugman's arguments probably apply to them too.

    Even before education, healthcare and social security, what a human being needs "universal access" to, is food. Are you saying food distribution should also be state-controlled?

    Clothing is also something to which human beings need universal access. So why not put the government in charge of that as well?

    I urge you to give this issue some thought and work out some reasoning on the basis of which you can divide sectors in the aforementioned categories, and then defend this reasoning. Using arguments put forth by scholars such as Krugman is OK, but "outsourcing" arguments to Krugman smacks of a muddled thought process. If you are quoting something by Krugman, internalise it and stand by it rather than making wishy-washy statements like "Krugman's arguments probably apply".

    Make a strong and credible argument, rather than stating "cos ole Paulie Krugman sez so"

  4. Anonymous said...

    Since you are familiar with the concept of logic and all, what is the premiss, on which your division of sectors into private and public, is based?

  5. Anonymous said...


    Thanks for dropping by!

    You are right about my "slinky side-stepping". You are also right about my unscientific approach that does not rely on first principles. And, man, you know what, you are even right about where I stand with respect to food, clothing, EGA, Mid-day meals, the works! Is your middle name 'Genius', by any chance?

    As I recall, the original discussion at Yazad's post was about poverty, not first principles. It was about the best way to eradicate poverty. Some people took the 'we need more liberalization' line, and I pointed out that there is no One Right Way to go about it; there are choices involved. I gave some of my choices, and since you asked me how I arrived at those, I just put together a bunch of things that have had an influence on me, that continue to inform my own choices. Whether you like it or not, those things are my starting points. My other starting point is that whatever public policy that one chooses to propose or support should have a grounding in reality (my model for reality in this context is provided by Sweden, a red rag to the conservative bulls), not in some woolly notions about utopia (socialist or whatever its opposite is). It is clear -- and I am aware -- that you come from a different point in outer space altogether. Shall we then say our premisses are different, and leave it there?

    Another point that I made at Yazad's site was that even in a liberalizing economy, there are many choices -- different paths, if you will -- that one can consider. Some paths are risky, and some, less so. Therefore, if one questions the liberalization process, the way they are being pursued -- as Dilip did -- it does not mean that he/she wants to reverse along the 'one, single, straight and narrow path' all the way back to socialist hell. Similarly, when 'universal access' is cited as a reason for a large public role in healthcare and school education, it doesn't mean total and only government control (State Coercion!). Think Sweden, think West Germany, and, for heaven's sake, think US, the one large country that is closest to the liberalizers' utopia.

    Your asides about dependence on experts are, sadly, off the mark. There are umpteen things that I don't know much about, in which I am forced to make a choice (like this post!). I cannot go back to first principles on everything. Given infinite time and infinite interest on my part, I am sure I can learn all about first principles from someone like you. For the moment, however, Krugman serves me nicely (and so does Amartya Sen), thank you.

    In the meantime, I have no interest -- nor patience -- with arguments like 'libertarianism/liberalization is better than socialism in reducing poverty' (or, is it vice versa?), and 'poverty-free utopia will be upon us, in due course, if only everyone does as we say'.

    I fully realize that, at the end of the day, all this stuff without any underlying 'first principles' is going to leave you cold. Let me just say that your touching faith in first principles (in a social science, for the non-existent god's sake!) does the same to me.

    Thanks again for your comments.

  6. Anonymous said...

    Why, your deduction skills are astonishing. My middle name is INDEED Genius. :)

    Anyway, I thank you for responding to my comment. I wonder if it is wise to carry on this discussion any further, and ask some more questions, since you have not answered any of the earlier ones. (Unless one counts self-depracating-sarcasm, another admirable side-stepping tool - "ooooohh, you're such a geeeeeeeeeeeenius!! ooooohh, your faith in a social science touches me!! (despite this)

    According to the maths I learnt at Genius School,
    2 X (side-stepping-questions) + 4 X (excessive "Thank you"s) = Please push off and leave me alone in my self-contradicting muddled world.

    Hence, cheerio. A recommendation before I go. Read the blog of an Indian student in Germany, since you seem to be so enamoured by the role of the State in that country. You might stumble upon some revealations.