Bill Totten's Weblog

Saturday, August 23, 2008

The Fictions of a Free Market

by Maggie Mahar

TPMCafe Book Club (August 11 2008)

What is delightful about James Galbraith's The Predator State (2008) is that he says things that are, at once, outrageous - and completely true. Because he shows so little concern for what one "can" and one "cannot" say in a polite capitalist society, one might call him an idealist. But Galbraith is not tilting at windmills; he is simply toppling the conventional wisdom of the past 28 years.

Begin with "the market". When you come down to it, Galbraith explains, "the market" is a fiction. In theory, "it is the broker, the means of detached and dispassionate interaction between parties with opposed interests ... Buyers want a low price, sellers wants a high price. The market works out the price that exactly balances these desires, a price that is fair because it is the market price." Even liberals believe in this mythy "market" - a higher intelligence that hovers over transactions ensuring that, as long as you let "the market" work its magic, everything will work out for the best

But Galbraith points out that when you try to define the word "market" you find that it is merely a negative. It refers to the "context of any transaction so long as that transaction is not directly dictated by the state. The word has no content of its own because it is defined simply, and by reasons of politics, by what it is not. The market is the nonstate and thus it can do everything the state can do but with none of the procedures or rules or limitations .. it is a disembodied decision-maker - a Maxwell's Demon - who somehow, and without effort, balances and reflects the preferences of everyone participating in economic decisions ... It can be these things precisely because it is nothing at all."

Yet who dares to say there is no wizard behind the curtain? "Can anyone in modern American politics ... deny [the market's] existence, or even its relevance?" Galbraith asks. "To do so would be political suicide - precisely like denying the existence of God". The best that a liberal economist can do is to "hedge and qualify, at the margins". One can say that the market "may be imperfect, that under certain conditions it may fail".

Meanwhile, take a look at the last quarter-century of this country's economic history, and you have to acknowledge that Reality offers what Galbraith calls "an overwhelming critique of the very concept of the market".

Supposedly, the consumer stands at the very center of the market, and supply responds to his demands. With, of course, certain exceptions. Such as Detroit, where, for some reason, the consumer's plea for affordable, safe automobiles has fallen on stone-deaf ears. Or the pharmaceutical industry which, for reasons of its own, persists in turning out newer, better allergy medications when what we would really like, please, is something that might delay the onset of Alzheimer's. But Alzheimer's research is expensive. Moreover, there is a saying in the drug industry: "a pill that cures is good; a pill that you take every day is better".

To be fair, consumers embraced the mammoth, exorbitantly expensive, gas-guzzling cars that "the market", in its wisdom, offered us - even after we learned that sometimes these cumbersome vehicles tip over. Maybe we didn't "demand" the SUV, but when Detroit told us that this is the vehicle we needed to feel safe, affluent, and well - above it all - we lined up. And we keep on buying the allergy medications, paying more for them each year (even though medical research shows that half of all Americans who take these pills do not suffer from allergies.)

Supposedly, consumers hold sway over the market because they are savvy shoppers. They refuse to overpay. They always wait until competitors come in and drive prices down. They insist on quality - and results. They learn from the past, and remember what they learned. In short, as Galbraith puts, it market enthusiasts believe that "economic man is a machine to whom whimsy and evolution are unknown".

But "in practice", Galbraith observes, "man is inconsistent; changeable; sometimes, though not consistently, irrational; his judgment biased and distorted and influenced by his peers".

The bull market of the 1990s proved just how irrational humans can be. Ignoring every sign that the market was over-priced - from spiraling price-earnings ratios to a Fed chairman talking about "irrational exuberance" - investors piled on, buying companies that, in some cases, didn't even have a product. Then when technology stocks began to dive, many individual investors kept on buying, like gamblers who believe that if they just stay long enough in the casino, their luck will turn.

At the height of the frenzy, supposedly sober journalists talked about how stratospheric stock prices represented "the collective judgment of millions of people around the world". The New York Times' Thomas Friedman celebrated the democratization of the financial world: "One dollar, one vote". The market, Friedman declared, had "turned the whole world into a parliamentary system ... [whose citizens] vote every hour, of every day, through their mutual funds, their pension funds, their brokers and more and more, from their own basements via the Internet".

The metaphor fueled faith in "the wisdom of the market". Who could question prices set by millions of voters? According to the received wisdom, in 1999 AOL was worth 305 times its previous earnings, while IBM was fairly valued at 28 times earnings, because more people had voted for AOL.

If investors actually picked stocks while seated in sealed voting booths, one voter might be able to correct for another's mistakes. But people who buy stocks are social creatures, and be they pros or fledgling 401(k) investors, they are influenced en masse, by the spirit of the times.

In short, they talk to each other. Galbraith explains: "modern behavioral economics has begun ... to show that the actual behavior of presumptively competent people" does not "correspond to the predictions of rationalist theory". Whether they are picking stocks or deciding to buy a car, "ordinary, intelligent people appear consistently unwilling, or unable, to calculate the consequences of their decisions in a manner predicted by the view that they are responding purely to the market. Instead, they act as social beings, concerned about their standing with their peers, about the fairness of the deal they are being offered, and other matters quite irrelevant to the utility of the object or money on offer."

There goes another piece of conventional wisdom : "The wisdom of crowds", it turns out, is just a catchy title for a book.

For, as every Wall Street veteran knows, in our competitive free markets, stocks (and other products) are not "bought" they are "sold".

"In the real world", Galbraith writes, "the autonomous individual is not the active agent who matters most ... Advertising is propaganda ... and markets are controlled by large organizations that have the capacity to decide what will be produced" (for example SUVs); "the capacity to adjust the presentation of such products to what research and experience indicate the public will actually buy" (for example allergy medications) and "the capacity to influence the public's buying preferences through advertising".

But what about the consumer's "freedom" in a free market - our freedom to say "yes" or "no"? Galbraith explains that we are "free to choose only among a menu of items set out for sale". Large corporations with "substantial political power" have control over "the design of products ... the pricing and the distribution" and "the planned obsolescence" of those products. Galbraith explains: "The freedom to shop is, for the rest of us, an incident to this freedom".

Finally, of course, our freedom to shop is constrained by how wealthy we are. Whenever anyone, liberal or conservative, talks about the importance of Choice in a free market, and how Americans like to be able to Choose from a menu - beware. This is especially true if they are talking about something important, such as health care or education.

Too often, "choice" means that we are "free to choose" - in fact forced to choose - what we can afford. When it comes to health-care "menu" is code for a tiered system. If you are middle-class, even if you are upper-middle-class, you may find that reformers who promise "universal coverage" are, in fact, offering an array of "choices to fit every pocketbook". And unless you happen to be perched on the top step of a five-step economic ladder, you may well discover that the only insurance policy that fits your purse really shouldn't be called "insurance". Either the co-pays and deductibles are so high that you can't afford to use it - or when you do use it, you'll be told that the treatment you most need isn't "covered". So-called "Swiss cheese" policies are filled with holes that open, like trap doors, when you most need protection.

As for education, Galbraith notes "he concept of a freedom to shop has been extended insidiously ... into the realm of careers where it plays even greater havoc with the normal use of words. In a 'free' capitalist society with private schools and universities free to admit whom they please and charge what the market will bear, the freedom to choose one's profession becomes, in part, the freedom to become what one can afford to become."

Does Galbraith have a solution? Yes. The rule of law. This is why we have government - to pass laws and regulations, and to enforce them, with an eye to the public good. The predator state is a state of anarchy where lobbyists have persuaded Congress that they own government.

But all of the campaign contributions in the world will not help a legislator if his constituency has decided that he doesn't deserve to remain in office. Lobbyists don't yet own our government. Voters still have power. They just need to remember what the world was like before 1980. It wasn't perfect. But it wasn't ruled by predators, either..

Bill Totten


Post a Comment

<< Home