Neoliberal Markets Deliver for the Rich

This is a cross-post with some modifications from Naked Capitalism.

It is a truth universally acknowledged by all good citizens that markets are the only way to organize a society. The implication is that the role of government is to support and protect the operations of markets, and little else. I’ve been looking at this in a series of posts here; you can find them on my author page. It turns out that the claims about markets reach back to neoclassical analysis by William Stanley Jevons, and mirrored by other neoclassical writers. In his book The Theory of Political Economy, available online here, Jevons claims to prove that markets maximize utility for all participants. Economists generally, and especially neoliberal economists, take that proof at face value and have exalted it into a principle for the organization of society. The proof doesn’t stand up to close examination.

Jevons restricts his efforts to what we would identify as a perfectly competitive market. He defines utility using the definition of Jeremy Bentham:

”By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness (all this, in the present case, comes to the same thing), or (what comes again to the same thing) to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered.”

This perfectly expresses the meaning of the word in Economics, provided that the will or inclination of the person immediately concerned is taken as the sole criterion, for the time, of what is or is not useful. III. 2,3, my emphasis.

He uses these definitions to prove that in a perfect market with no constraints people will trade in commodities until any further trades would reduce their personal total utility. That is all there is to the proof for the superiority of markets.

Now whatever the case may have been in the second half of the 19th Century when Jevons wrote, it’s ludicrous to suggest that all markets are competitive. It’s doubtful that many markets for specific goods and services would meet Jevons’ definition.

I examine the definition of utility in this post, following Philip Mirowski. It turns out that the math produces nonsense results. This is known to economists, but ignored. Samuelson and Nordhaus in their basic economics textbook, Economics (2005 ed.) just tell their readers that utility is a “scientific construct”, not something subject to measurement or observation. They don’t seem to see the oddity of using a term in general use for a completely different purpose. They seem equally indifferent to the oddity of the basic assumption that each of us would know what would improve our total utility if we had an infinitesimal increase of money. Despite the best efforts of decades of economists, the proof for the theory of the superiority of markets hasn’t been improved.

Jevons thought that the only valid proofs were mathematical, but there are other ways to derive correct answers. For example, there is little math in Keynes’ General Theory, and it has held up quite well, better than the infallibility of markets. Perhaps there is something behind Jevons’ argument that would support his claim that markets are superior to other ways of allocating resources.

In this post I look at several definitions of markets. The thing that leaps out is that they are all based on point transactions: each takes place at a specific time and place, and has nothing in common with the next transaction at the same place, or at some other place or at some other instant. If two people are buying something at the same time in different places, there is no connection. The information in any specific transaction only involves the parties to the transaction. Their motives, the benefits they seek, and the satisfactions or lack of satisfactions, are known only to them. Nothing about the last transaction tells anyone or anything about the future.

And Jevons doesn’t claim anything to the contrary. Here’s how he describes his result:

But so far as is consistent with the inequality of wealth in every community, all commodities are distributed by exchange so as to produce the maximum of benefit. Every person whose wish for a certain thing exceeds his wish for other things, acquires what he wants provided he can make a sufficient sacrifice in other respects. IV.98

Jevons concludes that markets facilitate the distribution of commodities (which he defines to include services) from moment to moment. He makes no claims about the future. And he specifically acknowledges that the answers he gets from his markets will give benefit the richest most, and the poorer you are, the worse your outcome. In Jevons’ conception, money rules, and the rich get what they want. None of the other definitions offers any other outcome.

There is always someone with a system for beating the stock market. Some are technical analysts, who talk of resistance levels, support levels and such; here’s an interesting example discussing oil prices. But there isn’t any reason to think this is more than throwing darts. So, believe if you want to. The plain fact is that no analysis predicts the future, and neither do markets.

The proponents of market theory tell us that out of this disconnected series of point transactions, we get the perfect allocation of resources for any situation. Problems with air pollution? Drought? Peak oil? Health care? Answer: Markets.

How is that supposed to happen? Even for Jevons markets are the wrong answer. He would agree that the rich get clean air, water, oil and health care, and the rest of us don’t. Let’s put this to the test. California is experiencing a horrible drought. In response, business interests are busy sucking up the ground water and using it for agriculture and for fracking. If nothing changes we can expect an Easter Island outcome, and it won’t matter which is the main cause, as Gaius Publius explains at Digby. Do you really want decisions about the future of California made by markets in water, as this guy at Forbes wants from his home in Portugal or his armchair theorists in the comment section?

We already have a method for organizing ourselves other than the market. It’s called government. The theory was was that the majority of voters would run government, but the “marketplace of ideas” has been overwhelmed by huge piles of money devoted to obfuscation and lies and clutter that makes it impossible to think rationally, and power is controlled by the people we want government to control. But when it comes to planning for a future, government is the only way non-rich people can play a part in deciding whether or how to prevent the disasters staring us in the face, including water vultures.

18 replies
    • Ed Walker says:

      The theory of the firm has nothing to do with the neoliberal economics as taught to the average citizen. It’s easy to imagine government as a firm, and that would never work to redistribute wealth and power to the chosen ones.

      On the other hand, there is some hope that some economists will start looking at these ideas more seriously. Here’s Brad DeLong on the proper size of the Federal Government, suggesting that government can do many things more more efficiently than the private sector.

        • TarheelDem says:

          Say more about what your disagreement with Ed Walker is.

          I think it is correct to say that most college economics students are not exposed much to Coase or Williamson or North unless these three have been ushered into more recent editions of standard texts. And even then, they can be read from a neoliberal perspective.

          It is likely controversial to look at government from the perspective of Coase’s analysis of firms or to look at the substantial transaction costs borne by the government in maintaining markets. Even the earliest markets were subsidized by some political body. Today, the government subsidizes the enforcement of contracts, attempts to protect the integrity of some markets from chicanery, statistical analyis critical to market research and utilization and other services. Those are often given only perfunctory cost/benefit analyses.

          But the biggest problem with cost/benefit analysis is there is not a solid methodology for actually doing post-performance cost/benefit analyses devoid of observer bias. And to be fair, corporations should be required to do the existential form of cost/benefit analysis that they are always demanding of government programs to discover the transaction costs of internal corruption, self-dealing, tax avoidance, and other gimmicks of management.

        • Ed Walker says:

          I’ll get to Coase soon enough. And let me try to make this clear. These posts are aimed at neoliberal economics, the kind you will hear if you ask the average person to talk about how the economy works. As I have said repeatedly in the preceding posts, there are some pockets of sanity in academic economics, mostly those oriented towards description and counting. For an example of how neoliberals responded to the plain fact that their policy pronouncements led to the Great Crash, see this from Gary Becker. Coase is no better.

          • Alan says:

            “… there are some pockets of sanity in academic economics… ”

            By academic economics I assume you mean the economics practiced in economics departments. Economics is also exists in other disciplines, such as anthropology. There is not much communication between the two. Economics the discipline can afford to ignore anthropology, which is a pity as a little ethnography would cure a lot of the nonsense economists spout.

  1. TarheelDem says:

    The implication is that the role of government is to support and protect the operations of markets, and little else.

    Respective of ideology, government roles in markets are remarkably unchanged except for the identification of who benefits. And that depends on who is financing the decision-makers in the government. This assertion is an strategic ploy designed to get the incumbents to voluntarily give up power. It’s function is much like the call for term limits.

    Once in power, none of the advocates for a minimal role in markets actually deliver.

    Which is to the good. Because markets evolve to the most powerful players, who use collaboration outside of the market space and sometimes predatory tactics within the market space to eliminate competition.

    There has been a lot of analysis and reflection on the development of markets for new commodities that show the dumb luck advantage of one among several early providers, which advantage compounds over time until the maturity of the commodity, at which point substitute commodities arise.

    Markets are not buyer-seller transactions for one commodity usually unless the buyer is a commercial buyer, the purchase is routine, or there are no substitutes available. Multiple negotiation occurs within the market space between one buyer and many sellers and one seller in some cases is considering offers from many buyers. At other times, the negotiation is over against what the buyer and seller undertand the “going rate” to be. That abstraction of the “going rate” gets streamed in time in market price streamed information, which typically lags the actual negotiated transaction. That streamed information is the aggregation that most economists think of. And that is why some players seek to front-run the publication of that stream to get an advantage.

    In reality, those point transactions are intersections of the value chain with the supply chain. The information about product, utility, place and time of availability for transaction, place and time of availability for delivery, rudimentary terms, and offering initial price move through backward through the value chain as the financial symbols to offset the transaction move forward into the account or pocket of the buyer. And the goods and service labor and materials move forward through the supply chain even as the transactions to purchase them move backward creating rudimentary or sophisticated market demand information.

    The transportation of goods, the movement of people, and the transmission of information connect the dots. Those connections are invisible as connections in economic analysis as are their spatial and temporal relationships.

    Stock market trends are contagious across stock market locations with different diffusion rates in time. Some goods and services are not available in certain places or in certain time periods.

    To the extent that an economy has a reality as a system, it is much like a complicated closed network of material and people conveyors and information connections. That structure creates network effects that confound models that examine abstract transactions. Those network effects are the macroeconomic realities that cannot be reduced to point models. By far the easiest one of these to understand is the multiplier effect of the circulation of money. Local economy promoters note that every dollar that enters their local economy buys x dollars of goods and services before it leaves their local economy and ask local residents to shop local to boost that effect. Which implies that there is also a market for markets.

    Each of those point-markets in the Jevons model has historical prerequisites and historical consequences. Wealth accumulated in a different social system can be used in a market so long as there is an exchange rate. Witness how Soviet technocrats became inter-regnum kleptcrats became capitalist oligarchs. Or how the collapse of the housing “market” impoverished millions of Americans.

    Markets are touted as means of rationing scarce goods and services. No one notices that in World War II, the United States government did not use markets to ration scarce goods and services, they used a government ration program that used paper tickets and cardboard coins. That was because markets ration so as to distribute according to the utilities of the proportion of the people best able to pay. If you seek to ration so that everyone gets at least minimal access to necessary goods and services, the government must impose a formal rationing system that allocates claims to goods and services according to some political philosophy. Equal support and shared sacrifice was the philosophy that resulted in the formal rationing system.

    Markets also are bureaucratically organized and operated. That makes them subject to the same forms of systemic violence as government. Consider the foreclosures that the market imposed through its privileges extended by state and local governments of people who did not have a mortgage on their homes or who had bought their homes with cash. The bureaucracy that implemented the market ran amok. Think of the self-dealing that increases profits and lowers tax bills. Think of how the labor “market” works for the 1%. Where are the meat markets for CEOs held in the public with examination of their accounting records, leadership style, and performance (or invent your own beauty pageant categories)? Hiring decisions are bureaucratic exercises of veiled violence. Or considering the current practice of walking terminated employees out of the facility–not so veiled violence.

    The rationing of necessities like food, water, air, and health care through the market is a prescription that some people should live and some should die of starvation, thirst, suffocation, or disease in order for those with enough money to gorge, squander, pollute, or receive luxury accommodations and the most up-to-date practice.

    Like the market, the government works best when it does not impose its own agenda but responds to the agenda and interests of all the people who comprise its constituent-jurisdiction. It is the culture that shapes the limits and agendas of the market and of government. It is the culture that shapes what Jevons calls utility. It is the culture that advertising has clobbered both on the economic and political side. And that is thanks the genius of Edward Bernays and his acolytes and imitators. The corruption of the marketplace of ideas and the conversations of citizens deforms both market and government from delivering the greatest good for the greatest number. And institutionally, both government and the denizens of the markets engage in that corruption.

  2. Jonf says:

    Markets may allocate resources but not always effectively or efficiently. Case in point: Obamacare. And government is indeed a force that may be used for the public purpose. Now, how do we get the right people elected to change the conversation?

    • TarheelDem says:

      The slippery terms here are “effectively” and “efficiently”. Having people die simply because they cannot afford health care is certainly not effective policy. Subsidizing health care through cost shifting willy-nilly is not an efficient policy. Having an insurance pool that is split based on risks in neither effective nor efficient. The most efficient community pool would encompass the entire population of the world. No one has put that on the table yet.

      Is insurance more effective and efficient than government direct provision of health care? Probably not, just for the transaction cost argument of tracking services, billing, and collection of payments. Compare fully funded Medicare to fully funded Veterans Administration. Recently, both have had caps on funding meant to make them more efficient that instead have reduced services or usage.

      Being a deliberately neoliberal program of government healthcare (Romneycare USA), Obamacare from an efficiency and effectiveness standpoint on individual transactions is the worst of both worlds but does make the compensation of providers more efficient by accentuating early stage preventive care, which reduces expensive secondary and complicating conditions altogether and makes risk allocation more efficient by moving, if slightly, toward a community pool. It is more effectively by not penalizing people who require either chronic or catastrophic health care more than once over a lifetime.

      • Jonf says:

        Yes and we should mention that Obamacare is not universal. Millions remain without health care. And someone pointed out that insurance is not health care. It is a profit making business and rather expensive at that. Imagine paying six grand a year and have a deductible of thirteen thousand. I guess it is all part and parcel another neoliberal privatization project for profit. This is a good example of what government can do and take the crooks out. At best Obamacare is a way station on the way to something better.

        • TarheelDem says:

          Insurance need not be for-profit. A lot of the early insurance plans were risk pooling among folks with similar occupations and risks; these “mutual” insurance companies started out as non-profit cooperatives. Typically the early insurance plans were dealing with life insurance and not health insurance. The trouble started when some bright fellow understood that insurance funds were a pool of cash that they could play with. And play they did, which is why every state created an insurance commission to regulate and ensure that insurance plans did not defraud policy holders or get taken down by embezzlement. The real boom in operating costs and also profits came when insurance companies started rating and coding and managing separate pools of risk–a form of price discrimination against the risky. The excuse was the moral hazard of policy-holders’ precipitating an event themselves to collect the insurance–a market-based solution.

  3. pdaly says:

    Dr. James Gilligan, psychiatrist and an expert in violence (his finding that violence begets violence) in this video talks about how US recessions (severity and duration), age-adjusted national suicide rates, and age-adjusted national homicide rates INCREASE when Republican presidents are in office and decrease when Democratic presidents are in office. He states one the of strongest predictors of rising rates of violent deaths is an increase in the wealth extremes of a society and the subsequent increase in shame and humiliation of the unemployed population. (The economic term of art in England for these people are the “redundant” people).

    Comparing cross-sectional data (red states and blue states) during the same period of time, when unemployment rates would be about equal across the nation, the rates of homicide and suicide are significantly higher in red states compared to blue states.

    The main difference he found is the significantly better unemployment insurance/safety nets among the blue states compared to the red states. He hypothesizes the unemployed, uneducated person in a blue state suffers less shame/humiliation with the amount of relief provided by the state government and therefore is less violent to people in his surroundings. Of course, the culture of the state (capital punishment, approval of corporal punishment of children, rate of gun ownership) contributes, too. One of Dr. Gilligan’s medical findings is that men in prison for violent offenses have themselves been severely abused as children.

    He asks people to review the data, saying it is time for “evidence-based politics” and not just ‘evidence based medicine’ in order to prevent “epidemics of death.”

    I see an argument for the redistribution of wealth by government to ensure benefits to society that a market will not be able to “see” or achieve.

  4. Alan says:

    Ed wrote: “We already have a method for organizing ourselves other than the market. It’s called government.” But as you wrote at the beginning: “The implication is that the role of government is to support and protect the operations of markets, and little else.”
    This, I think, is one of the key parts to the “neo”. It’s not that there is no government in neoliberalism. In fact, government plays a key role in neoliberalism and can be authoritarian. This is at odds with Smithian economic liberalism. The prophets of neoliberalism are at heart “men of system”. It’s a form of totalitarianism (see Wolin).
    There’s a new book that takes on the repurposing of government to neoliberal ends: Wendy Brown, Undoing the Demos: Neoliberalism’s Stealth Revolution
    Interview with Wendy Brown: What Exactly is Neoliberalism?

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