[p2p-research] what to think of the market

[Michel Bauwens]

Hi Ryan,

this is a contribution to our debate on the market, and I agree with the
approach of Dean Baker:

Dean Baker: the market is not the
problem!!<http://blog.p2pfoundation.net/dean-baker-the-market-is-not-the-problem/2009/07/27>
[image: photo of Michel Bauwens]Michel Bauwens
27th July 2009

 Below is Dean Baker’s
contribution<http://www.zcommunications.org/znet/viewArticle/21756>to
the Re-Imagining Society debate at ZNet.

*Dean Baker:*

*“As every backcountry hiker recognizes, you must first know where you are
before you can figure out how to get to where you want to be. While it is
important to know where we want to go, progressives often badly
misunderstand where we are now.*

*Specifically, much of the anger of progressives is wrongly focused on the
market, as though the market is the source of the troubles in the world.
Progressive publications have featured endless diatribes against “market
fundamentalism,” implying that the strict devotion to market principles is
the core problem that we must counter.*

*In fact, the market is not the problem. The market is a tool, like the
wheel. It makes as much sense to attack the market as it does to attack the
wheel.*

*The problem is in how the market has been structured. The right has used
its control of the government to structure the market in ways that
redistribute income upward and produce many other bad outcomes, like poverty
in the developing world and global warming.*

*Progressives fall into the right’s trap when we imply that these outcomes
are simply the result of the natural workings of the market, and that our
opponents have a rigid adherence to market principles. Poverty and
inequality are not inevitable outcomes of a market economy; they result from
the fact that the market was rigged to produce these outcomes. Furthermore,
our opponents absolutely do not have a rigid adherence to market principles.
They have a rigid adherence to policies that redistribute income upward.*

*Our efforts must be focused first and foremost on combating the ways in
which the wealthy have rigged to the deck to ensure that the market will
favor their interests. This is the best immediate path forward and will also
provide the basis for a clearer understanding of where we might ultimately
hope to go.*

*How the Wealthy Rig the Deck*

*Conservatives are fond of highlighting the self-made person: someone who
starts from humble beginnings and through talent and hard work manages to
accumulate enormous wealth. While their poster children may be genuinely
talented and hardworking, behind any “self-made” person one can almost
always find the big hand of the government.*

*For example, Bill Gates rise from moderate affluence to incredible wealth
was only possible because of government granted copyright monopolies on
computer software. The government would arrest anyone who makes and
distributes copies of Windows and other Microsoft software without Bill
Gates’ permission. As a result of this copyright monopoly, Microsoft became
one of the most profitable companies in the world as the use of personal
computers exploded over the last quarter century.*

*While conservatives would have us believe that copyrights came down from
heaven, in fact, copyrights are a form of government granted monopoly. They
serve an important public purpose; they provide an incentive for creative
and artistic work, but this does not change the fact that copyrights are
instruments of government policy, not inherent attributes of a market
economy.*

*Real market fundamentalists do not believe in copyrights. They believe that
the market will provide sufficient incentives to promote creative work
without government granted copyright monopolies. If the country were
actually run by market fundamentalists, then Bill Gates would have to work
for a living.*

*The same applies to patent protection. This is most important in the case
of prescription drugs. The United States now spends more than $250 billion a
year on drugs ($3,200 for a family of four). These drugs would cost about
one tenth of this amount in the absence of patent protection.*

*This is demonstrated by the fact that many chain drug stores now sell
thousands of generic drugs for $4 a prescription and sometimes less. The
drugs available at $4 per prescription are not chemically distinct as a
group from the brand drugs that can sell for hundreds of dollars per
prescription. The only difference is that the latter are subject to patent
monopoly protection by the government.*

*This is not only a question of dollars and cents; it is a question of
lives, especially in the developing world where patent protection often
makes drugs unaffordable for much of the population. However, even in the
United States millions of people have great difficulty paying for drugs they
need for their life or health.*

*Patent protection does serve an important purpose in providing an incentive
to develop new drugs, but again this is a question of public policy, it is
not an intrinsic feature of the market. There are other, far more efficient
ways to support research into the development of new drugs. For example, we
could set up prize funds to reward important innovations as has been
proposed by Nobel Prize winner Joe Stiglitz and others.*

*We could also just have the government pay for the cost of developing
prescription drugs up front, as it does when it pays out $30 billion a year
for biomedical research conducted by the National Institutes of Health. In
either case, once the research is funded, the drugs developed could then be
sold in a competitive market for $4 per prescription, just like generics.*

*Of course, these mechanisms would likely mean much lower profits for
Pfizer, Merck and the other big pharmaceutical companies. But Pfizer, Merck
and their political allies are not being market fundamentalists. They are
fighting to protect government intervention that benefits them.*

*The government granted monopolies through “intellectual property” are far
from the only mechanism by which the government redistributes income upward.
The collapse of the financial sector and the subsequent government bailout
revealed a whole set of implicit guarantees that supported the profitability
of the financial industry. Lenders could feel safe in lending money to Bear
Stearns, AIG, Citigroup and the rest (except Lehman) because they correctly
believed that the government would never allow these financial giants to
fail.*

*This guarantee meant higher returns for bondholders, since the government
effectively subsidized their investments. More importantly, it allowed for
the top executives at the banks to earn enormous pay packages, since the
government was giving them a guarantee that allowed them to speculate with
other people’s money. The Wall Street crew might mutter about deregulation
and letting the market take its course, but in reality they are big-time
dependents of the government. To the financial industry, “deregulation” just
means that they want their government subsidies with no strings attached.*

*In fact, at an even more basic level, the corporation itself is a creation
of the government. Individuals can act on their own to form partnerships,
but the creation of an entity that has a completely distinct legal status
from its owners requires the intervention of the government. Corporate
charters were originally only granted to companies that were deemed to
fulfill a specific social purpose such as improving transportation by
building turnpikes, canals, and railroads or expanding trade.*

*This point is important. The creation of corporations, like copyrights and
patents, were explicit government policy. They are not intrinsic to the
market. Genuine market fundamentalists wouldn’t want to see the government
granting legal personage and limited liability to artificial entities like
corporations. Market fundamentalists would want individuals to freely
associate in business as partnerships that don’t receive special privileges
from the government.*

*The structure of international trade is also determined by the government.
The so-called “free trade” agenda of the last three decades in reality has
almost nothing to do with free trade. A main purpose of U.S. trade policy
has been to put U.S. manufacturing workers in direct competition with
low-paid workers in the developing world. This predicted effect of this
policy is to lower the wages of manufacturing workers and non-college
educated workers more generally. By depressing the wages of these workers,
as well as the prices of the goods and services that they produce, this
trade policy raises the real income of highly paid professionals and those
who get their income from capital. (If they pay less for manufactured goods,
and their income stays the same, then their real income rises.)*

*The structure of labor-management relations is another area of explicit
government intervention. If a union organizes its members to support the
strike of another union (i.e. a secondary boycott), the government will fine
the union and arrest its leaders. Free market fundamentalists should have no
objection to one group of workers opting to support another group of
workers. Once again, the policy in place has the effect of hurting ordinary
workers to the benefit of corporations, even at the expense of undermining a
commitment to the freedom of individuals.*

*Even the idea that the market fundamentalists refuse to consider
externalities can readily be shown to be utter nonsense. The market
fundamentalists absolutely insist on zoning restrictions that prohibit the
building of a slaughterhouse or steel factory in high-income neighborhoods.
In fact, they generally support zoning that prohibits low-income housing in
their neighborhoods. They fully recognize the concept of externalities and
the role of government in controlling them. They just don’t want the
government restricting externalities in ways that reduce corporate profits.
*

*In almost every area of public policy it is easy to show that the market
fundamentalists do not really favor leaving outcomes to the market. Rather
they want to set in place a structure that ensures market outcomes will
favor the wealthy. When progressives respond by criticizing the market, we
pursue a path this is both conceptually wrong and politically disastrous.*

*Market outcomes, as opposed to government directed policy, enjoy
substantial legitimacy among the public. Conservatives know this and milk
fears of stifling government bureaucracies to great effect. Rather than play
into the conservatives’ trap, progressives should actively promote polices
that structure the markets in ways that help the vast majority, instead of
causing income to flow upward.*

*For example, we should reject copyrights and drug patents as archaic
mechanisms for supporting creative work and innovation. It easy to develop
market oriented policies that will more effectively promote creative work
and innovation and that are less likely to lead to vast fortunes being
accumulated in these areas.[i]*

*These policies will also have the enormous advantage of making the world’s
vast intellectual output available to everyone everywhere at almost no cost.
Imagine children in even the poorest developing countries being able to get
access to the web on computers or cell phones that are very cheap, because
they use open source software. Suppose they can then download at no cost any
book, newspaper, or journal article that has ever been written, as well as
any song, movie, or video. This would be a free market outcome.*

*Suppose that the most effective drugs for treating any disease were
available at just the cost of manufacturing them, which would rarely be more
than a few dollars per prescription. Similarly, the price of most medical
tests and equipment would plunge to levels that made them seem unimportant,
if we had a free market in these areas rather than government patent
monopolies.*

*We could quickly deflate the Wall Street boys and girls by taking away
their government security blanket. The obvious story here is that the
institutions that are “too big to fail” are run by the government, as is the
case now with Fannie Mae and Freddie Mac. Otherwise, there should be a
credible commitment from the government that if large institutions get into
trouble, then they will fail and that their creditors will be out of luck.*

*With corporations more generally, it is evident that the existing rules are
poorly designed for the current economic environment. Management has come to
control corporations and run them in their own interest, to the detriment of
the shareholders and other stakeholders (at least in the United States).
There are already elaborate rules on corporate governance that set
restrictions on what the insiders are allowed to do. These rules can be
restructured to limit the power of top corporate management, most
importantly the power to largely set its own pay.*

*If rules of corporate governance required that compensation packages of top
executives were regularly sent out for shareholder approval, in elections in
which unreturned proxies do not count (it is currently standard for
management to count proxies that are not returned by shareholders as
supporting its position), it is likely that the multi-million dollar pay
packages of top executives would come back down to earth. The elimination of
bloated executive compensation packages in the corporate sector is also
likely to bring downward pressure on pay for top officers in hospitals,
universities, and even non-profits, since all of these institutions have
felt the need in recent decades to raise pay in order to stay in line with
the corporate world.*

*Trade can also used as a force to reduce inequality in the wealthy
countries and promote development in the poor countries. Current trade
policy only forces non-college educated workers to compete with their
low-paid counterparts in poor countries. However, we can also adopt “free
trade” policies that are structured toward putting our most highly paid
professionals (doctors, dentists, lawyers, accountants) into direct
competition with highly paid professionals from the developing world.*

*It is far cheaper to educate and train a doctor in the developing world
than in the United States. If honest economists were designing trade policy,
they would have focused on opening the door to professionals from the
developing world rather than creating structures to facilitate trade in
manufactured goods. Our policy should be focused on making it as easy for a
smart kid growing up in India or China to educate themselves to U.S.
standards and practice medicine and law in the United States, as it is for a
kid growing up in the Los Angeles suburbs.*

*To ensure that developing countries benefit from this arrangement, a fee
can be attached to the pay of professionals trained in the developing world,
which will be paid to the home country. Given the outsized professional
salaries in the United States even a modest fee should be sufficient to pay
for the training of 2-3 professionals for every one that comes to the United
States. This should allow for better health care and other professional
services in the developing world, while hugely reducing the cost of medical
care and other professional services in the United States.*

*Another important change in government policy would be to have a central
bank (the Federal Reserve Board in the case of the United States) that is
more committed to sustaining high rates of employment than an arbitrary rate
of inflation. In addition to the strains directly associated with being
unemployed, high unemployment also puts downward pressure on the wages of
those at the middle and bottom of the wage distribution. If the Fed
consistently pursued monetary policies that were intended to keep the
unemployment rate low, it would create an economic environment that made it
easier for large segments of the workforce to enjoy rising living standards.
*

*There are many other policies that can be added to this list, but the point
is that these are all market-oriented policies that will help to ensure
progressive outcomes such as greater equality, better access to health care,
and increased economic security. We should not be afraid to use the
government directly where it provides the best solution. For example, a
government run Social Security system is far better and more efficient than
its private sector counterparts.*

*However, this is not a matter or principle that separates progressives from
conservatives. Over the last three decades Conservatives have aggressively
used the government to structure the markets in ways that redistribute
income upward. If we don’t recognize this fact and stop calling them “market
fundamentalists” then all our visions will be illusions.”*


-- 
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