Provide free markets just outcomes?

Table of Content

1. Introduction

2. Market Failure versus Failure-of-Market Outcome

3. Ideological Background
3.1 What is an Ideology?
3.2 New Right
3.2.1 Robert Nozick and the Libertarianism
3.2.2 Friedrich August von Hayek

4 About the Justice of Market Outcomes
4.1 Responsibility for intended/unintended outcomes
4.2 Inequality and Injustice
4.3 Negative versus positive Freedom
4.4 Social Justice as a rhetorical metaphor

5 Conclusion

1 Introduction

Not only in economics people often talks about markets in fairly different circumstances. What does that mean? The Britannica Online Encyclopedia serves us with the following definition:

“A market is a mean by which the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions.”^[1]

What they call ‘means’ could also be named as a social arrangement. Analogously to the physical location of a street market every other form of markets is a man-made institution in order to organize trade. Thereby it is in addition to the right of own property probably the most salient feature of every capitalist system.

But as long as markets are not natural but social constructs, they and the way they are shaped have to be subjects of human monitoring. Although this seems self- evident from an impartial point of view, free markets and their results are often taken for granted by some economists. This article focuses on the results of markets, the so called market outcomes. More precisely it is about the justice of market outcomes with special attention to the ideology and thought of Neo-liberalism with respect to this subject.

During this article I will continue along the following structure: First I will expose the possibility of market failures and distinguish these failures into traditional market failures and another form of undesirable market outcomes, the failures-of-market outcomes. After that, we will devote attention to the upswing of the New Right and its ideological background. After focusing on two extremely influential thinkers – Friedrich von Hayek and Robert Nozick – we will examine the justice of free markets. I will finally end up with a conclusion in which I resume the most important results and give an overview about the implications.

2 Market Failure versus Failure-of-Market Outcome

Whenever something is evaluated, it can either pass or fail. This is the same for market outcomes. If the results don’t correspond to our expectations, we could be therefore inclined to proclaim a market failure. However since this term is already used in a very specific way in economics I intend in this chapter to explain its meaning and introduce the distinction between market failures and what I will call failures-of-market outcomes.

Most economists accept that there are cases of suboptimal market outcomes. Even if e.g. the Austrian School refutes to name it a market failure^[2], it is common sense that there suboptimal results in terms of efficiency.

Market failures occur “…when markets fail to efficiently provide or allocate goods and services.”^[3] There is a fairly wide consensus among economists concerning the main causes of this phenomenon, which are cardinally the following three:

First there is the problem of market power: If one rival in an industry disposes of market power he tends to reduce production “…in order to drive up prices and increase profits”^[4] – too few goods are provided and prices are above marginal costs. Another reason are externalities. This means that there is a third, nonparticipating party to an exchange who is either paying a cost or receiving a benefit.

Finally we have to mention public goods. Since they are non-excludable and non rival^[5], they wouldn’t be provided in a complete free market system.^[6]

It is important to note that according to mainstream economics market failures have only allocative character. Since there is a sharp distinction between allocation and distribution, an extremely unequal distribution of income is therefore not regarded as a market failure as long as the allocation is pareto efficient.

But there are cases “... in which the market is doing everything it is supposed to be doing but society is still unhappy with the results.”^[7] Although the outcome fulfills the efficiency criteria completely, it might be not desirable. A simplistic example^[8]: Two people are entering into a bargaining situation – the one is a seller of babies, the other person likes to buy babies, both are not coerced in any way. Where is the market failure in this situation? From an economic point of view we have an evident case of comparative advantage and efficiency due to specialization. Although most people would dismiss this solution. This is a potential situation of a so called Failure- of-market outcome.

Unfortunately it seems to be no space in a traditional theoretical framework of (micro)economics for such issues. This deserved to be questioned: Is it proper to constraint economics, as a discipline, on a few technical models excluding the knowledge and the merits of other (social) sciences? Certainly not. Since economic questions always refer to various types of human activities, it is not proper to “...separate economics from the other social science”^[9], especially anthropology, sociology and the political Sciences.

Colander thus advocates “…a dual framework which includes the standard market failure, but also a broader category that includes the failure-of-market outcomes.”^[10] This makes it possible to incorporate moral, psychological and justice issues in the policy framework. But nonetheless it isn’t meant that economists prescribe whether moral issues should enter into the solution. What the economist does is to provide the framework within which economic issues and normative issues can be considered.

For our purposes it’s quite important to understand the moral dimension of the failure-of-market outcomes. If we want to examine whether outputs are just or not one we cannot look only on the optimal allocation of (social) goods without considering any (re)distributional needs due to failure-of-market outcomes.

3 Ideological Background

Before we are able to examine the arguments and the stance of the so called ‘New Right’ concerning the issue of market justice, a theoretical framework of their ideology and basic principles is needed.

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^[1] http://www.britannica.com/eb/article-9109822/market.

^[2] http://www.mises.org/article.aspx?Id=1035.

^[3] http://www.mises.org/story/1806.

^[4] http://elmo.shore.ctc.edu/economics/market.htm

^[5] A good example for non-excludable and non-rival goods is streetlight: It is not possible to charge people who benefit from it and regardless the amount of passengers walking under it, there is still the same light available for another passenger.

^[6] See http://www.bized.co.uk/virtual/economy/policy/tools/government/gexpth2.htm

^[7] Colander 2003 p: 83.

^[8] See Colander 2003: p.85.

^[9] Terreblanche 1998: p.3.

^[10] Colander 2003: p. 85.