A free economy, virtue and externalities

Opponents of a market economy often decry the operation of what they perceive to be selfishness in the market as well as problems of market failure such as the existence of externalities. Whilst I would not pretend that these problems do not exist, we do have to ask whether a market economy or government control of economic activity has the most effective mechanisms for limiting the harm from selfishness and from externalities.

An example cropped up over the weekend that illustrated the problem of government control. The Royal Mint is to remint all five pence and ten pence coins in order to save about £6m a year. This will cause chaos and cost time for individuals who find that these coins no longer work in machines; it will cause the vending machine industry to spend anything up to £100m changing to new machines. No consideration has been made, it would seem, of the external costs imposed upon society as a whole by this government action. Other examples of similar practice abound. The IEA recently published research showing that the costs imposed upon businesses that administer the collection of the government’s taxes had risen in the UK to £15-20 billion per annum: much of this increase arises as a result of the government trying to cut its own costs and impose costs on businesses instead. It is not unusual for me to spend one hour waiting for a GP in the local doctor’s surgery – possibly about 40 hours of people’s time are used up in this way every morning in my village alone. My daughter’s school has decided to levy a charge for school clubs to assist the school budget – the charge is so tiny that the time cost for parents of writing the cheques will dwarf the 0.003% of the budget that the money will raise from each club.

There are two issues here. A market economy allows people to serve their own interests only by serving the interests of others. This limits the extent to which I can impose costs on others through my economic activity and therefore limits the extent of externalities. There is no such constraint when the government controls economic activity (just the constraint of a quinquennial election). The government can impose costs on anybody at any time. Secondly, a market economy forces participants to practise virtues. Different readers will have different views about this but, as a Christian, I take the view that virtues can only be nurtured by practice. As such, even if it is self interest that causes me to take account of the effect of my actions on others, this is not a bad thing.

A market economy forces participants to be trustworthy (in most circumstances), do things on time, take account of the value of other people’s time, smile and be pleasant to customers and so on. Sometimes, of course, this does not work out as it should. There are opportunities for sharp practice and imposing costs on others. These problems can be managed in a market economy – especially by extending property rights and by developing an appropriate legal system. Indeed, it is often the government that discourages the practice of virtues by bailing out banks, encouraging box-ticking approaches to regulation etc. The opportunities for imposing costs on others and not caring about the needs of others are much greater when the government is in control.

13 thoughts on “A free economy, virtue and externalities”

  1. Posted 06/09/2010 at 12:47 | Permalink

    Once on holiday I got a face infection which needed treatment on my return. The NHS no doubt did a fine medical job; but they were quite prepared to let me, a teacher, go into the classroom with a huge bandage which made me look like a seriously wounded veteran of the First World War. There seemed to be no understanding of, or concern about, my practical needs, as opposed to the clinical aspects.

    It’s only fair to say that once I had told them, in no uncertain terms, that their proposed treatment was completely unacceptable they did come up with a perfectly adequate ‘compromise’. But it had to be pointed out to them. Governments don’t really care about individual consumers.

  2. Posted 06/09/2010 at 14:04 | Permalink

    Unasked and unanswered questions in Booth’s piece: 1)Is poor planning the purvue of government more than that of market-driven participants? If “No consideration has been made” to externalities, then the problem was poor-planning, not “government” itself. Any catalog of private, corporate mistakes would suggest that unintended consequences, i.e., externalities, have accompanied centuries of private economic pursuits. 2) While individuals may practice virtues in any situation, governmental or private, can venal purposes genuinely foster virtues? Class analysis of enlightened self-interest again can catalog too many abuses to make that principle convincing.

  3. Posted 06/09/2010 at 15:10 | Permalink

    Self interest is not a “venal purpose” but an extension of self respect. It can, of course, become disordered and become greed and selfishness.

  4. Posted 06/09/2010 at 16:37 | Permalink

    ‘A market economy forces participants to practise virtues.’

    Only that of commutative justice. What about faith, hope, charity, justice (in all its forms), prudence, temperance and fortitude.

  5. Posted 06/09/2010 at 17:06 | Permalink

    Michael – I did not say “all virtues” and I was not trying to pack the post into a formal Christian way of thinking about virtues. However, it is certainly helpful to practise prudence and restraint as an actor in a market economy. That is not to say that all actors will but if I have a really annoying customer (as I frequently did when working, say, at Boots) restraint is the order of the day.

  6. Posted 06/09/2010 at 18:20 | Permalink

    I’d agree about prudence. But St Thomas said that there are several kinds of prudence as well as of justice. Notably political prudence in a civil ruler, and the virtue of obedience in the ruled.

  7. Posted 08/09/2010 at 09:53 | Permalink

    […] e mercado Filed under: Economia,Política,Teoria — André Azevedo Alves @ 10:52 A free economy, virtue and externalities. Por Philip Booth. A market economy forces participants to be trustworthy (in most circumstances), […]

  8. Posted 09/09/2010 at 16:02 | Permalink

    There’s always so much question about the incentives in a free market, but what about the incentives in a statist “planned” system? Big government removes incentives for personal responsibility and personal relationships as it claims to provide for the physical and moral needs of more and more people. You cannot relieve the “burdens” on society without weakening society.

  9. Posted 13/09/2010 at 18:59 | Permalink

    On the Daily Mail’s website today (13 September) there’s a report that the US economy is on the brink of collapse and financial apocalypse. Some blogger posted that he gives it only five years before the US is totally dominated by China.

    We may be about to discover that unfree societies like China enjoy an evolutionary superiority over free ones.

  10. Posted 14/09/2010 at 13:38 | Permalink

    @Michael Petek – It is surely oversimplistic to describe the USA as free and China as unfree. Given the level of taxes and regulation in America, some businesses may be less constrained by government in China than in the US. Both countries are certainly unfree, but in very different ways.

  11. Posted 14/09/2010 at 16:02 | Permalink

    I doubt very much that Americans would concur that they are unfree comparably, though differently, to China. Taxes and regulations in the USA have their source in law, and the USA is under the rule of law.

    China is not. The government there doesn’t need to tax and regulate, as it can and does act at will towards the lives and possessions of Chinese. It does not need the sanction of any laws at all.

    My point is that a government such as China’s, which consists of nine men of whom eight are engineers, and which exercises despotic powers gives the Chinese way of life an evolutionary superiority over ours.

  12. Posted 14/09/2010 at 16:24 | Permalink

    @Michael Petek – It is very problematic to compare countries in terms of freedom. There is a subjective element based on the preferences of the individual making the judgement; an adherent of Falun Gong would certainly view the US as far freer than China. Moreover, the Rule of Law is no guarantee of freedom.

    I don’t agree that the ‘Chinese way of life’, as you put it, has evolutionary superiority over the Western tradition of individual freedom. But, unfortunately, individual freedom has been undermined in the West by socialism, with the growth of the welfare state and the steady destruction of private property rights.

  13. Posted 14/09/2010 at 17:23 | Permalink

    The question of China’s evolutionary superiority is open. The unique selling point of the Chinese way of life is: (a) that they have had 5,000 years’ experience of holding a vast self-contained civilisation together; (b) all power is concentrated in the hands of nine men, all but one of whom are engineers, not bean-counters like our leaders; (c) the Chinese leaders work in terms of what is physically possible from an engineering point of view – they implement policy within the compass of physical possibilities; (d) if a banker gets in their way, they don’t kowtow to him, they shoot him.

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