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.