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Is Peace Possible Under Capitalism?
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by Karen Redleaf, W A M M
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Part 1—Underlying Concepts
Editor’s Note: This is the first of a two-part series by Economist Karen Redleaf
Background
Economics is the study of scarcity. Economics examines choices societies make concerning how to use their limited resources by asking four questions: What is to be produced? How? For whom? And how are these decisions made? Capitalism is a political, social, and economic system in which property, including capital assets, is owned and controlled by private persons. Capitalism is characterized by: (1) purchasing labor for money wages, and (2) using prices to signal how to allocate resources between uses. A market is any context in which goods or services are bought or sold. Economic liberalism, or neoliberalism, is a doctrine advocating the greatest possible use of markets and the forces of competition to coordinate economic activity. Free trade ideology is all about imposing neoliberalism on the entire planet.
In the United States we are living under what some call extreme capitalism. Because I believe that we worship the Market as God, I see current American economic ideology as a religion I call “market fundamentalism.” As the messengers of the Market God, economists are the high priests of this new religion. They preach that the Market’s “invisible hand” always provides the best solution.
Market Failure
Consider me a fallen priest. I am an economist, but I don’t worship markets. My expertise is market failure. To even utter “market failure” today is blasphemous. Market failure, market failure, market failure. Market failure refers to the inability of a system of private markets to provide certain goods, either at all or at the most desirable levels. As recently as the 1990s, this blasphemy was taught in every economics department in the United States. Joseph Stiglitz, the author of the textbook for my undergraduate course in public finance, won the Nobel Prize in 2001. My public finance text lists eight principal sources of market failure: failure of competition; public goods; externalities; incomplete markets; information failures; unemployment and disequilibrium; redistribution; and merit goods. This article examines the first five of these sources of market failure.
Economists know that for the “invisible hand” to work there must be competition. But when economists say “competition” they really mean perfect competition. Perfect competition describes situations in which there are so many buyers and sellers that no one player can affect the price. Monopoly is the opposite of perfect competition. The spectrum from monopoly to perfect competition reflects the level of power that players have over price. To the greatest extent possible, a seller will restrict output to increase demand and obtain higher prices. The more effectively one player can impact price, the greater the failure of competition. Unfortunately, failure of competition, that is, the tendency toward monopoly, is increasing.
Pure public goods have two critical properties. Public goods are non-excludable, which means it is not feasible to ration their use. Individuals who have not paid for the good cannot be prevented from enjoying its benefits. Public goods are also non-rival, which means it is not desirable to ration their use. Consumption by one person does not preclude enjoyment of the good by anyone else. Clean air is a public good. If my neighborhood has clean air, I will get to breathe it whether I pay for it or not. Because there is no effective way to exclude me, the only way to charge me is through the tax system. I cannot be charged per unit of consumption. Clean air is also non-rival, since I don’t use up the clean air by breathing it. The private market will not supply, or will not supply enough, of a pure public good, providing a rationale for government activity. In contrast to public goods, private goods are purchased and consumed by individuals. When I go to a restaurant, I can purchase and consume lunch. Since there is no such thing as a free lunch, I do not get to consume what I do not pay for. What I do consume is used up in the process, and is no longer available for someone else to consume. Private goods are excludable and rival.
There are some goods which have both private and public good characteristics. This is the case with externalities. An automobile looks like a private good. When I buy an automobile I own it and no one else can use it unless I decide to share. But even though I choose to drive a very fuel-efficient hybrid vehicle, I still have to breathe the pollution that gas-guzzling vehicles spew into my air. Gas-guzzling vehicles produce negative externalities. They impose a cost on people who had no say in the purchasing decision. We breathe polluted air and fight wars for oil because others believe that if they can pay the purchase price they are entitled to the vehicle of their choice. Corporations impose giant negative externalities on society. Designed to privatize benefits and socialize costs, corporations are externality producing machines. The executives at Coca Cola decide how much soda to produce based on how much they can sell. But the cost of a can of soda does not factor in the societal cost of massive pollution and the theft of our precious, irreplaceable freshwater supply—we all pay those costs whether we choose to drink the poison or not. In the presence of externalities, markets fail to produce the optimal level of output.
Incomplete markets exist whenever private markets fail to provide a good or service even though they could provide it at lower cost than what people are willing to pay. Even as they claim to worship free markets, politicians create this type of market failure every time they make goods or services illegal. The market for travel to Cuba is incomplete because I cannot buy a plane ticket to go there, even though I would willingly pay. Others might feel the same way about illegal drugs. Such drugs could be regulated, taxed, and supplied by the market. Prejudices also create incomplete markets. Some neighborhoods do not have grocery stores or banks, despite the wishes of neighborhood residents.
In the past, a lot of government activity was motivated by two factors. The government saw that consumers lacked access to accurate information necessary to make the best decisions. And the government recognized that the market supplied too little information. The government created labeling laws and rules against practices like drug companies advertising directly to consumers. By taking responsibility for correcting information failures, the government provided necessary consumer protection.
When we look at information we can begin to see how market failures overlap. Information failures are one type of market failure. But information is also a public good! Information is non-rival in that giving information to one more individual does not detract from the amount others have. Because information is non-rival, economic efficiency requires free dissemination. Free markets are places where informed consumers make rational choices. We don’t really have free markets. We see market failure everywhere we look, but the state corporate system instructs us to shut our eyes, wave our flags, and “keep on shopping!”
Is peace possible under capitalism? Although I did not answer the question posed in the title, I hope I have provided a framework which you can use to reach your own conclusions. I’ll give you time to think about your own answers before sharing my thoughts. I will return with my conclusions in the next newsletter.
Feel free to check out Karen’s blog - click here. |
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W A M M Action
200,000 victims have been killed, harmed or displaced in Darfur. The global community must act. Through the HOPE for Darfur campaign, Human Rights First is working to re-energize the peace process on Darfur, which has been stalled. They are calling on the U.N. to appoint a diplomat of the highest international stature—someone who can bring all necessary players to the table to negotiate a lasting peace. Online - click here.
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© 2006 Women Against Military Madness. All rights reserved.
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Complete May 2006 Index - click here
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