What problems are markets the answer to?
I am a proponent of free markets for the things that markets are good at. Markets are great at pricing things whose future attributes are relatively predictable by the market players, and that don’t require a decision-making time horizon greater than the market trade horizon. For example, markets are great at pricing stocks, because companies are ongoing entities and the market can judge performance over time (both past and possible future) to do the pricing. Furthermore, it’s not critical to society (or wasn’t prior to the current mess) that any one company continue to exist.
When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.
This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (”how do I get rich?”) with the community incentives (”how do we do what’s best for us as a society?”)
Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.
Stever, what do you consider the “just” price of oil to be, versus the market price, and how would you determine that?
In a broader sense, how would you allocate goods that don’t fit a market scheme?
October 16th, 2008 at 4:34 pmThis is a super-tough question, and it’s much easier for me to complain about the current system than propose a viable alternative.
For limited-but-useful resources, “net present value” is a calculation that does exactly the opposite of what we want: it devalues the future rather than increasing the value of what will someday be critical-but-scarce.
I think the answer for me involves some degree of consider long-term consequences (the “what will the impact be for seven generations” type thinking), along with the criticalness to our continued survival/state-of-being. This could change over the lifetime of a resource. Once the world’s food supply becomes dependent on oil, for example, the price would rise hugely, to create a strong, strong motivation to find an alternative and to preserve oil for food, rather than using it, say, for disposable water bottles.
As for the details, I truly don’t know enough about the monetary system and alternative pricing schemes/issues to do a specific design job.
Any other ideas out there?
October 19th, 2008 at 10:23 amOff the topic of oil, but still within what problems markets ought to answer, you might add human organs and women’s reproductive powers to your “not” list. With the former, opponents argue that our organs are so essential to our well-being that we ought to be prevented from selling them—and that anyone despearate enough to do so should be saved from themselves—similar to an abolition on voluntary slavery. And with the latter, the worry is that commodofying the womb devalues an essential feature of womanhood—something we ought not to do simply out of respect.
In both cases though, few complain about gifts (kidney donations or surrogate mothering out of love, not for want of profit). And on my view, I think both could be done ethically for profit, with healthy regulations in place. Education, income, and mental stability requirements on kidney sellers, and perhaps the same plus the requirement that they have kids of their own and mandatory counseling for aspiring for-profit surrogate mothers (to ensure they know full well up the emotional attachment they’re bound to develop during pregnancy, and to comfort them after the transaction’s complete).
Thanks for asking, Stever! Cool to think through these bioethics issues again (haven’t taught that course in a coupe years).
—Matt—
November 17th, 2008 at 9:35 am