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Envisioning the Future Requires Knowing the Present


[Contribution to the Reimagining Society Project hosted by ZCommunications]

 

 

As every backcountry hiker recognizes, you must first know where you are before you can figure out how to get to where you want to be. While it is important to know where we want to go, progressives often badly misunderstand where we are now.

 

Specifically, much of the anger of progressives is wrongly focused on the market, as though the market is the source of the troubles in the world. Progressive publications have featured endless diatribes against "market fundamentalism," implying that the strict devotion to market principles is the core problem that we must counter.

 

In fact, the market is not the problem. The market is a tool, like the wheel. It makes as much sense to attack the market as it does to attack the wheel.

 

The problem is in how the market has been structured. The right has used its control of the government to structure the market in ways that redistribute income upward and produce many other bad outcomes, like poverty in the developing world and global warming.

 

Progressives fall into the right’s trap when we imply that these outcomes are simply the result of the natural workings of the market, and that our opponents have a rigid adherence to market principles. Poverty and inequality are not inevitable outcomes of a market economy; they result from the fact that the market was rigged to produce these outcomes. Furthermore, our opponents absolutely do not have a rigid adherence to market principles. They have a rigid adherence to policies that redistribute income upward.

 

Our efforts must be focused first and foremost on combating the ways in which the wealthy have rigged to the deck to ensure that the market will favor their interests. This is the best immediate path forward and will also provide the basis for a clearer understanding of where we might ultimately hope to go.

 

 

How the Wealthy Rig the Deck

 

Conservatives are fond of highlighting the self-made person: someone who starts from humble beginnings and through talent and hard work manages to accumulate enormous wealth. While their poster children may be genuinely talented and hardworking, behind any "self-made" person one can almost always find the big hand of the government.

 

For example, Bill Gates rise from moderate affluence to incredible wealth was only possible because of government granted copyright monopolies on computer software. The government would arrest anyone who makes and distributes copies of Windows and other Microsoft software without Bill Gates’ permission. As a result of this copyright monopoly, Microsoft became one of the most profitable companies in the world as the use of personal computers exploded over the last quarter century.

 

While conservatives would have us believe that copyrights came down from heaven, in fact, copyrights are a form of government granted monopoly. They serve an important public purpose; they provide an incentive for creative and artistic work, but this does not change the fact that copyrights are instruments of government policy, not inherent attributes of a market economy.

 

Real market fundamentalists do not believe in copyrights. They believe that the market will provide sufficient incentives to promote creative work without government granted copyright monopolies. If the country were actually run by market fundamentalists, then Bill Gates would have to work for a living.

 

The same applies to patent protection. This is most important in the case of prescription drugs. The United States now spends more than $250 billion a year on drugs ($3,200 for a family of four). These drugs would cost about one tenth of this amount in the absence of patent protection.

 

This is demonstrated by the fact that many chain drug stores now sell thousands of generic drugs for $4 a prescription and sometimes less. The drugs available at $4 per prescription are not chemically distinct as a group from the brand drugs that can sell for hundreds of dollars per prescription. The only difference is that the latter are subject to patent monopoly protection by the government.

 

This is not only a question of dollars and cents; it is a question of lives, especially in the developing world where patent protection often makes drugs unaffordable for much of the population. However, even in the United States millions of people have great difficulty paying for drugs they need for their life or health.

 

Patent protection does serve an important purpose in providing an incentive to develop new drugs, but again this is a question of public policy, it is not an intrinsic feature of the market. There are other, far more efficient ways to support research into the development of new drugs. For example, we could set up prize funds to reward important innovations as has been proposed by Nobel Prize winner Joe Stiglitz and others.

 

We could also just have the government pay for the cost of developing prescription drugs up front, as it does when it pays out $30 billion a year for biomedical research conducted by the National Institutes of Health. In either case, once the research is funded, the drugs developed could then be sold in a competitive market for $4 per prescription, just like generics.

 

Of course, these mechanisms would likely mean much lower profits for Pfizer, Merck and the other big pharmaceutical companies. But Pfizer, Merck and their political allies are not being market fundamentalists. They are fighting to protect government intervention that benefits them.

 

The government granted monopolies through "intellectual property" are far from the only mechanism by which the government redistributes income upward. The collapse of the financial sector and the subsequent government bailout revealed a whole set of implicit guarantees that supported the profitability of the financial industry. Lenders could feel safe in lending money to Bear Stearns, AIG, Citigroup and the rest (except Lehman) because they correctly believed that the government would never allow these financial giants to fail.

 

This guarantee meant higher returns for bondholders, since the government effectively subsidized their investments. More importantly, it allowed for the top executives at the banks to earn enormous pay packages, since the government was giving them a guarantee that allowed them to speculate with other people’s money. The Wall Street crew might mutter about deregulation and letting the market take its course, but in reality they are big-time dependents of the government. To the financial industry, "deregulation" just means that they want their government subsidies with no strings attached.

 

In fact, at an even more basic level, the corporation itself is a creation of the government. Individuals can act on their own to form partnerships, but the creation of an entity that has a completely distinct legal status from its owners requires the intervention of the government. Corporate charters were originally only granted to companies that were deemed to fulfill a specific social purpose such as improving transportation by building turnpikes, canals, and railroads or expanding trade.

 

This point is important. The creation of corporations, like copyrights and patents, were explicit government policy. They are not intrinsic to the market. Genuine market fundamentalists wouldn’t want to see the government granting legal personage and limited liability to artificial entities like corporations. Market fundamentalists would want individuals to freely associate in business as partnerships that don’t receive special privileges from the government.

 

The structure of international trade is also determined by the government. The so-called "free trade" agenda of the last three decades in reality has almost nothing to do with free trade. A main purpose of U.S. trade policy has been to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This predicted effect of this policy is to lower the wages of manufacturing workers and non-college educated workers more generally. By depressing the wages of these workers, as well as the prices of the goods and services that they produce, this trade policy raises the real income of highly paid professionals and those who get their income from capital. (If they pay less for manufactured goods, and their income stays the same, then their real income rises.)

 

The structure of labor-management relations is another area of explicit government intervention. If a union organizes its members to support the strike of another union (i.e. a secondary boycott), the government will fine the union and arrest its leaders. Free market fundamentalists should have no objection to one group of workers opting to support another group of workers. Once again, the policy in place has the effect of hurting ordinary workers to the benefit of corporations, even at the expense of undermining a commitment to the freedom of individuals.

 

Even the idea that the market fundamentalists refuse to consider externalities can readily be shown to be utter nonsense. The market fundamentalists absolutely insist on zoning restrictions that prohibit the building of a slaughterhouse or steel factory in high-income neighborhoods. In fact, they generally support zoning that prohibits low-income housing in their neighborhoods. They fully recognize the concept of externalities and the role of government in controlling them. They just don’t want the government restricting externalities in ways that reduce corporate profits.       

 

In almost every area of public policy it is easy to show that the market fundamentalists do not really favor leaving outcomes to the market. Rather they want to set in place a structure that ensures market outcomes will favor the wealthy. When progressives respond by criticizing the market, we pursue a path this is both conceptually wrong and politically disastrous.

 

Market outcomes, as opposed to government directed policy, enjoy substantial legitimacy among the public. Conservatives know this and milk fears of stifling government bureaucracies to great effect. Rather than play into the conservatives’ trap, progressives should actively promote polices that structure the markets in ways that help the vast majority, instead of causing income to flow upward.

 

For example, we should reject copyrights and drug patents as archaic mechanisms for supporting creative work and innovation. It easy to develop market oriented policies that will more effectively promote creative work and innovation and that are less likely to lead to vast fortunes being accumulated in these areas.[i]

 

These policies will also have the enormous advantage of making the world’s vast intellectual output available to everyone everywhere at almost no cost. Imagine children in even the poorest developing countries being able to get access to the web on computers or cell phones that are very cheap, because they use open source software. Suppose they can then download at no cost any book, newspaper, or journal article that has ever been written, as well as any song, movie, or video. This would be a free market outcome.

 

Suppose that the most effective drugs for treating any disease were available at just the cost of manufacturing them, which would rarely be more than a few dollars per prescription. Similarly, the price of most medical tests and equipment would plunge to levels that made them seem unimportant, if we had a free market in these areas rather than government patent monopolies.

 

We could quickly deflate the Wall Street boys and girls by taking away their government security blanket. The obvious story here is that the institutions that are "too big to fail" are run by the government, as is the case now with Fannie Mae and Freddie Mac. Otherwise, there should be a credible commitment from the government that if large institutions get into trouble, then they will fail and that their creditors will be out of luck.

 

With corporations more generally, it is evident that the existing rules are poorly designed for the current economic environment. Management has come to control corporations and run them in their own interest, to the detriment of the shareholders and other stakeholders (at least in the United States). There are already elaborate rules on corporate governance that set restrictions on what the insiders are allowed to do. These rules can be restructured to limit the power of top corporate management, most importantly the power to largely set its own pay.

 

If rules of corporate governance required that compensation packages of top executives were regularly sent out for shareholder approval, in elections in which unreturned proxies do not count (it is currently standard for management to count proxies that are not returned by shareholders as supporting its position), it is likely that the multi-million dollar pay packages of top executives would come back down to earth. The elimination of bloated executive compensation packages in the corporate sector is also likely to bring downward pressure on pay for top officers in hospitals, universities, and even non-profits, since all of these institutions have felt the need in recent decades to raise pay in order to stay in line with the corporate world.

 

Trade can also used as a force to reduce inequality in the wealthy countries and promote development in the poor countries. Current trade policy only forces non-college educated workers to compete with their low-paid counterparts in poor countries. However, we can also adopt "free trade" policies that are structured toward putting our most highly paid professionals (doctors, dentists, lawyers, accountants) into direct competition with highly paid professionals from the developing world.

 

It is far cheaper to educate and train a doctor in the developing world than in the United States. If honest economists were designing trade policy, they would have focused on opening the door to professionals from the developing world rather than creating structures to facilitate trade in manufactured goods. Our policy should be focused on making it as easy for a smart kid growing up in India or China to educate themselves to U.S. standards and practice medicine and law in the United States, as it is for a kid growing up in the Los Angeles suburbs.

 

To ensure that developing countries benefit from this arrangement, a fee can be attached to the pay of professionals trained in the developing world, which will be paid to the home country. Given the outsized professional salaries in the United States even a modest fee should be sufficient to pay for the training of 2-3 professionals for every one that comes to the United States. This should allow for better health care and other professional services in the developing world, while hugely reducing the cost of medical care and other professional services in the United States.

 

Another important change in government policy would be to have a central bank (the Federal Reserve Board in the case of the United States) that is more committed to sustaining high rates of employment than an arbitrary rate of inflation. In addition to the strains directly associated with being unemployed, high unemployment also puts downward pressure on the wages of those at the middle and bottom of the wage distribution. If the Fed consistently pursued monetary policies that were intended to keep the unemployment rate low, it would create an economic environment that made it easier for large segments of the workforce to enjoy rising living standards. 

 

There are many other policies that can be added to this list, but the point is that these are all market-oriented policies that will help to ensure progressive outcomes such as greater equality, better access to health care, and increased economic security. We should not be afraid to use the government directly where it provides the best solution. For example, a government run Social Security system is far better and more efficient than its private sector counterparts.

 

However, this is not a matter or principle that separates progressives from conservatives. Over the last three decades Conservatives have aggressively used the government to structure the markets in ways that redistribute income upward. If we don’t recognize this fact and stop calling them "market fundamentalists" then all our visions will be illusions.




[i] On alternatives to copyrights for supporting creative and artistic work see Baker, D. 2003. "Artistic Freedom Vouchers: Internet Age Alternative to Copyrights," Washington, D.C.: Center for Economic and Policy Research, available at http://www.cepr.net/index.php/publications/reports/the-artistic-freedom-voucher-internet-age-alternative-to-copyrights/. For alternatives to patents for financing the research and development of prescription drugs see Baker, D. 2004. "Financing Drug Research: What Are the Issues." Washington, D.C.: Center for Economic and Policy Research, available at http://www.cepr.net/index.php/publications/reports/financing-drug-research-what-are-the-issues/.

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