Hacking the Free Market
March 26, 2011 5:28 PM   Subscribe

Engineer-turn-blogger Scott Whitlock offers some insight into the limitation of free markets.

"It seems pretty certain that if we fail to leave the future generations more value than we’re taking from them, they’ll make us pay. They’ll turn on the companies and families that profited at their expense, and they’ll either sue for damages, or drag the bodies of the CEO’s through the streets behind camels, depending on which area of the world they live in.

"The problem is that if there really is a future cost to our actions, the market isn’t factoring that into the price. Even though companies are accruing the risk of a large future liability, they don’t have to account for this risk in their balance sheet. That’s because while future generations have a stake in this situation, they don’t have a voice now. Nobody’s appointed to represent their interests. That’s why the free market continues to be hacked, at their expense.

"I’m afraid the solution lies in the hands of politicians, and that makes me sad. We need a global body that can manage natural resources, including the atmosphere. At this point, a political solution seems just as impossible.
posted by lohmannn (33 comments total) 19 users marked this as a favorite
 
Agree with problem statement.

Don't agree with specific implementation of solution.
posted by ZenMasterThis at 5:43 PM on March 26, 2011 [2 favorites]


Elinor Ostrom's fantastic work on the commons (previously) brings something to bear on this.

It doesn't have to be "politicians"; collective management of a common resource can work. But it does require people to talk to each other and make agreements with each other. In an ideal, naïve sense, this is what government is and what politicians do; but that's the same naïveté that says that our economy is some kind of Robinson Crusoe capitalism. In both cases, the agreements work best on a scale where the stakeholders are able to actively make the decisions.
posted by yourcelf at 5:58 PM on March 26, 2011 [1 favorite]


This is good stuff. I liked this, because it's coming from a different angle toward something I say often:

Even though companies are accruing the risk of a large future liability, they don’t have to account for this risk in their balance sheet. That’s because while future generations have a stake in this situation, they don’t have a voice now. Nobody’s appointed to represent their interests. That’s why the free market continues to be hacked, at their expense.

My particular focus on that has been in terms of governments, which are running up huge debts for the temporary benefit of current citizens, indebting future citizens who do not benefit, and who have no voice in the proceedings.

Capitalism's central current problem is probably externalization of costs, but it doesn't just apply to the private sector. Forcing other people to pay for your benefit is wrong. It doesn't matter if it's an oil refinery polluting the air, or a government issuing bonds for non-investment items. It amounts to the same thing: taking things away from other people involuntarily for your own benefit. You are negatively impacting their quality of life, and ability to make their own choices. It's not just a matter of having cake or eating it.... you're stealing their cake and eating it.
posted by Malor at 6:06 PM on March 26, 2011 [2 favorites]


"Whenever we have a common resource we always over-exploit it until, as a society, we put regulations in place for managing it. In cases where we didn’t (Easter Island comes to mind), we use up the resource completely with catastrophic results."

Easter Island would have some forest right now if the natives practiced some free market principles. The dwindling supply of forest would have forced the price of trees up, making giant statue building too expensive. The high price of trees would attract capital for investments in new trees, eventually resulting in more forests.

Whales on the other hand are still around. They would not be if the price of whale oil did'nt become so expensive that it never made economic sense to drill for crude in the Pennsylvania back country. Good thing the US government did not subsidize the whaling industry in the 1870s.
posted by otto42 at 6:10 PM on March 26, 2011 [1 favorite]


I've been toying with an axiom:

Free markets can never prevent anything.

I'm not sure if it's true, but I suspect it is.

The most common explanation for how the Free Markets works (that I've heard) is that it lets competing ideas/products be tested for fitness, with weaker ones dying off/losing market share. Under this mechanism, a bad idea ("Let's use all the water on Earth to make flat screen TVs!") is only judged to be bad after it's failed ("Hey, where's the water?).

So I worry when people start talking about using the Free Market to fix anything other than this or that process being less than maximally optimal.
posted by benito.strauss at 6:15 PM on March 26, 2011 [4 favorites]


Easter Island would have some forest right now if the natives practiced some free market principles.

otto42, I'm curious. Why do you think the occupants of Easter Island didn't practice free market principles? Or what prevented free market principles from operating?
posted by benito.strauss at 6:18 PM on March 26, 2011


lohmannn: "or drag the bodies of the CEO’s through the streets behind camels"

I think I could get behind that.
posted by dunkadunc at 6:27 PM on March 26, 2011 [4 favorites]


Whales on the other hand are still around. They would not be if the price of whale oil did'nt become so expensive that it never made economic sense to drill for crude in the Pennsylvania back country. Good thing the US government did not subsidize the whaling industry in the 1870s.
posted by otto42 at 6:10 PM on March 26 [+] [!]


1859: Oil first drilled in Pennsylvania, United States. Sperm whale population about 800,000.
1970: Oil production peaked in the United States; oil at a historically low price. Sperm whale population about 400,000, just a shortly before its historic minimum.

I hope you were simplifying your argument, because I think the relationship between whaling and petroleum is more complex.
posted by Jehan at 6:47 PM on March 26, 2011 [4 favorites]


Easter Island would have some forest right now if the natives practiced some free market principles. The dwindling supply of forest would have forced the price of trees up, making giant statue building too expensive. The high price of trees would attract capital for investments in new trees, eventually resulting in more forests.

Surely the scarcity of lumber for construction would have made statue building a clear case of conspicuous consumption? Who wants to sell more tress when you can be the very last person to own a new statue? Funny thing this market.
posted by Jehan at 6:54 PM on March 26, 2011 [4 favorites]


Free markets can never prevent anything.

I'm not sure if it's true, but I suspect it is.


"Never" and "anything" allow for very little wiggle room. I think this axiom needs work.
posted by 2N2222 at 6:57 PM on March 26, 2011 [2 favorites]


The problem is that if there really is a future cost to our actions, the market isn’t factoring that into the price.

cf. Tragedy of the commons
posted by MikeKD at 6:59 PM on March 26, 2011 [1 favorite]


I'd be wary about using Easter Island as an example of anything. We don't really know enough of the details to make anything but the broadest of judgments.

Regarding whaling, the discovery of petroleum resources and refinement techniques didn't eliminate demand for animal based oils. But it seems to have put a significant dent in the demand.

Interesting that Tragedy of the Commons describes situations producing less than optimal results, under both free market conditions, and less than free market conditions.
posted by 2N2222 at 7:18 PM on March 26, 2011


"Whenever we have a common resource we always over-exploit it until, as a society, we put regulations in place for managing it. In cases where we didn’t (Easter Island comes to mind), we use up the resource completely with catastrophic results."

Didn't someone win a Nobel Prize in Economics Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel recently for proving that this isn't always the case?
posted by VTX at 7:24 PM on March 26, 2011


No shit, Whitlock. Did you just wake up and read an introductory macroeconomics text?
posted by Ardiril at 7:29 PM on March 26, 2011 [2 favorites]


Previously, the Tragedy of the Commons Debunked

I have my own theory about Easter Island after looking at the archeological evidence. I expect that at some point it will be shown that the cause of the collapse was an invasive species that killed the trees and other native plants that supported the population. These species were probably brought by an earlier European expedition that was either lost, or didn't note the discovery of the Island. It seems awfully coincidental that in the decades after Europeans opened the Pacific and started exploring, there was this dramatic change in Easter Islands ecology. The inhabitants had been living there for hundreds of years already and thrived, but then after 600-1000 years of settlement they are like fuck it cut down all the trees.

As for the blog linked in the FPP, I struggle with where to begin. His complete misunderstanding of individuals in the free market and choice theory. His ideas that future generations will somehow punish the older generation. When has this happened. His description of a proposed O2 business model which he concludes is impossible, but in fact bears a striking resemblance to the business model of the bottled water industry.

I suppose it is a good thing that he left his career driving trains to blog. At least on the Internet his train wreck won't kill anyone.
posted by humanfont at 7:33 PM on March 26, 2011 [2 favorites]


You're dissing a guy for providing a clear explanation of a fundamental macroeconomics concept, for no charge, in blog form, where everyone can read it?
posted by LogicalDash at 7:45 PM on March 26, 2011 [1 favorite]


I think that there is a fundamental "market" reality to democracy as well. People tend to vote (at least in the US) in majorities that favor the candidate who is doing to "do good things for me now". There is no form of democracy that I have seen that has the general capacity to overcome this problem. Someone else can bear the burden.

Democracy only functions in a corrective, non-direct-self-interest capacity if there is an undeniable threat that almost everyone agrees on. War can be a good example of this, creating a commonly accepted willingness to share the burden (at least it used to be like that in the US, but that is another topic). The FUD about climate change has been just effective enough to keep corporations (and consumers) from having to own the price of climate change prevention. The fact that the US didn't sign the Kyoto accord is directly correlated to it's political system visa-vi it's basic culture.

United States democracy is a failed marketplace of overselling outmoded ideas to appease the electorate, and no one is selling harsh medicine for solving anything - unless that medicine is force fed to the those who don't have the money to properly participate in elections. The individualism that democracy at least strongly implies is extremely problematic when trying to create systems for rationally sharing the burden of an externality.

By the way, libertarians can go fuck themselves, which does affect me at all.
posted by thebestusernameever at 7:50 PM on March 26, 2011 [1 favorite]


humanfront, I think you are on right track, only it wasn't Europeans who brought the invasive species. There is pretty good evidence that it was the introduction of commensal rats by exploring Polynesians who devastated Easter Island's forests before people actually settled there (there is usually a several century lag between the first transient knowledge of a new land and the actual decision to settle there in numbers). That was the window in which the rats did their work.

Terry Hunt has put forth some compelling arguments including this paper in the frontline Journal of Archaeological Science (PDF). There's a popular version in Smithsonian Magazine, a readable and more in- depth book chapter here (PDF), and lots more at Hunt's website.

The "what kind of person could have cut down the last tree on Easter Island" trope is pretty much Jared Diamond getting archaeology wrong, as he so often does.
posted by Rumple at 7:52 PM on March 26, 2011 [2 favorites]


I'm dissing anyone who construes it as "insight". That essay is straight out of junior high school econ, second quarter.
posted by Ardiril at 7:53 PM on March 26, 2011 [1 favorite]


"Insight" is not a synonym for "innovation". Writing about an old idea in a new way might in fact be insightful, if it allows some people to understand more intuitively than they did before.
posted by LogicalDash at 8:06 PM on March 26, 2011 [1 favorite]


There is no such thing as a free market. Anyone who tries to persuade you that there is either has a vested interest or is an idiot.
posted by Decani at 8:22 PM on March 26, 2011 [4 favorites]


How could you structure such a system? Should companies be forced to account for estimated future liabilities, so it shows up on their P&L statements? Do we allow them to account for true value that they’re passing forward, like new technologies they’ve developed, which can help to offset the liabilities they’re incurring? Obviously that’s impractical. Not only does it become a bureaucratic nightmare, but there’s still no international body to oversee the principles of the accounting system.

Yes. We really need some sort of International Accounting Standards Board, or at least some Generally Accepted Accounting Principles. Then we could start thinking about this problem properly. Maybe we could begin by giving it a name...hmm...how about calling it an externality?

IngoranceFilter.
posted by anigbrowl at 8:24 PM on March 26, 2011 [1 favorite]


My junior high didn't offer Econ, as far as I know. Neither did my high school.
posted by aniola at 9:12 PM on March 26, 2011 [2 favorites]


It's true that the pure free market is not a full and complete solution to all economic problems, but I don't think many of its best friends would claim that. Greed, lack of foresight, and poor management are at least as common in centrally-managed economies, and there's no reason to think a 'global body' would be any different.

This is a thin post, but I love the way the blog post is tagged as 'deep-thoughts'. I can just see Whitlock wrinkling his forehead and sticking his tongue out as he wrestles mentally with these shallow commonplaces.
posted by Segundus at 2:09 AM on March 27, 2011 [2 favorites]


My junior high didn't offer Econ, as far as I know. Neither did my high school.

Get a study guide for AP tests or a college review book, they're dirt cheap.
posted by anigbrowl at 2:28 AM on March 27, 2011


The "free market" is a simplified abstraction of a very complex set of social interactions reovling around information theory and allocation of goods. Don't mistake it for the real world.
posted by humanfont at 6:26 AM on March 27, 2011


People are debating the existence / non-existence of free markets. I'd settle for an acknowledgment that free markets aren't always the best way for a society to manage a given resource.

Because where I grew up that was certainly blasphemy, and in American political discourse (such as it is) I often hear people say "But you're interfering with the Free Market", and everyone acts as if that's an irrefutable argument.
posted by benito.strauss at 8:06 AM on March 27, 2011 [1 favorite]


It's not the BEST™ system, it's the BEST SYSTEM WE'VE GOT™
posted by blue_beetle at 9:16 AM on March 27, 2011


Get a study guide for AP tests or a college review book, they're dirt cheap.

It's ok. I understand junior high level economics, second quarter. My point is that not everyone is coming from that background.
posted by aniola at 10:54 AM on March 27, 2011


The modern neo-liberal conception of a free market is not a "system" at all. It's a rhetorical trick for handwaving complex social problems away and leaving their resolution and economic rule-making in general up to blind chance or to the unchecked self-interested whims of the most economically powerful actors in a society.

The contemporary ideal of the free-market is a conceptual vaccuum into which capitalists pour their wish-fullfillment fantasies and into which they direct their will to power. Real free markets would be impartially rule-governed and incorporate adequate checks and balances in such a way as to prevent capital holders from having grossly disproportionate power and influence over a socety's economic and political processes. Real free markets (if they existed) would provide true power and freedom for all economic actors, by promoting greater equality of economic opportunity.

The complete absence of regulation in society has never led inevitably to greater individual freedom and greater opportunities for general prosperity and the idea that unrestricted commercial activity could somehow magically yield optimal outcomes is likewise stupidly naive.
posted by saulgoodman at 11:04 AM on March 27, 2011 [5 favorites]


"People are debating the existence / non-existence of free markets. I'd settle for an acknowledgment that free markets aren't always the best way for a society to manage a given resource."

Well, good luck with that. The powers-that-be have a vested interest in promoting the fiction of the free market, because that's how they justify their behavior when backed into a corner. We're unlikely to see any serious competition for the ideology that underlies much of the Western world's economic policy, while economists enable this flawed world view. (Just like those darned climate scientists, they GET PAID to promote this ideology).
posted by sneebler at 1:32 PM on March 27, 2011


these are all free market transactions which operate without anyone than the buyer and seller


And that pesky currency and interest monopolist...
posted by AndrewKemendo at 6:38 AM on March 28, 2011


There is no right answer to the question of whether anarchistic unregulated markets provide efficient social outcomes. There just aint. I don't care who you are either there is no such thing as a minimally regulated market - its either regulated or it isn't.

You can't argue for or against the "free market" with any kind of reliability because there is no control group or verified examples of long term markets which were truly "free." That in and of itself should tell you something.

Whatever. This stuff isn't worth arguing because everyone is wrong. Including myself.
posted by AndrewKemendo at 6:42 AM on March 28, 2011


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