Bernie Sanders is right: Markets are dumb
One of the more striking aspects of free market ideology in American politics is how cornucopian magical thinking has become not just acceptable, but ubiquitous and nearly unquestioned.
Consider the reaction to a seemingly commonsensical observation that presidential contender Bernie Sanders made on Tuesday. "The whole size of the economy and the GDP doesn't matter if people continue to work longer hours for low wages and you have 45 million people living in poverty," Sanders told CNBC. "You don't necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country."
The smug contempt from outlets as varied as The Washington Post and Reason was swift. Even The Week's own Jim Pethokoukis and Michael Brendan Dougherty got in on the scolding. But no reaction had quite the same quality as that of National Review's Kevin Williamson, who insisted "prices are not arbitrary" before going full Road-to-Serfdom on the Vermont senator:
Free markets are not irrational; they are a reflection of what people actually value at a particular time relative to the other things that they might also value. Real people simply want things that are different from what the planners want them to want, a predicament that can be solved only through violence and the threat of violence. [National Review]
Okay. Let's work through this step by step, shall we?
You've got two people — a worker and an employer — and they're negotiating over a job producing, deodorant spray. The worker wants to be paid $50,000 a year, and the employer wants to pay him $40,000. They settle on $45,000.
But what if there's a bad recession and high unemployment, or a sudden cut to unemployment benefits, or a new trade deal that exposes deodorant spray makers to more international competition? The worker still needs $50,000 — he's got two kids and a mortgage — but now his situation is more desperate and precarious. So when the employer offers $30,000, the worker takes it.
Or the reverse: Congress passes a new health care reform that means the worker can get decent coverage even when he's unemployed, or radically reformed monetary policy drives unemployment below 4 percent, or new international laws on currency manipulation cut the trade deficit. The employer still thinks the job is worth $40,000, but the worker's situation is better, so he's asking for $60,000 and the employer agrees.
In which of these three scenarios was the worker's labor correctly valued? The right answer, of course, is "all of them." In all three scenarios, the market, such as it is, functioned correctly. It's just that the balances of power were different.
We can take this further: As Williamson correctly points out, money is simply a medium of exchange — a method for transforming one resource into another. And creating 23 brands of underarm deodorant spray (much less the thousands of total brands the economy actually boasts) requires resources. Plastics and paints and chemicals; assembly and packaging and shipment; ad campaigns and air time; and, of course, the work hours to make all of this happen.
If deodorants weren't as cheap and ubiquitous, or if there were fewer brands, there would indeed be some amount of money freed up to do something else in the economy. It might go to another company entirely. It might go to taxes to fund food stamps and thus pay for those starving kids to eat. Conversely, if our theoretical deodorant worker was able to bargain his way to $60,000, that's less money left over in the firm to dedicate to concocting ever more deodorant brands. The point is, contra Sanders' critics, there is, in fact, a certain inherent tension between all those brands and the starving kids.
The economy only produces so much wealth at a given time, and that wealth must be divvied up somehow. Scarcity is a thing. By definition, if some of that wealth is being used for one purpose, it cannot simultaneously be used for some other purpose.
Simply hoping economic growth will increase the "size of the pie" for everyone won't help if the slice of the pie the average worker gets is shrinking. Especially when what your slice of the pie can buy is shaped by the size and distribution of all the other slices.
Prices may not be arbitrary, but they are most certainly subjective. Real people all want things, but they don't all want the same things or agree on what their worth. So for economic activity to occur at all, those subjective preferences must be culled down to one final price. And in all the countless iterations and instances in which these sorts of negotiations occur, which price survives the culling process? As in the case with the worker and his employer, whichever one has the most power behind it; when the opposing side feels the risk of losing out on the deal entirely is just too great.
As the above examples should make clear, the range of policies that shape those balances of power are nearly endless: the social safety net, monetary policy, financial regulation, immigration law, labor law, the minimum wage, paid leave, the length of the work week, overtime, trade deals, intellectual property law, the list goes on. This is not a question of "central planning," or of having bureaucrats direct the flow of every last resource in the economy. It is a matter of the inescapable social, political and policy choices that shape the balances that exist prior to market dynamics, and that profoundly shape how those dynamics ultimately hash out.
In the 1986 science fiction film The Fly, Jeff Goldblum’s character quips at one point that "computers are dumb — they only know what you tell them." Markets, in a very real sense, are computers as well: giant decentralized systems for processing price signals. And markets are also dumb. They don't know what to do with their immense analytical power any more than actual computers do. They have to be told, to be given a set of inputs and then calculate from there. All those aforementioned policies that shape the balance of power in the economy are those inputs. And every choice is a different input, reflecting a different set of priorities and moral values.
The idea that markets allocate resources or hash out prices on their own is completely nonsensical. It's like saying your computer can calculate your tax returns on its own, without you having to hit a button. Kevin Williamson's libertarian preference for a small government is no more "neutral" than is Bernie Sanders' preference for a robust and activist social democracy. Both represent a particular set of inputs, and thus a particular set of outcomes.
The final judgment, then, must inevitably be which outcomes are morally defensible, and which are not. So if you're cool with starving children, then by all means, keep snickering at Sanders.