Even though I have a great respect for the power of free markets, they have their weaknesses. Earlier, I wrote about the problem of "free riders". Certain types of goods -- goods where a person can obtain a benefit regardless of whether one pays the costs -- are under funded in a free market system. Free riders make sure that the good in question does not get the funding it would get if people actually had to pay for the benefit.
Another problem with a market system is that, when it comes to directing the course of society, it is not democratic. A democratic system is one that abides by the principle, "One person, one vote." A free market, on the other hand, functions on the principle of "one dollar, one vote."
If you want to direct the course of society in a particular direction, you use dollars, like magnates, to attract resources into that particular channel. The more dollars one can assemble, the more pull one has in the free market.
Decision Making in the Free Market
The principle of "one dollar, one vote", in a society where it is not the case that everybody has the same number of dollars, is one in which different people do not have the same number of votes. They do not all have the same pull. One person can pull more resources in the direction of his choosing than, in some cases, tens of thousands of people can pull resources in their direction.
In fact, a substantial portion has virtually no economic pull, while others have a great deal of economic pull. In the United States, two percent of the households hold over half of the market votes. If this two percent decide that they want the resources in this country to go in a particular direction, then they can outvote the remaining 98%. Any company that wants to make money – which is virtually any company at all – has to respect the fact that 70% of that money is in the hands of 10% of the households. The remaining 30% of the money is in households where the vast majority of that money needs to be spent on food, housing, clothing, medical care, education, utilities, and other expenses.
This is not always a bad thing. Bill Gates is opting to pull those resources in the direction of research into fighting Malaria and AIDS. Others use their economic votes to pull economic resources into the production of private planes, limousines, yachts, diamonds, and similar industries.
As I said, I am a fan of free markets. Free markets allow information to be processed extremely rapidly. The instant that oil reserves are threatened, the price of gasoline goes up. This is the market’s way way of saying, "Hey, folks, we have a shortage coming. You had better start rationing what we have and we had better start rationing it now." This is a good thing. If we waited for legislators to act, the shortage would hit before we took any meaningful steps to prepare for it, and that would be bad.
However, "one dollar, one vote" has its drawbacks. Imagine an isolated community facing a significant shortage of water. Ten thousand people want the water for drinking. One person wants the water for his beautiful garden. We apply the doctrine of "one dollar, one vote" and discover that this one person has more money than the other 10,000 combined. If we live entirely by free-market principles, the water goes to the garden, and 10,000 people go thirsty. The rich individual has used the economic pull of "one dollar, one vote" to draw the water resources into providing a garden, rather than quenching the thirst of 10,000 residents.
The principle of one dollar, one vote, means that those who have the dollars to purchase SUVs and can afford to pay for the gas that goes into them can draw a disproportionate amount of gasoline out of the supply path. This leaves less for others to use, forcing them to bid up the price as they compete against each other.
Perception Management and the Democratic Process
In my last posting, I wrote about another product on the market these days; "perception management." This industry involves using techniques from marketing to planting stories to "purchase" a state of affairs where people have certain beliefs and values. Our beliefs and values are economic commodities, with 'perception management' or 'public relations' firms using the money that their clients provide to pull our beliefs and desires into certain directions.
If we compare the amount of "perception management" that the wealthy can afford, compared to the amount of "perception management" that the poor can afford, it is not at all difficult to anticipate the direction in which money will draw our beliefs and our values.
Just as one person can draw all of the water away from 10,000 others in our hypothetical village, and the wealthy can draw a disproportionate amount of gasoline into their activities leaving the rest of us to bid up the price of what remains, people with money can afford a great deal more "perception management" than others. Taking into consideration food, clothing, shelter, education, health care, and other expenses, over half of the population can afford very little “perception management”
At this point, we have to ask how much this market in "perception management" affects the other way in which resources get allocated -- the democratic process.
The democratic process is reserved for decisions where "one dollar, one vote" is deemed inappropriate, and “one person, one vote” is used in its place. Theoretically, in the political arena, the individual with $6 in his pocket has as many votes as the person with $6 billion in assets.
However, the ability to purchase "perception management" is the same as the ability to purchase votes. Companies compete against each other for their ability to provide those with money the most “perception management” at the least cost. Competition drives technology and innovation. We can only expect that their skills at “perception management” are getting very good. They prove their worth by bringing about measurable shifts in the “perceptions” of the voters – winning votes for their clients.
As the science of perception management develops, those with money are going to be able to purchase more and more sympathetic public opinion. Over time, and to an increasing degree, we can expect the political arena to become less a realm of “one person, one vote”, and more like the market realm of “one dollar, one vote”. It will all depend on who can afford the best “perception managers”.
The Good and the Bad
In pointing out this particular problem with capitalism, as well as the issue of public goods raised earlier, I am clearly not saying that capitalism is evil and needs to be avoided. There is no way that a government has the capacity to respond nearly as quickly or nearly as accurately to the possibility of a future shortage or surplus. Command economies face huge inefficiencies that truly do make it the case that if everybody is made equal, they will be made equal in their misery and squalor.
It would be nice to have easy answers to the questions of how best to organize society. Some people may be tempted to the view of "all free market or none at all" by the deceptive simplicity of this position. However, reality simply is not organized this way.
I will continue to speak in glowing terms about the power of the free market, and continue to complain when government officials interrupt its workings in ways that are a detriment to us all.
However, as I do so, I will remain mindful of the two big problems with free-market solutions. Public goods will be under funded, unless governments require that those who would benefit from a public good pay for it, and "one dollar, one vote" gives people the power to vote resources away even from those who need it to survive.