Failure of Economics and the Market System?

Recently, there have been a number of articles about the failure of economics and its metrics in predicting and reflecting on the “health” of the United States. Much of the criticism has focused on the use of GDP [Gross Domestic Product] as a leading indicator. Unfortunately, such criticisms, while having statistical and economic validity, have the result, whether intended or not, of shifting debate from the larger problem.

The larger debate has been around for a very long time, but with the growth and power of the “market economy” and those who benefit directly, and often excessively, from it, those earlier misgivings tend to be buried in the detritus of history. There was a reason why William Jennings Bryan rallied millions behind his presidential campaign in 1896 when he campaigned against what he saw as the Republican plutocrats with his slogan that “you shall not crucify mankind upon a cross of gold” Although technically a speech for bimetallism, the slogan reverberated though the west, the laboring class, and poor farmers. In his poem “The Gods of the Copybook Headings,” Rudyard Kipling pointed out exactly what happens when the “gods of the marketplace” become paramount. The Russian revolution, while it might have been directed by goons and disaffected intellectuals, was paid for by the blood of the poor and disadvantaged, as was the more recent Cuban revolution and the rise of Fidel Castro. The current American rage against investment bankers and the “market” also reflects a gut-level feeling on the part of most Americans that valuing everything in dollar terms is somehow wrong, even as we react to commercial after commercial that insists happiness and success come from acquiring this and that, and more in general.

Yet the reaction of the financial, economic, and political leaders has been to address the shortcomings of the “market system.” Too many of these leaders and too many of both the critics and those who feel that the “GDP Problem” is resolvable are ignoring the critical assumptions that lie behind the use of economic statistics to define, for want of a better term, “national prosperity.” The first assumption is simply that, given modern methods, anything of value is commercial and can and should be able to be valued and quantified accurately. The second is that, in economic terms, those things that cannot be valued and quantified in hard and measurable terms are of lesser or no value. Now, I’m well aware that my statement of the second assumption will scarcely go unchallenged, but in economic and public policy terms, there shouldn’t be any dispute. For example, almost no business or corporation put an economic value on their acts that degraded the environment until governments stepped in and assigned values, essentially by fiat, in the form of fines and regulations. At that point, and only at that point, did the environment become valued in economic terms. The same sort of reaction occurred with regulations on child labor and wages.

Before going on, for those who may think that I am being excessively “liberal,” I want to make several basic points. First, like it or not, every working nation or region needs to maintain over time a viable market-based economy. You cannot trade, purchase, or sell goods or services without a societal mechanism for doing so, although there are many variations on “market economies,” some better and some worse. Second, market systems work best for goods and services that can be easily quantified and valued, and the harder and more removed such quantification and valuation are from the day-to-day ebb and flow of commerce, the less accurate and the less reliable any valuation is. Third, because market systems are imperfect, large systems need various restraints or rules. Too few restrictions, and one has the worst excesses of the American robber barons or the current Russian commercial oligarchs. Too many restrictions, and one eventually has no market system at all, but a government-run and badly administered [because it cannot be administered well by anyone, given the complexity involved] command-and-control system, which usually results in a black market, if not several.

The rush to find better quantification of everything in life effectively presupposes that everything can be quantified absolutely. But can everything of value and worth really be quantified in economic terms? By adopting a market-based approach to everything in society, as we seem well on the way to doing, we seem to have forgotten, at least in terms of laws and national policy, that when we try to place a dollar [or euro or yuan or yen] value on everything, that which cannot be quantified accurately, or quantified at all, tends to be undervalued or not valued at all.

Recently, I’ve been seeing ads on television citing the fact that the United States has one hundred years worth of undeveloped natural gas — with the implication that this is some vast enormous reserve that should be immediately exploited. The question that comes to my mind is: “And then what?” What energy sources will be available to my children’s grandchildren? This ad points out, effectively by example, that there is little or no value to preserving resources for future generations. It ignores the costs to future generations of having to use more expensive fuel sources — or perhaps having none at all.

What few policy-makers seem willing to admit is that there are whole sectors of life and the world that the market system cannot value accurately, nor will ever be able to do so in cold economic terms. Some of these are: the value of an individual life; the value of the survival of the human species; the value of an integrated and functioning world eco-system; the good health of an individual; the pursuit of happiness; freedom; freedom from hunger… That list is far longer than any policy-maker wants to consider in realistic political or legal terms — and none of them can be valued accurately in economic terms.

For example, how does one value a human life? Some economists will say that we have established a de facto value for human life by the terms of either life insurance or the health and safety regulations we have put in place over the past century or so. But consider the terms of those regulations, or of life insurance. In life insurance, the death benefit is based strictly on the level of premium one is willing to pay. In government regulations, the value of a human life is determined by comparing the cost of implementing the regulation and dividing those costs by the total estimate of “lives saved” by the regulation. In addition to the very real difficulty in estimating the number of people who might have died, there is also the problem of, if you will, quality control. Are all lives the same? Are all lives of people of the same age even the same? Will a child grow up to be a drug addict who is a drain on society or a Nobel prize-winning scientist? If all lives are valued the same, then the process says that human accomplishment means nothing. If they are not, how does one determine what makes one life more valuable than another?

Geology and science suggest rather emphatically that at some time in the future, a rather large or moderate chunk of rock or other cosmic debris will slam into our lovely planet, and millions, or billions, or all of our species will die. It’s not a question of if, but only of when, or whether we do ourselves in before that occurs. We have yet to come up with the comparatively few millions of dollars necessary to scan our solar system to see everything that might be headed our way. And why is the value of species survival quantified at less than the cost of a few bridges to nowhere?

As a culture, we seem unable not only to grasp, but to act in realization of the fact that there are real values, perhaps greater values, to aspects of life that cannot be quantified than to those to which a dollar value can be firmly pinned. Yet dollar certitude remains what we as a society hold to. Is that because Madison Avenue has told us so… or because the majority of us are unable to say that some things are more important than the no-longer-so-mighty dollar?

1 thought on “Failure of Economics and the Market System?”

  1. Iron Sparrow says:

    Thanks. I've been really enjoying your articles on economics and politics. It helps to be reminded why these topics are so complex and difficult to discuss in clear-cut terms.

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