Thursday, September 12, 2013

Limits of markets - II

One problem in moving more and more and more from a market economy to a market society where everything has a price is about inequality - it leads to what can be called economic apartheid. Market prices reflect both the ability and willingness to pay. When everything is up for sale, the ability to pay (or lack of it) matters. As Edward Sandford Martin  said, 'You cannot make your opportunities concur with the opportunities of people whose incomes are ten times greater than yours.' A certain level of inequality is inevitable but if it goes on exacerbating then at some level, there are bound to be problems.

The rich and successful tend to to think that everything is due to hard work and luck has played no part in their success  but Sam Harris and Michael Lewis point out that this is not so as does Michael Sandel in one of his Harvard lectures. All that hard work comes after huge dollops of luck determine that you find yourself at the right place at the right time. Rahul Gandhi says that "poverty is a state of mind". Seriously?! Prof. Sandel writes in his book:
If the only advantage of affluence were the ability to afford yachts, sports cars, and fancy vacations, inequalities of income and wealth would not matter very much. But as money comes to buy more and more - political influence, good medical  care, a home in a safe neighbourhood rather than a crime-ridden one, access to elite schools rather than failing ones - the distribution of income and wealth looms larger and larger. Where all the good things are bought and sold, having money makes all the difference in the world. 
Another reason why we should think more before moving towards commodification of everything is because markets promote certain vales and attitudes towards what is being priced. In standard economic theory, a transaction is fine if it results in some people being better off and no-one else is worse off. It assumes that putting a price on a good doesn't change the character of the good. Is this true in all situations? Sometimes market values crowd out non market values worth caring about.An example is the difference between fees and fines. Prof. Sandel writes:
A study of some child-care centres in Israel shows how this can happen. The centers faced a familiar problem: parents sometimes came late to pick up their children.A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centres imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased.
Now if you assume that people respond to incentives, this is a puzzling result. You would expect the fine to reduce, not increase, the incidence of late pickups. So what happened? Introducing the fine changed the norms. Before, parents who came late felt guilty; they were imposing an inconvenience on the teachers. Now parents considered a late pickup as a service for which they were willing to pay. They treated the fine as if it were a fee. Rather than imposing on the teacher, they were simply paying him or her to work longer.
The price effect - when the price goes up, people buy less of a good ,and when prices go down, they buy more - is generally reliable when material goods like PCs or mobile phones are being discussed. But  it is less reliable when applied to social practices governed by non market norms. In the above case, when the price of arriving late increased, late pickups increased. The social norm of a moral obligation was now viewed through a market lens as overtime fees.

Even in  the case of some material goods that have significant social norms associated with them, the price effect doesn't seem to work. Consider the demand for gold in India.  The price of gold keeps going up and the demand keeps rising.

Market and moral values are not always additive. There are situations where social norms apply where introducing monetary incentives to encourage some behavior gets you less of it not more. We should ask if it is always necessary to maximize social  utility  regardless of the moral worth of the preferences. Economists say that they don't 'traffic in morality' but their belief in maximising utility is itself a value judgement. I abhor the Gordon  Geccko philosophy that 'greed is good'.

What is the importance of norms and attitudes that market values may crowd out? Are they worth preserving? If so,  should we avoid incentivising with money certain activities even though they may do some good?The answer varies with each case and depends on the attitude and values likely to be lost. Human nature is too complex to be reduced to a simple formula that can be applied everywhere.

PS: A conversation between Michael Sandel and A.C. Grayling: Part 1, Part 2, Part 3

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