Tuesday, January 11, 2011

Markets Are Ungrounded

There is no truly free market, in the sense that it is absent from state regulation. State regulation is inherent in the notion of a market. The absence of state regulation is anarchy, in which markets do not function.

The idea of a free market is a popular one. It's a nice idea - it allows us to lay all kinds of complicated ethical questions at the feet of consent. But, as I have mentioned in the past, it's not "consent all the way down." A market must have regulation to exist, and regulation by any means but unanimous consent is inherently non-consensual.

So what does the state have to do in a market economy?

1. The state must define who is a market participant.

In other words, the state must decide whose choices and property rights must be respected.

Who may participate in the market? Who may buy and sell, or refuse to buy or sell? Who may own property?

Are men and women both proper market participants? Are children? Adolescents? The elderly? Deceased people (through documents or proxies)? Unborn people (perhaps through imaginary proxies)? Future people? Possible future people?

Are animals? Dogs? Chimpanzees? Cattle? AIs?

Are people with severe developmental disabilities proper market participants? People with moderate developmental disabilities? People with thought disorders? People with mood disorders?

Whose welfare or utility are our rules designed to maximize?

To some degree, the state must also define the unit of a market participant. Is it a single individual? Can it be a family? A business partnership? Is a single individual over his entire lifespan a market participant, or are young and old versions of the same person separate market participants?

2. The state must define what counts as property, and what belongs to each market participant.

Is one's labor one's property? Does one own one's genetic endowment?

Can people be property? Are our children our property? Our spouses or sex partners? The sexual services of our sex partners? The promised future sexual services of our sex partners?

Are animals property?

Does one have a property interest in one's feelings?

Are our bodies our property? Our organs? Blood? Semen? Ova? The years of our lives? What about antibiotic resistance - is the capacity for antibiotics to prevent infections our property? Is our appearance our property? Are the feelings that we produce in others our property?

Do we own our attention?

Is our general good behavior (not stealing, not raping) our property? Are things we have been promised our property?

Do we have a property interest in having enough air to breathe? Water to drink? Food to eat?

Can land be owned? If so, does a land owner own the wild animals on his land? The air above his property? How high up?

The related issues of (a) who is a market participant and (b) what is property are especially convoluted when we consider that some entities may be classified as either a market participant or a piece of property - or have elements of both, as with the current position of children and the historical position of women.

3. The state must define appropriate remedies for enforcing property rights.

Once the state has defined who may own property and what property may consist of, it must define what may happen when a property right is violated. Money sanctions? Specific performance? Self-help? Death or loss of a member by the breaching party? Imprisonment?

This is an especially complicated question, as the state may define different sanctions as appropriate remedies for different sorts of property violations.

4. The state must define what requires consent.

The state must define what counts as a transaction requiring consent. This is related to the above questions about what counts as property, what belongs to a person, and who is a market participant. If my money is my own, taking it from me requires my consent; but if it is not my own, it may be taken without my consent. And if I am not a market participant, my consent is not required in any case.

What counts as consent? Is affirmative consent required, or merely a failure to opt out? Must we consent to be advertised to? When can consent be presumed?

When can a substitute for consent be used? What substitutes are appropriate?

How far into the future may consent operate? Can it operate into the past?

When is apparent consent not real consent?

5. The state must define cheating.

There are many flavors of cheating that tend to undermine the market. Open up an introductory contract law text book to get an idea of the issues that must be regulated.

Is fraud okay? Accidental misrepresentation? How careful must an assertion be? What disclosures are required to make a transaction consensual?

What about coercion? Undue influence? Mutual mistake?

Is exploiting the cognitive biases of one's contract partners "cheating"? Exploiting the naivety of a contractual partner? Exploiting his illiteracy? His poor understanding of the contract's language?

Do the motives for putative cheating matter? What are the relevant states of mind?

And perhaps most importantly . . .

6. The state must define the procedure (if any) for changing the rules of the market.

As I hope I have shown, social norms affect and are affected by market rules. But social norms - and material circumstances - change, and with them, perhaps the rules of the market should change. How can this be accomplished? Majority rules? Unanimous consensus? Should there perhaps be . . . a market for establishing market rules? (And, if so, what are the rules of the meta-market?)

The State Has A Lot Of Work To Do

It's not simple. It can't be "free." And it can't be based on pure consent.


  1. I was thinking today that 100% consistent ethical behavior, if we value consent and avoid coercion, is probably impossible in the grand scheme of things. I'm hard-pressed to think of any reasonably complex social situation in which no party's rights or preferences are violated in any degree or form, save for the trivial case in which no parties exist.

  2. Thanks. It's amazing how many people fail to understand this.

  3. Todd - one man's trivial case is another man's utopia. <3

    sqrtnegone - I know whatcha mean.

    I should mention I'm still a huge fan of Posner and Nozick.

  4. Adding to your 6th point:

    The other thing people ignore is that there /is/ a meta market.

    The state constantly changes the rules of the market, and it is composed of institutions and individuals all of whom are subject to market forces, sometimes through legal contracts (campaign contributions) and sometimes illegal (bribery, kickbacks).

    This leads to a positive feedback for the concentration of capital: entities with capital change the rules to favor their increased capital.

    I think this is why neither utopian socialism or free market libertarianism would work. The former concentrates so much power that its abuse is immediately inevitable, while the latter gives the masses no means to fight the feedback loop of wealth concentration.

    I guess this is the standard argument for anarchism: all power tends to concentrate and exercise to enforce itself, so all concentrations of power must be continually opposed to maintain balance.

  5. An anarcho-capitalist would argue that such issues are more efficiently decided in the domain of private courts, which would themselves be subject to jurisdictional competition. My favorite exposition of this idea is still "The Machinery of Freedom," by David Friedman. Alas, I agree with TGGP's characterization of the state as "tempting candy" (or whatever it was). A monopoly on force is, for practical purposes, inevitable when social interaction becomes sufficiently complex.

    Another relevant book that you might want to look at is Simple Rules for Complex world by Richard Epstein. His discussion of the evolution of the New York diamond trade is fascinating.

  6. Anarcho-capitalists love coercion and monopoly of force at a local level.

    Marxists love coercion and monopoly of force at a national level.

    Some feedback loops of power concentration are meant to be balanced at different levels of interaction.

  7. I'm just getting back to this topic after thinking about other things for a while.

    TGGP - heartwarming to know that government is capable, in some instances, of doing a worse job than anarchy.

    Chip - so I started reading Machinery of Freedom, at least what's on the web. He seems to pretty much admit that there can't be a truly consent-based legal system, and I don't find his account of how jurisdictional disputes would be resolved to be convincing. He proposes a bargaining process by which people's preferences can be "a major factor" in deciding the laws they live under, but admits that "we cannot each get exactly the law we want." Extra-lamely, he notes, vis-a-vis capital punishment:

    "If, by some chance, the customers of the two agencies feel equally strongly, perhaps two courts will be chosen, one of each kind, and cases allocated randomly between them." Somehow I do not think saying "we'll flip a coin to determine whether you're up for the death penalty or not" will satisfy the desires of either set of customers.

    Genuine question for those more familiar with libertarian theory than I: how does such a system deal with parents beating, sexually abusing, selling, or overworking their young children?

    Friedman seems to rely on the fact that war is expensive to conclude that protection firms will work out their differences on the market. Isn't that conclusion pretty suspect, just based on observation of the world?

  8. I think the last point - regarding the cost of war - is empirically grounded. To whatever profound extent, modern warfare has been made possible through the power of conscription and taxation, that is, through the state's use of force. If the burden of military funding fell on private protection firms (which at some level would probably be underwritten by private insurance firms), it seems obvious to me that the means and incentive for collective military adventurism would be constrained by competing considerations. Adam Bellow, in his book on Nepotism, provides historical evidence that international military conflicts fell dramatically following the rise of finance (his depiction of the Rothchilds as unwitting promoters of pacifism is entertaining). The mechanism isn't mysterious. International commerce is valuable to those who participate in markets, and warfare, being costly, damaging, and risky, has the foreseeable potential to disrupt the preconditions that allow markets to function efficiently. Lacking the confiscatory and compulsory powers of the state, voluntarily funded private protectorates would likewise have a rational incentive to resolve conflicts through nonviolent means when the option exists.

    Of course, at some point you're still going to come up against problem of tempting candy, and human nature.

  9. Here is what I don't understand: how is the David Friedman model any different from the current situation in the world?

  10. You're on shaky ground here.

    All this post is.. is pointing out non-controversial givens among all libertarian economists. Yeah, a market needs some form of property right, etc. Minarchist libertarians thus say the government should provide that. Anarchist libertarians argue that it shouldn't because it can be provided sans state. You say Friedman's arguments aren't convincing, but give no reason. You give no theory of the state (i.e. what the state is) or any logical arguments why only a state can do these things. Empirically, every single thing up there has existed sans state provision (see e.g. Bruce Benson, Demsetz, Greif, Friedman on Ireland and Iceland, Michael Dove at Yale on stateless societies in Asia, etc.). Experimentally, property rights emerge (see Vernon Smith). And logically, property emerges from humans pursuing their self-perceived interests within the confines of bounded rationality (see Hayek, Coase, etc).

    You can probably never have pure, absolute, universal "consent" in any human society because any single person can define consent (or "aggression" or "coercion" or "property" or "liberty") any way they want and then not get what they want. Trivial. I'm not sure why this is relevant to us needing a state or markets being ungrounded. It doesn't even seem like an interesting point.

  11. Cal, this is EXACTLY the argument I'm interested in having! (In order to understand it myself, for the most part.)

    My main proposition is that a "state" is not distinguishable in an important way from the sort of security firm envisioned by Nozick and other libertarian philosophers.

    Either there are higher-level rules for how security firms operate (which is the same as having a state), or security firms operate without rules, acting with coercion if they wish, which is back to the problem with a state.

    I think security firms in real life would be more like prostitutes choosing between pimps. That is, you get to choose your exploiter.

  12. Also, a major problem with libertarianism is that it relies on rational agents to remedy their own suffering. But an unimaginable amount of suffering is experienced by beings other than rational agents capable of remedying their own suffering (animals, children, the insane, future people, etc.). I think any theory of fairness needs to account for this kind of suffering.

    It is simply not enough to farm it out to the empathy of other beings. "If you like animals [children, old people], don't abuse them" is hardly a justification of animal suffering.

  13. The state is distinguishable in an important way from a market security firm. A/the central defining characteristic of the state (which is almost universal in the literature) is that it is a **mass ideologically legitimated** territorial monopoly on mass coercion, as Weber put it "a monopoly on legitimate violence." A security firm does not exist because of a mass ideology of legitimacy projected onto it as some kind of quasi-mystical "voice of the people" or mystical "voice of god." It exists because people are individually willing to pay for its services and ceases to exist when they do not (unless it can maintain its costs via mass coercion, which is prohibitively expensive without a mass ideological legitimacy). This lack of mass ideological projection clearly and drastically affects the cost and thus feasibility of mass coercion for any would-be state. And this is supported in the empirical literature and economic theory.

    Having "higher-level" rules is not the same as top-down state rules just as having bottom-up market prices is not the same as having state price controls...

    Rules, norms, common law, case law, customary law, commercial law, stock market law, international law, etc. all empirically predate and theoretically emerge outside state monopolization. See e.g. Caplan and Stringham's overview of this here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1674441

  14. Libertarianism is not a theory of fairness or a personal philosophy, nor is it a normative prescription for any specific action. It is pluralistic, metanormative political philosophy opposed to statism.

    Insane people are still rational agents in the economic sense, and so would be "future people." I don't see how animals are relavent. LSE philosophy grad student JC Lester dealt extensively with technicals of rational agency, want-satisfaction, liberty, etc. in the book 'Escape from Leviathan: Liberty, Welfare, and Anarchy Reconciled." It's recommended and you can find pdfs of it online (or I have it) if you're interested. It's the book Nozick would've written if he'd been a better philosopher.

  15. Libertarianism is not a theory of fairness

    This lack of mass ideological projection clearly and drastically affects the cost and thus feasibility of mass coercion for any would-be state

    See, these are exactly the two pieces I was missing. Your explanation makes it so much clearer - thank you!

  16. So let's say I revise all instances of "The State Must Decide . . . " in the above article to "Someone Must Decide . . . And Enforce The Outcome" - whether it's a state is pretty irrelevant to my point.

    I think my main point is what Cal says above, slightly modified - "Markets are not a system of fairness."

  17. Right, then the above article would be correct. However then it would not at all be in conflict with libertarianism... unless that "someone who must decide and enforce" refers to a top-down coercive state (as opposed to bottom-up, nonstate order in human society i.e. from human action sans mass ideological projection onto a state).

    Some libertarians might argue that markets (in the strict money-profit-trade sense) are totally "fair." Randists probably would. However what most libertarians argue is (a) freedom within individual property rights is moral in itself and/or (b) logically results in better outcomes than statism by all sorts of metrics, including most notions of fairness. See e.g. Lester's book where he deals extensively with Rawls and Sen.


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