Summary The Morality of Commercial Life - 30J302-B-6
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Course
The Morality of Commercial Life (30J302B6)
Institution
Tilburg University (UVT)
Summary of Lectures 3 to 12 with book integration notes from the 3rd yr IBA course of the Morality of Commercial Life. It helped me getting an 8.5 in the final exam ;)
My notes include a thorough explanation of everything covered in the course material, including graphs and examples to give a bette...
Lecture Three - Why are markets great
What characterizes markets (or what makes markets different from e.g., states, churches,
NGOs, etc.?
Trade, exchange, supply, demand, prices, WTP, etc.
A market is a decentralized order where people freely exchange products and services, the
production distribution and consumption of which happens on the basis of prices.
What are (alternatives to) markets?
Markets are only one institutional way to distribute scarce goods and services. What are
other way that we can distribute goods that are usually sold in the markets?
● Markets: willingness to pay; whomever pays the price.
● Auctions: willingness to pay; whomever pays most.
● Governments: centralized planning (on what basis: see below).
● Queueing: on the basis of time invested (first come, first served).
● Lottery: on the basis of luck or fate.
● Waiting lists: on the basis of urgency or needs.
● Meritocracy: on the basis of desert.
● Voting: on the basis of popularity.
● Nepotism: on the basis of ‘who knows who’.
● Free (or subsidized): open to everyone (e.g. taxpayers pay, not the consumers).
● Et cetera.
On a minimal approach a market is seen as “community of advantage” that offers participant
opportunities and incentives to interact in mutually beneficial ways.
However, when economists talks about market thay have a more ideal type approach,
which means that conventional economists describe ideal-type markets relying on very
demanding, unrealistic assumptions (perfect competition, profit maximization, homo
economicus, perfect rationality, convex indifference curves, etc.)
Highly idealized markets in Economics 101 textbooks are caricatures of real-life markets
(where competition is not perfect, people are not perfectly rational, etc.)
Why are markets great?
,Why are markets greater than states?
Markets - Consequentialist Arguments
Markets are often praised for their efficiency. Market provide incentives to increase
productivity, cut unnecessary costs, etc.
Given diversity of talents, each market agent will benefit from “specialization of function and
division of labor” (Friedman, 1961) and engaging in free trade.
In addition, decentralized markets are amazingly good at coordinating actions between
diverge agents, each of which best knows what it wants.
The price mechanism collects and conveys a lot of information and is thus, epistemologically
superior to centralized planning (cf., Friedrich Hayek)
How do (normative) economists put this?
Markets maximize efficiency, productivity, growth and create win-win situations.
Market thus have good (or even: the best possible) consequences. Or: markets maximize
consumer and producer surplus (i.e., utility)
cf., Pareto-optimality: a social status is pareto optimal if and only if no one’s position
can be improved without worsening the position of someone else
These ideas made a big impact on actual policies throughout the world (on both national and
international levels). Take Alan Greenspan, Chair of the US Federal Reserve from 1987 to
2006 and a staunch believer of ‘self-regulation’ of (agents in) free markets (also banks, …).
“Free competitive markets are by far the unrivaled way to organize economies (…). We have
tried regulation ranging from heavy to central planning. None meaningfully worked.”
(Greenspan, March 2008)
Friedman’s View - Consequentialist Argument
Friedman was an economist and a market enthusiast.
See: https://www.youtube.com/watch?v=RWsx1X8PV_A
See also: https://www.youtube.com/watch?v=eWrImRnH6bw
, His view has to do with the invisible hand of Adam Smith. People’s selfishness (and even
greed) automatically leads to the realization of the public good. Through mutually beneficial
trades, markets align private and public interest. “Every individual (…) intends only his own
gain, and he is in this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention (…). By pursuing his own interest he frequently promotes
that of the society more effectually than when he really intends to promote it.” (Smith 1776,
Book IV, Chapter 2.9)
Markets - Deontological Arguments
The other main arguments for markets is deontological. Markets respect (much better than
ohter institutions) crucial (or even: inviolable) rights and liberties: freedom, property,
self-ownership. People (consumers, producers, employees, etc) are free in market but (as
citizen) subject to state power and coercion (i.e., they have to abide the law)
Some view taxes as legalized robbery, theft or even slavery: you are forced to work for
someone else, who takes away your property without your consent.
Market Respect Freedom - Libertarianism
Libertarians take freedom to be the highest good. Thus, morally desirable societies leave
individuals as free as possible. This implies: Laissez-faire capitalism
Minimal taxation
Minimal regulation
Minimal state
Robert Nozick’s minimal or “night watchman” state:
“A minimal state, limited to the narrow functions of protection against force, theft, fraud,
enforcement of contracts, and so on, is justified; any more extensive state will violate
persons’ rights not to be forced to do certain things, and is unjustified.” (Nozick 1973: ix)
So forget about public education, no public health care, no public roads and transportation
because all of this implies coercive taxation.
Nozick’s “Wilt Chamberlain” argument. If we start from a just distribution and allow for free
(market) exchanges, then the resulting distribution must be just for everyone involved in the
exchanges. Whatever inequalities arise from free (market) exchanges are justified.
“We are not in the position of children who have been given portions of pie (…). What each
person gets, he gets from others who give to him exchange for something, or as a gift.”
(Nozick 1974: 149)
Property rights are absolute, and can only be exercised by owners.
Nozick’s “Self Ownership” argument: coercive government interventions in free market
exchanges are incompatible with recognizing people as self-owners.
Recognizing and respecting people as self-owners is crucial to treating them as ends in
themselves (Cf. Kant’s categorical imperative)
, If I own myself and my body, then I own my own talents and powers and thus whatever I
produce with those. Since the fruits of my labor are mine, taxation and redistribution turns
me into a mere resource for others. This is incompatible with self-ownership and equal moral
dignity.
Why are markets great according to Milton Friedman?
Like Rand and Nozick, Milton Friedman (1961: 6) takes “freedom of the individual as his
ultimate goal in judging social arrangements.”
“In the late 18th and early 19th centuries, an intellectual movement developed that went
under the name of Liberalism. This development, which was a reaction against the
authoritarian elements in the prior society, emphasized freedom as the ultimate goal and the
individual as the ultimate entity in the society. It supported laissez faire at home as a means
of reducing the role of the state in economic affairs and thereby avoiding interfering with the
individual.” (Friedman 1961: 3)
Friedman views market as essential to a free society in both a principled and a more
consequentialist way.
“Economic arrangements play a dual role in the promotion of a free society. On the one
hand, “freedom” in economic arrangements is itself a component of freedom broadly
understood, so “economic freedom” is an end in itself to a believer in freedom. In the
second place, economic freedom is also an indispensable means toward the
achievement of political freedom.” (Friedman 1961: 3)
“Viewed as a means to the end of political freedom, economic arrangements are essential
because of the effect which they have on the concentration or the deconcentration of
power. (…) the kind of economic organization that provides economic freedom directly,
namely, organization of economic activities through a largely free market and private
enterprise, in short through competitive capitalism, is also a necessary though not a
sufficient condition for political freedom.” (Friedman 1961: 4)
According to Friedman, one cannot have political freedom without the kind of economic
freedom that markets enable (i.e. a necessary condition).
Do you see a consequentialist and/or a deontological argument in this quote?
“If it is voluntary and reasonably well informed, the exchange will not take place unless both
parties do benefit from it.” (Friedman 1961: 6)
Of course, both arguments!
According to Friedman, the consequentialist and deontological arguments are necessarily
linked. Freedom matters and it is the market that respect this because it enables people to
exchange voluntarily (deontological), which they will only do if it is in their mutual benefit
(consequentialist).
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