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Understanding markets and collateral consequences

Published on 26 October 2012
Updated on 23 February 2024

Our hunter/gatherer ancestors had, say, 300 stock-keeping units (SKUs) – the managerial term for worldly goods. In New York City alone, the SKU is well over 10 billion nowadays (see The Mind of the Market: How Biology and Psychology Shape Our Economic Lives by Michael Shermer). If you think nature is multifarious, think again: we have probably created more cultural objects in 10,000 years than nature has created species in 500 million. True, one may not compare brands of breakfast cereals with finches, but what about the innumerable boring species of insects? (Haldane quipped that God must have had an inordinate fondness for bugs.)

SKUs are but a small fraction of what John Searle calls ‘social reality’, the most humongous reality ever conceived by a conscious mind (see The Construction of Social Reality by John Rogers Searle). With our language, we create, constitute, and maintain the social reality of human civilisation. Every sentence we utter bestows one or multiple meanings on a ‘brute fact’ in the material world. There is no limit to our imagination about the real world, hence no limit to the complexity of the social reality we create. This social reality may well be structured but, at the same time, wholly interdependent. Everything affects everything, not to speak of its emergent properties.

Crown by Josh Keyes (ThinkSpace)
Crown by Josh Keyes (ThinkSpace)

The collateral consequences of goods

Now, back to goods and services. Each such good has uses (one or few, unless it is an enabler like the internet). When we buy it, we assume voluntary consequences, as signified through voluntary exchange. Goods, however, also have collateral (involuntary or unintended) consequences: for our health, for the environment, for our social well-being. In fact, their production and use reverberate endlessly across our social reality well beyond the voluntary transaction.

Everything has consequences. With increased knowledge, we are able to discern second- and third-order collateral consequences, as in the case of climate change. Basically, any one use may have higher-order collateral consequences. Dealing with an object’s collateral consequences becomes way more demanding than just using it (we know this from the plain throw-away plastic bag). And there are just so many SKUs that dealing with it all becomes daunting.

In the world of economics, it’s logical for individuals or ‘actors’ to consider the outcomes of their actions. But, it’s challenging to weigh all the intended and unintended consequences when making decisions. How do we distill the abundance of social factors into a clear ‘yes or no’ choice? (see Conquest of Abundance: A Tale of Abstraction versus the Richness of Being by Paul Karl Feyerabend)?

I may accept that a person is able to autonomously attach a value to a good or service which is offered to him, and express his willingness to enter in an exchange in order to obtain it. Mind you, it is a heroic assumption already: she would have to be coherent and consistent, have perfect foreknowledge, and be able to establish relations among all possible choices before him (Amartya Sen has convincingly argued that this reductionist stance is unwarranted; see Development as Freedom by Amartya Sen). At a pinch, I may even agree that we can aggregate the many expressions of ‘willingness’ into a demand function, though this is possible only by substituting wealth for want (one cannot have more wants than one’s income). Sen, a Nobel-prize winning economist, shows that famines were far more caused by lack of entitlements (money to buy food) than physical penury – people starved because they poor (see Poverty and Famines: An Essay on Entitlement and Deprivation by Amartya Sen).

I tend to agree with Hayek’s pragmatic stance that the market, as a decentralised mechanism, is best suited to ensure that dispersed knowledge informs individual decisions. Unlike some contemporary neoliberals, Hayek didn’t argue that the outcomes of a market system are overly optimistic (‘Panglossian’). Instead, he asserted that it is simply superior to central planning, a more modest claim (see The Use of Knowledge in Society by Friedrich Hayek). State-driven central planning tends to be too heavy-handed and fails to consistently produce satisfactory results over time. I’m hesitant to pass judgment on privately-led planning; however, it’s worth noting that firms often prioritise dominance over mere market share competition. Therefore, it seems prudent to rely on market mechanisms when facilitating voluntary exchanges.

But how should we address collateral consequences? How do we integrate them into this framework? It’s a challenge we face. Collateral consequences stem either from materiality or have implications for our social systems, which we acknowledge as far more intricate than the material realm. We’re transitioning from the straightforward realm of voluntary exchange to that of unilateral action within the material and social spheres. This shift represents a fundamentally different scenario, and it’s where markets must demonstrate their effectiveness in managing collateral effects.

Why is it different? I throw away a plastic bottle, and the environment is affected by my carelessness: my act has collateral consequences. The environment is not a party to a voluntary exchange with me; it has no voice in the matter, even less it has a right to reject the deal. So, somebody has to ‘give him a voice’, or allow it to ‘make a deal’, give him a right to put things ‘right’.

Hammered by Josh Keyes
Hammered by Josh Keyes (ThinkSpace)

Only collective human intentionality can address this issue, regardless of whether it’s through the state or any other institution. We must establish a guiding principle: we must acknowledge that the object in question, such as the environment, holds a social status (see Making the Social World: The Structure of Human Civilization by John Rogers Searle). Addressing environmental concerns cannot solely rely on the autonomous individual, as they lack the social resources to do so, unless they possess dictatorial power. It’s only when we incorporate the environment into our social reality that it becomes a priority for consideration. Therefore, the market – an institution facilitating voluntary exchanges – needs to be complemented by other institutions that manage what were originally involuntary transactions.

Determining which institution is best suited for this second task is a challenging question, and there’s no pre-existing answer. Perhaps the market could be adjusted (by whom?) to account for both material and social consequences. However, markets are not inherently suited for such purposes. Addressing collateral consequences may require implementing an administered price, a concept opposed by advocates of free markets. Alternatively, ad hoc regulations might be necessary. Whether a resulting hybrid system is viable or if we should pursue separate or innovative institutions depends on the specific circumstances. Hayek’s presumed superiority of the market becomes less certain. As demonstrated by the case of Kodak, which excelled in making photographic film but struggled with electronic cameras, when the rules of the game change, the former leader may face challenges. There’s no guarantee that the market is inherently better at handling involuntary consequences, so its relative importance may diminish.

Not only do we face collateral consequences external to the individual, but we also encounter them within. For instance, while I may enjoy my gin and tonic, I must also consider the well-known negative effects of alcohol on my health. Thus, my decision isn’t just between an apple and a gin and tonic; I must also account for the involuntary health consequences, among other factors. Balancing desires becomes challenging for a rational mind when confronted with collateral consequences. In such cases, it may be pragmatic to supplement market incentives with other approaches, ranging from nudges to prohibitions.

In the face of this incredibly complex problem, what does orthodoxy advocate? Reductionism is often the preferred approach. It suggests that we can simplify the issue into a single variable – price – and by following prices, we can act ‘efficiently’, making optimal decisions. However, this approach is overly simplistic and can only thrive in a social world that downplays the significance of materiality. It’s akin to Plato’s cave allegory serving as a guide to policy-making.

In summary, as our social reality becomes increasingly complex, the exponentially growing collateral effects overshadow mere price considerations. We see this complexity manifesting in policy decisions, where contextual issues often pose greater challenges than price considerations. (Doubtful? Consider Switzerland, where road-building frequently occurs underground, reflecting a unique societal perspective.) While it’s easy to blame the government, doing so merely deflects responsibility.

Do I offer a solution? No, but I’ll assert that compressing hyper-dimensional material and social realities into simplistic points is an impossible task. Our best approach is to seek uneasy compromises while remaining vigilant for boundary conditions. There’s nothing inherently superior about our efforts; we’re simply navigating the complexities as best we can. Humility should guide our actions.

Therefore, let’s exercise humility and refrain from asserting the inherent superiority of unfettered markets. After all, markets themselves are part of our social reality, not something prior to it, as suggested by Bastiat, a figure revered by the neoliberal right (see see The Law by Frédéric Bastiat).”

This post was first published on DeepDip.

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