At one end of the spectrum of market types is a pure free market capitalist system, with no government interference in economic transactions. At the other end is a pure socialist system, in which the government owns all means of production and makes all decisions related to production. Neither pure type has ever existed. Governments of one sort or another—from tribal leaders to elected or appointed officials—have always imposed some rules on the marketplace, and individuals have always maintained some control over economic decisions.
Policymakers of the late twentieth century are, nevertheless, drawn to the free market ideal. In economic models of a perfectly free market, efficiency in allocating goods and resources is guaranteed: Goods go to the consumers who value them the most, and resources go to those who can use them most productively. It is, therefore, appealing to attempt to make actual markets conform to this ideal. In addition, perfectly free markets are the easiest to model mathematically; real-world complications are difficult to explain logically, much less mathematically.
Robert Kuttner argues that the free market is not optimal for several reasons. First, the market is never completely free. Governments appropriately impose restrictions regarding health and safety, enforceability of contracts, and various “unfair” practices. Second, even in a purely free market, results are not always optimal because decisions that are rational for individuals can lead to results that are nonoptimal for the group. Only government interference or cooperation among actors in the market—which may be impractical for many reasons, including enforceability of agreements—can lead to optimal results.
Kuttner also points out a basic conflict between democracy and free markets and sees each system as appropriate for answering different questions. The former employs a rule of “one person, one vote,” whereas the latter dictates “one dollar, one vote.” Some questions clearly are moral in nature and inappropriately answered by markets. Kuttner lists questions of slavery, abortion, the death penalty, and the sale of body parts and fetal tissue among these. Furthermore, the application of market norms in institutions tends to erode civic behavior such as charity and volunteerism.
The widest departures from free markets in the U.S. economy are those for labor, life and health, and, surprisingly, money. Each of these markets is treated in a separate chapter that describes various restrictions and regulations that, Kuttner argues persuasively, make sense in terms of guiding the market toward desirable outcomes. Kuttner deliberately excludes from consideration the markets for education, the arts, public spaces, religion, charity, and sport, choosing to explore a representative sample of markets in-depth without overwhelming the reader. His choices are apt, and readers can easily extend his arguments to markets for other products and services.
Kuttner’s first several chapters outline the premises of a free market model and lay the groundwork for his criticisms of it. Such models assume rationality and stable preferences on the part of consumers, as well as enough time for markets to “clear” (for all desired transactions to take place). In these models, incomes reflect the merits of market participants, and prices fully capture costs and benefits. Kuttner questions each of these assumptions, and, in the case of consumer rationality, he points out experimental evidence that the assumption is false. He fails, however, to provide an alternative: Consumers may not be rational all the time, but it is difficult or impossible to state in which ways they will act irrationally. If such a statement could be made, it probably could be modeled as another form of rationality. He also presents actions such as supporting public radio and television, voting, and returning a lost wallet: Free market models, in their simplest forms, predict that none of these will occur.
Three chapters in the middle of the book treat particular markets in depth: those for labor, medical care, and money. Each has particular characteristics that, in Kuttner’s opinion, make a free market less than optimal. Labor is peculiar in that the “product” has a stake in its price: Workers, unlike loaves of bread or cars, care about their market price and their conditions of work. Optimal contracts must consider the long term instead of focusing on setting current marginal cost equal to marginal product, as economic models dictate. Such considerations explain features of real-world markets including long-term employment contracts and seniority systems.
Medical care remains...
(The entire section is 1909 words.)