What matters in market conditions is whether others share your wishes.
American economist Joel Waldfogel published The Tyranny of the Market: Why You Can’t Always Get What You Want in 2009. In it, he pointed out the serious drawbacks of the free market, particularly its inability to meet the needs of all consumer groups. The Tyranny of the Market shot to the top of best sellers among market specialists and economists. The Tempora Publishers recently brought out a Ukrainian translation of the book. The Ukrainian Week asked Professor Waldfogel about who suffers from the tyranny of the market.
U.W.: When people had to deal with a lack of goods and queues and empty shelves in shops in the Soviet Union, Ukrainians knew capitalism provided more for consumers. Many economists who advised official Kyiv during the transition period repeated the mantra of making the market as free as possible, claiming this would guarantee welfare and freedom. Your book is entitled The Tyranny of the Market. Do you claim that the free market model cannot give consumers complete freedom of choice?
I am certainly a great supporter of the market. In many cases it works very, very well. One argument that has often been brought up in support of the free model was that it was able to satisfy any human wish if people were prepared to pay. Everything, it was claimed, depends on what you want, and to meet the desires or needs of individual consumers you don't need to have the consent of others. In other words, thoughts about this incredible freedom are quite common, while I point out that in many cases our individual desires are not enough and a great many other people also need to share them. What matters in market conditions is whether others share your wishes.
U.W.: You speak about the tyranny of the market which serves only the wishes of the majority. Nevertheless, Apple has successfully made products that people could not have wanted because they were so innovative. So this tyranny is not complete?
It is far from complete. It emerges in certain markets where the fixed cost of product delivery is high. That is to say, tyranny is limited in the case of a product that can be offered without a large initial cost. There is no need for your desires to be shared by many other people. But if it is about a product geared towards many people, you will feel the difference. For example, we have essentially one main newspaper in every city in the US. Even very large cities do not have a lot of large-scale dailies. The question is: Is this product aimed to meet your wishes or mine? It usually targets the greater part of consumers, and people with special wishes do not receive what they want.
It may be that “special wishes” is not exactly the right way to put it. It is rather something that is not quite typical. One of the examples that I based my study on was that ethnic composition of U.S. population may vary greatly. I studied mass media products such as newspapers and radio and TV stations. The black and the white populations in the United States have different wishes when it comes to these products. Moreover, Hispanics and Anglophones stand apart. Curiously, in cities where one of the groups was in the majority, its representatives had a much wider and better choice, fitted specifically to their needs, in contrast to those in which their group accounted for a lower percentage of the population. And this is direct proof that even in conditions of a free market, meeting consumer needs depends not only on how much money an individual consumer has and what he wants but also on what other people around him want.
U.W.: The facts cited in the book and the conclusions drawn are evidently useful to market specialists, entrepreneurs, government officials and perhaps politicians. Are these groups part of your intended audience?
We in the United States have always been great supporters of the market, and for good reason. But some arguments in favour of using only market mechanisms go too far. Here is another example: think about people who live in small towns compared to big cities. Town dwellers are offered a lot less indeed. And this is not surprising. But even in the United States, government policies – or social policies – are aimed at providing for citizens in such places. For example, the post provides services even where there is very little demand for them. We do not charge people in remote areas higher postage rates. These are conscious decisions to meet people's needs in a balanced way. The market would not do that. This must be done through the government. To be frank, my book intends to supply proof and facts that would prevent people from claiming that the market can miraculously solve all problems.
U.W.: Social democrats or Christian democrats in Europe would say that they grasped this concept a long time ago and that there are aspects of society that cannot be left to market forces: education, culture, health care and key social services. Would you agree that this problem is being successfully solved in certain European countries?
I believe that there is greater awareness about these issues in many European countries. Such ideas are controversial in the United States but not in Europe where, as you say, governments take many steps to prevent certain consequences of market forces.
U.W.: After the onset of the 2008 global financial crisis, many claimed with renewed vigour that free market capitalism had exhausted itself. What is your opinion on the current stage in the development of the science of economics and the future of capitalism?
That's a big question. I will try to focus on one aspect about which I can speak competently. In general, there are two types of economists: those that study only theory and those that study real economic data. I am unswervingly in the empirical camp. My book is partly aimed against those whose theories proclaim that a market economy provides everyone with everything.
In theory, manufacturing constantly depends on the scale. And this is the idea that was always kept in mind by people like Milton Friedman who always said that capitalism and freedom go hand in hand. But if you look at the way the economy works, this extreme version of individual freedom falls apart. It is not all that simple. I would even repeat that in many markets you don't get what you want unless others want the same thing.
What can be done about it? Does this mean that capitalism is bad? No. It only means that it’s not perfect. One more thing is that when people talk about defining government policies or market interference mechanisms, the claim that any government influence would be inefficient and harmful – it is often repeated in the United States – appears to be wrong.
U.W.: There is one more great economic issue today. Developing countries essentially strive for the standard of living enjoyed by the middle class in the United States. But now some people say that in a world of seven billion people, individual consumption on the level of Western countries is simply impossible. This global market would simply lack resources. What is the solution? Is it possible for everyone to achieve the American model of a market economy and American levels of consumption?
I don’t think I can answer this question. As an economist, I would say that the problem of overconsumption arises because less than the full price is paid for certain products. I mean that the price of every product would have to include its cost for the planet: air emissions or environmental pollution. When the consumer does not pay the full price for a product to be manufactured, he can consume too much of it, which may exhaust the resources of the planet. So the economic aspect of the problem is this: Will we face up to the full price that reflects the cost of production? I'm talking not only about monetary value but also whether we pay in full for using air and water. If not, consumption may be excessive and have harmful consequences.
U.W.: It often seems that the success of the market economy largely depends on the level of laws in the country, the pressure of corruption and how responsibly the ruling elite behaves. Can a free market, or capitalism, itself generate a rule-of-law system? Or is legality a purely political aspect of social development?
This is a very important question. I believe that many Western economists do not even stop to think about it, because they accept the rule of law is a given. In fact, it is one of the capstones. Even Western economists who are critical of the government's role in the economy believe that there is a need for a ruling cabinet that would secure legality and the rule of law. Milton Friedman famously said: Government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. I believe that many advisers and observers from the West who supported the transition to capitalism were not fully aware of how important it was to have legality and the rule of law as the basis for its successful operation. The market cannot secure that on its own. An engaged and fair government is needed. It is only in these conditions that the market can develop and operate properly.
Professor Joel Waldfogel is an American economist who prefers to work on the practical aspects of economics rather than theory. He has a PhD from Stanford and now works for the University of Minnesota. His Scroogenomics: Why You Shouldn't Buy Presents for the Holidays, which is a reflection of his practical interests, argues that Americans waste around $85 billion every year on Christmas presents. His book The Tyranny of the Market: Why You Can’t Always Get What You Want was published 2009 and generated significant interest among specialists.
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