Scott Sumner  

More markets please

Do criminals obey regulations?... Neoliberalism is making the wo...

I've devoted much of the past ten years to advocating the creation of a highly liquid nominal GDP prediction market. I believe this sort of market would eventually revolutionize macroeconomics. Over time, people would stop thinking of the stance of monetary policy in terms of interest rates and begin focusing on what really matters, expected future NGDP. We could begin monitoring the efficacy of monetary policy in real time.

But NGDP is not the only area where we need more markets---there are hundreds of other areas crying out for reform. Legalizing markets in drugs, prostitution and gambling could radically reduce our prison population, save enormous sums of money, reduce violence in Latin America and reduce authoritarian tendencies in our own government. Markets for organ transplants could save tens of thousands of lives. (Why do progressives seem so upset by the health cost of repealing Obamacare, but not the ban on organ markets?)

In Europe, they are far ahead of America in many areas, with much more widespread privatization of airports, air traffic control, airport security, passenger rail service, postal delivery, toll roads and many other activities. Hong Kong has one of the world's best subway systems, and its privately run. Imagine what private enterprise could do with NYC's abysmal system.

Given the need for many more markets, I was surprised to see Noah Smith make this argument:

Taken to its ludicrous extreme, marketism would incur far too many transaction costs. Imagine having to pay a fee for the air you breathe, or to walk down the street where you live. Such a free-market paradise would feel more like a prison.

The late 20th century saw an expansion in the scope of human relations that take place in markets. But the early 21st century should be a time for rethinking this trend. The idea of markets in everything is bumping up against its natural limits.

If you expected the article to justify this claim with many horror stories about actual failed markets, you would be disappointed. Instead Smith points to some rather far-fetched examples of possible overreach, such as privatizing the air we breathe. Smith's right that markets are not appropriate in all areas of life, but I don't agree with his claim that we are bumping up against the natural limits of markets. In my view the neoliberal revolution of the late 20th century didn't go nearly far enough.

Smith refers to Coase's argument that some activities are better handled within firms than through markets:

Within companies, people often prize loyalty to coworkers or to an organization. That may explain the surprising yet common finding that direct monetary incentives often reduce work performance rather than increase it. Privatizing the army, tax collectors and prisons is a bad idea, because it ignores the crucial function that loyalty, dedication, idealism and commitment play among combat troops, bureaucrats and prison guards.
That's a good argument, but in the US combat troops and tax collectors are generally employed by the government. There are some private prisons, but I'm not sure there is any evidence that government prison guards have more idealism or loyalty than private sector prison guards. One part of San Francisco has a very successful private police force. Perhaps prisons should not be privatized, but that's an empirical issue that needs to be studied--appeals to loyalty, dedication, and idealism do not answer the question.

Again, markets are not appropriate everywhere, and I don't rule out the possibility that there has been overreach in a few areas. But overall, there is still a massive need for more markets, not to mention a need for more deregulation of existing markets in areas such as zoning, occupational licensing and many other activities.

Check out this CNN story on the HK subway, which earned a 2 billion dollar profit in 2014. It carries 5.2 million passengers a day, and has a 99.9% on time rate. (Hong Kong has only 7.4 million people.)

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Why can't we have nice things?

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CATEGORIES: Free Markets

COMMENTS (14 to date)
Cloud Yip writes:

Um... to that HK subway....

First... most of the profit of the MTR company is actually from selling properties around its stations. The high property price (especially) those around subway is actually a result of our “railroad first” transportation policy. So... I would argue it’s profit is subsidized in an implicit way...

Secondly, we in HK are actually complaining rigorously on it service.... the 99.99 on time rate is a fact. But it keeps breaking down on really peak hours, and given the 99.99 on time rate expectations... I think you can see how big a trouble everytime it breaks I would argue 99.99 is not a metric to be envy of, we paid a high price(through land price) to get that service, and they don’t really delivery when most needed....

Back to your point, can more market help? Absolutely! We need more competition, from other transportation like buses and uber maybe? But regulations are hindering them...

Scott Sumner writes:

Cloud, Thanks for that information. I loved the HK subway when I rode it a couple years ago. It seemed far superior to what we have in the US, But I can imagine it's all about expectations, and even occasional breakdowns would be frustrating.

New York could give a subway corporation some valuable property as part of any privatization package.

A writes:

The opiate crisis shows how a legal route creates scale and distribution networks that interact with the addictiveness, and severity, of a drug category. And even if legalization doesn't make waves in normal times, they might make stressful periods more sticky, like the role of opium in 18th and 19th century China.

BC writes:

Isn't the reason that we don't pay for air that its marginal cost of production is zero rather than "transaction costs"? As far as I know, we do pay for air if we want to breathe it underwater from a scuba tank. That's because providing air via a scuba tank requires economic resources.

We also pay fees for the food we eat and the water we use. I can see Smith's point though. Imagine paying a fee for every single bit sent through your cell phone. The transaction costs would be ludicrous. Oh, wait.

Don Boudreaux writes:

Noah Smith should read the extensive economics literature on property rights. He can begin with Harold Demsetz's famous May 1967 American Economic Review article, "Toward a Theory of Property Rights."

Humans have incentives to create, define, and enforce such rights only for resources that are so scarce that the value of each 'unit' - if used efficiently - exceeds the value of the resources and time required to protect that resources as private property. Noah Smith's example in a market for breathable air (on earth) reflects error because, fortunately, breathable air on earth is so abundant that it's available to all for free. There is no need for markets in such a case. Only when resources are scarce relative to demands are markets useful.

David R. Henderson writes:

Excellent post, Scott.

PaulS writes:

JR trains in Japan are a bit like that HK subway; they are very reliable and one-time is around 99.8%

And yet I think the approach would fail in the USA. A privatized NYC subway would act like the cable companies, which are monopolies and awful. US airlines are semi-competitive and manage to be awful too.

The problem is probably cultural. US companies are often out to steal as much as possible - absolute sovereignty of the financial. And along with that, pride in a job well done is largely a thing of the past.

Maybe if there were truly competitive options in NYC ... but the place is simply far too overcrowded for that.

ChrisA writes:

I think the commentator who is making the claim that the HK subway is only doing well thanks to its exploitation of the associated property that the stations are located on, is missing the point. That is exactly what private corporations do that many public ones can't or don't - look for unexploited value. If you look at most publicly run metros around the world the property value is usually well under exploited because there are no incentives for the managers running it to do so. In London for example there is all this railway land in the centre of the city which is hugely valuable, I would bet that if the tracks were owned and run by a private company (as was used to be the case before the Labour government destroyed Railtrack out of pure incompetence), much of it would have by now been roofed over and large residential and business towers built above them.

The Original CC writes:

What BC said. The reason we don't have markets for air is that air is not a scarce resource. It's disappointing to see someone ignoring this to make some argument against markets. Good point about scuba tanks!

Cyril Morong writes:

Great post. What do you think of this article from the WSJ?

How Much-Criticized Occupational Licenses May Reduce Racial and Gender Pay Inequality: New research shows occupational licensing conveys information to employers about skills and criminal records

Scott Sumner writes:

A, Actually I think the opioid crisis is a strong argument for legalization. People are prevented from using relatively safe products like pot, and then reach for much more dangerous and addictive substances like opioids.

BC, I agree.

Don, Good point.

Thanks David.

Paul, If American airlines offer poor service (and I agree they do), then why not allow a free market? Let those superior foreign airlines come in and compete. Instead we ban foreign airlines from serving US routes. When we allowed import cars into America in the 1970s the quality of American cars increased, as they were forced to get their act together.

I would add that the poor service of airlines is partly due to government control of airports, air traffic control, and airport security, which makes the flying experience much worse.

Chris, Good point

Scott Sumner writes:

Paul, I would add that in my experience cable companies that compete in a free market (against other cable companies) are superior to those that were granted government enforced monopolies.

And let's not forget that even with all the service problems of American companies, they are still far ahead of government bureaucracies like the INS, IRS, DMV, etc.

Compare the Post Office to Fedex, for instance. Compare the airlines to Amtrak.

Scott Sumner writes:

Paul, I would add that there are competitive options in NYC, including buses and taxis and Uber. Those also need to be deregulated.

TM writes:

It's funny that Scott, as usual, overlooks the most important area where a market would be useful: money. Why not let the market take care of money, since it does such a good job everywhere else? Who needs NGDP targeting then? Why not let the market decide the quantity of money and its form?


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