One little piggy went to market

I have a confession to make. Over the last year or so, I’ve been really quite evil. I really never meant to be, but there it is. Evil as a doorknob. Like many of my ilk, I can pin point the exact day the evil started, it was in November 2009 and I was in the Felix office, chatting to the Business Editor. The chat went something like this:

Moi: The government should really pay for education/ health/ hash brownies for the poor. Satan: Well, if it’s such a good thing, why don’t richer people just pay for it for them anyway? Can’t people just be charitable, or are you saying the government is more moral than everyone else?

And there the bastard had me. Wouldn’t it be a whole lot better if people just came together themselves and sorted out each other’s difficulties? What was it that made government intervention so much better than private action? This got around a WHOLE load of issues too. Want your child to learn evolution? Set up a school that does it. Want poor kids to learn about evolution? Set up a school for them too. Is it really that different from the government doing it? In fact, it should be better – being controlled from near, not Whitehall, means better efficiency and accountability. On top of that, surely the freedom to teach as you wish has a moral value to it? It’s not like current state schools are anything to write home about. Assuming you can write, that is.

I started to see the benefits of privatisation everywhere. I didn’t believe that cuddly services such as health and education should be run purely in pursuit of profit, rather that the freedom should be given to professionals, patients and parents to make their own decisions about services and this freedom comes from privatisation. Every time someone complained that the government should do more for such and such I’d think, “Why don’t you just go ahead and do it, or convince professionals to?” At every stage this was my outlook. How on earth could the government do something better than its citizens, I thought. Yes, most of us don’t have the expertise to set up a school, but neither do most politicians. They hire professionals with our money, why not cut out the middleman and hire them ourselves?

But I wasn’t an evil voice in the wilderness, I had my Gospel and I read it religiously; The Economist magazine. You really have to read the thing to understand its allure, but basically it kept me in market- loving, unions-hating rapture for hours on end every week. And when my sister got me a Kindle subscription for Christmas? In the Holy Name of Friedman, I just didn’t stand a chance.

It all reached its zenith when, one fateful May morning, I put an X beside the name of Sir Malcolm Rifkind, Conservative MP for Kensington. Yes, that’s right. I’m Rory the Tory. Rory the Milk Snatcher. The Sheriff of Ror-ingham.

But things have since changed. Let me be clear, I really didn’t mean to be evil. I honestly believed the in freedom, efficiency and accountability that letting the market into public goods would bring. I now realise I was mistaken. The purpose of this article is to explain just why I was mistaken: why markets really aren’t as wonderful as free marketers such as my younger self might hope. Perhaps in the process some other poor devils might realise the errors of their market-orientated ways, too.

Market Failure

Even in theory, markets can’t always work properly. A year ago, I’d have said that if there were a more efficient way of doing something, the market would always find it and adopt it, because otherwise businesses wouldn’t survive. Unfortunately, this isn’t the case and market failures can appear in two fundamental ways:

The Problem of Lemons

Firstly, I have no problem with fruit and neither do markets. We’re talking about Lemons with a capital ‘L’; crap cars. It’s a well known fact that the very second you drive a new car out of the car shop, it drops fabulously in price in a way that doesn’t make perfect sense. It’s true that everyone likes the idea of being the first owner of a car, but not so much that they would insist on paying many thousands of pounds less just because someone had ‘her’ for a week. Instead, there’s a classic market failure operating.

Imagine you see an ad for a car. It’s almost new and so going for a price not too far off what it would have been hot off the shelves (that’s how a car shop works, right? Shelves and massive industrial trolleys?). It seems like a good deal, but something’s bugging you. If the car’s really so good, why is the guy trying to sell it? Sure you can give it a test drive and check out the MOT, but all that already takes up time and time is money, already making the car more expensive. And even if the MOT etc. checks out you’ll still be left wondering why this car’s on sale- unless it’s faulty? Because you don’t know everything there is to know about the car, there’ll always be that doubt. Coupled with the extra money and time it takes to check the car out, this means that inevitably you’re going to offer a lower price than the seller should really get for the car, to compensate for the uncertainty.

Can’t people just be charitable, or are you saying the government is more moral than everyone else?

But now look at it from the car owner’s perspective; he realises that if he tries to sell the car, the above reasons will mean he gets a poor price. Which means that unless there is an emergency (a new baby, unemployment) he has little incentive to sell a perfectly good car. Unless, of course, it’s faulty. Then he still has every incentive to get rid of the thing.

And now we can see that both buyer and seller will create a spiral; the buyer is scared of Lemons so he offers a low price, the seller doesn’t like the low price so he only sells if he has a Lemon which means even more used cars are Lemons which means the buyer will offer even less to compensate for the risk and so on. This isn’t so bad if it only affects cars and manufactures now offer guarantees on used cars to alleviate this, though it’s still an issue. The big problem is the exact same market failure exists in healthcare - just as Lemons are more likely to be put up for sale, sick people are more likely to take out health insurance; pushing up its price and driving healthy people out, further pushing up the price. People getting lower prices than they would like for their cars is ok, but sick people finding themselves priced out of insurance really isn’t. There is a clear case for government intervention here. This leads us to the next market failure:

The Prisoners' Dilemma

Thisun’s a nice economics parable. There are two recently arrested prisoners being interrogated separately by police. Whatever evidence the police have, it’s not enough for a conviction. The prisoners are each given a choice; either own up to what you and your friend did, in which case you get 2 years in prison and the other guy 10, or you can keep quiet but if the other guy ‘fesses up things are reversed, he gets 2 years you get ten. If you both confess, you get 5 years each. A confusing state of affairs, but it’s clear that the best result for both is to keep quiet. The problem is, since neither of them can be sure the other won’t say anything, the most rational move for each is to confess, rather than run the risk of being the only silent one. All things being equal, keeping quiet gets you an average of 5 years locked, speaking out gets you just 3.5. Two rational prisoners will always tell on each other, leaving both unnecessarily in prison.

There are many real world examples of this, an obvious one being hygiene. Sandwich shops, for example, would have no incentive to spend a small sum on making clean sandwiches if it means making them slightly less competitive than rivals, despite the fact that sandwich shops making people ill is bad for the industry as a whole. Clearly businesses need educated workers and yet it makes no sense for any individual business to invest in schools if those guys are just going to work for someone else. Again, there’s a clear case for government intervention here.

Halfway to Damascus

I was gradually convinced that markets, hoever rational, could never fully create the optimal outcome for everyone and, sadly, it’s the poorest who would lose out the most. I’m no commie, mind, but these are sensible reasons for a well regulated market system with social welfare and public goods. I haven’t changed altogether. In an election tomorrow, I would still vote Tory (they’re hardly full on free marketers these days) and I don’t necessarily support every last penny spent in the name of welfare. So I’m a long way from skipping down a small country lane with pretty petals in my hair nursing an injured baby rabbit, but the evil has rescinded, somewhat. Unlike, alas, that tattoo of Thatcher on my shoulder…