July 25, 2014
Oren M. Levin-Waldman, Ph.D.
Those who oppose regulations of any type, including mandates to pay workers a specified minimum wage, often invoke the language of free markets. In a market economy, the argument goes, individuals should be free to enter into transactions, whether it be for the purchase of goods and services or labor services.
Not only does interference in these transactions violate one’s liberty, but it undermines market efficiency because it may create obstacles to individuals making choices which could result in the full utilization of resources. And yet, one wonders whether this isn’t really a skewed understanding of what markets are all about.
Those who invoke free markets also tout Adam Smith as the patron saint of free and unfettered markets. If they only read Smith, they would know all too well that markets are not about the unfettered pursuit of self-interests or selfish interests even if that pursuit causes harm to others. And if they only read Smith, they would understand that Smith’s political economy was really about creating a just moral order. Yes, Smith assumes that government interference in the market could foul things up, but he was specifically responding to the heavy hand of mercantilism, especially with regards to England’s relationship to its colonies. But Smith also assumes that individual behavior unchecked will lead to the tyranny of irrational passion over reason.
The regulator, or course, would be the market place and its invisible hand. Through competition in the marketplace, individuals would pursue their self-interests based on their own rational decisions of how best to achieve a good life. With true competition, producers would not exploit consumers because the invisible hand would effectively punish those who tried. After all, we would simply buy from the competitor. Smith even talks about the need for government to ensure competition by breaking up monopoly when necessary. Why? Because monopolies distort markets by effectively taking advantage of and exploiting those with less power then them.
Big corporations that crowd out smaller mom and pop operations means that consumers over time will be restricted in their ability to make free choices. The absence of competition because of these types of monopolies mean that consumers don’t really have the freedom in markets that Smith wanted them to have. These same types of monopolies also mean that workers don’t have the ability to bargain over wage rates because there is no real competition between employers to purchase workers’ labor services. In fact, large corporations like Walmart often use their market power — monopoly power — to dictate wage rates to their suppliers. Remember because the small mom and pop shops have been driven out of business, big sellers who are often the primary sellers of goods are in a position to dictate terms to suppliers. Otherwise, their goods don’t get sold.
The problem, however, is that to talk about these monopolies and markets in the same breath is really a contradiction in terms. Letting corporations exploit consumers and workers is not about free markets, but markets out of control. Smith recognized that employers would collude with one another to drive down wage rates. In so doing, he was tacitly acknowledging that employers possessed superior market power to set wage rates and that workers, unless they possessed some unusual skills or talents, really did not have the ability to freely negotiate their wages. He even states in The Wealth of Nations that it is reasonable to assume that workers will organize themselves into unions in order to attain a measure of monopoly power to counteract the monopoly power of employers.
All of this, then, returns us to the meaning of markets. A market is nothing but an institutional setting in which individuals and/or groups can engage in transactions, i.e. purchase and sell goods and services. But it is also a legal framework where rules of fair play are established and enforced. In order to have a market, Smith understood that government would be needed to facilitate market operations. Government would be necessary to maintain an infrastructure — then roads, bridges and seaports and now roads, bridges, seaports, airports, train lines, and mass communication networks — that facilitate transactions.
Government would also be needed for the administration of justice. One cannot sell what one does not own. Therefore property rights have to be protected and contracts enforced, and this requires government to maintain courts. To this we would add the maintenance of an educational system so that individuals can be taught the necessary skills to function effectively in the market place
So what, then, is the meaning of markets? Markets are about cooperation. Through markets we work together to achieve socially optimal outcomes. For Smith, the invisible hand of competition in the market place would lead to an opulent society in which all could prosper. But this meant that government would have to break up monopolies in order to prevent the type of exploitation that comes with the absence of competition.
Therefore, it should follow that if markets are about cooperation then it is also necessary for government to enforce fair labor laws, including the maintenance of a good minimum wage, in order to prevent the exploitation of workers. It doesn’t take rocket science to figure out that if workers aren’t paid liveable wages that enable them to purchase goods and services, then nobody really prospers because the economy will only contract. If a real market is about cooperation so that we can all work together to obtain socially optimal outcomes, then workers have to be part of that equation too. In other words, real markets are not only about producers and managers, they are about everybody. They need to be inclusive and that requires maintaining labor market institutions.