Economy & Business

Why Free Markets?

Passengers sit inside JetBlue’s Terminal 5 at JFK Airport in New York. (Reuters photo: Joshua Lott)
‘Markets work,’ say conservatives, but why and how?

I’ve been thinking a lot about infrastructure the past couple of weeks, mainly about airports and seaports and the ways in which they are (or fail to be) integrated into our cities and factories. Infrastructure is, among other things, what many people imagine to be the dividing line between things done by free enterprise and things done by the government: Businesses build the factories and produce the widgets, and government builds the highways, utilities, and other infrastructure that make it possible to move products, raw materials, and workers around to make that all happen.

That line gets blurry pretty quickly. The Constitution charges the federal government with building postal roads — for many years, lines of physical transit and lines of communication were practically synonymous (the term “communicating rooms” lives on in some of the more old-fashioned quarters of the hotel business) — but the first paved intercity road in the United States was a privately built, for-profit toll road, the Lancaster Turnpike, which remains in use to this day. The Port of Los Angeles was begun in earnest by Phineas Banning, who owned a stagecoach line and later built the first railroad connecting San Pedro with Los Angeles, and much important work on the facility was undertaken by private firms such as Southern Pacific Railroad. (The railroad’s communication subsidiary, the Southern Pacific Railroad Internal Networking Telephony Co. — Sprint — remains in business today.) But much of the most consequential work done at the port beginning in the early 20th century was undertaken by the federal government. The New York City subways began as private competing lines before they were reorganized into a government monopoly.

But who will build the roads?” That’s an old libertarian joke about the habitual response to the idea that we can rely on free markets for critical infrastructure. But what’s with the free-market fetish, anyway? Why is it that libertarians and free-market conservatives are always going on about the wonders of the market? Many people who have had interactions with credit-card companies, cable providers, or airlines are considerably less enthused about free markets. Why entrust our critical national infrastructure — or education, or health care, or anything important — to the same process that produced Comcast and Spirit Air? Free-market enthusiasts may respond that the same process produced the iPhone and Amazon, at which point things often break down into a not especially fruitful discussion of the relative importance of the private and public sector in the creation of the modern Internet.

The “why” of free markets is the same as the “how”—in short: brainpower.

People have problems. For a couple of hundred thousand years, the main ones were finding things to eat and finding ways to keep from being eaten. Yes, Comcast and Apple, Whole Foods and Walmart, Coca-Cola and those $36.99 bottles of “raw water” that Silicon Valley types with too much money are shelling out for all are the products of the same consumer-driven capitalism — but, love it or hate it, most of our ancestors would have considered themselves rich beyond imagining if they came into ownership of the contents of a 7-Eleven. Life before capitalism was solitary, poor, nasty, brutish, short, and lacking in avocado toast.

But we still have problems. People make a moral case for free markets — that people have a moral right to be left free to pursue their own interests as they see fit — and there’s something to that, but it’s easy to make too much of the moral case, too. The case for free markets is mostly instrumental: The possibility of profit causes people to self-organize in such a way as to focus the maximum human attention on solving the problems that people care the most about. Notice there is no should in that sentence: People in the communication business wryly observe that every major advance in communication technology in the past hundred years has been driven at least in part by pornography. That’s a joke, but it isn’t just a joke. There’s what people want, and what you or I think or Senator Snout thinks people should want. They aren’t the same thing. If you want to figure out what people think they should want, give them a survey. If you want to figure out what people actually do want, try selling them something. Vast amounts of capital — including human intelligence, the most valuable of all resources — have gone into making food plentiful, automobiles safer and more reliable, housing more affordable and more comfortable . . . and reality-television shows, artificial-intelligence–enabled face-swapping porn, the Super Bowl, and any number of things that do not strike me as obviously valuable. People value what they value.

It’s a neat trick, and it works. What’s interesting is that it actually is getting more effective. For years, big, profitable firms such as Ford and IBM have thrown off enough profits to invest in sideline projects with no immediate short-term commercial application, but now American technology firms such as Alphabet (which is what they expect us to call Google now) can do that sort of thing on a truly unprecedented scale. When Elon Musk dreamed up his hyperloop, he decided he didn’t have time to run a hyperloop company on top of running a car company, a solar-power company, and a space-exploration company, so he just threw his work out there and invited the geniuses of the world to join in and make of it what they could. (Spare me the emails about how Musk’s various enterprises have benefited from government subsidies and hence do not constitute “pure” free-market action. We’re talking about how the world actually works here, not about some sophomoric attempt at moral philosophy.) Now, there are several firms and more casual projects dedicated to solving, one by one, the engineering challenges associated with the concept.

Sometimes, somebody decides that some intelligence should be directed at a problem so far removed from the prospect of profit that it is ignored by free-market actors. Those aren’t unimportant problems, necessarily. Some of them have to do with what economists call “public goods” — which is not synonymous with “stuff that’s good for the public” or “stuff the public thinks is good and wants” — which are for various reasons hard to package and sell for a profit. Public goods are, as the economists put it, “non-excludable in consumption,” meaning that you can’t build a missile-defense system over San Francisco that protects only paying customers from North Korean nukes: Either you have it or you don’t. Public goods also are “non-rivalrous in consumption,” as in the case of a street light whose light isn’t used up for the next guy because it illuminated the sidewalk for you. It’s hard to charge people direct prices for goods that are non-rivalrous and non-excludable, but of course the real world is complex: The guys who first built the Lancaster Turnpike could keep non-payers off the road, but the sidewalks, the paved streets of a city, and the interstate highway system are in some ways more valuable because they are mainly free at the point of use. There are both private and public parks, but public parks serve a different civic function than do private ones — and the existence of one does not tell us very much about the usefulness or desirability of the other.

There are useful ways to focus intelligence on problems outside of market competition. A great many scientists and other big thinkers are not natural entrepreneurs, and they often are most interested in working on problems that do not have immediate commercial applications. They may not be looking to become billionaires, but they do value prestige. (And the little bit of money that comes with a Nobel Prize or a MacArthur grant doesn’t hurt, either.) Musk has made use of that from time to time, holding contests for student engineers related to SpaceX and hyperloop challenges. The John Bates Clark Medal in economics, the Pritzker Prize in architecture, the Man Booker prizes in literature all work to incentivize the application of creative intelligence beyond the profit motive as such.

In some ways, that’s the easy part. In his recent hyperloop conspectus in Wired, Alex Davies writes: “The tubes and pods should be easy enough to build, but making hyperloop a reality takes more than a few good engineers and a small fortune or two. It will require a whole lot of legal maneuvering, regulatory wrestling, and a massive amount of political will and public buy-in. Infrastructure, you should know, is hard.” That’s all true, and too often those of us in the free-market camp lament that legal maneuvering and regulatory wrestling, all that wrangling of political will, as nothing more than a burden, a series of hoops that lesser men set up for the pleasure of watching greater men being obliged to jump through them. But if you think building a hyperloop is hard with the law, try building one without it. Not that our only choice is between the regulatory state as currently constituted and Rothbardian anarcho-capitalism — there’s a lot of room for reform short of abolishing regulation categorically. But there is a kind of distilled intelligence in the law, too, and in regulation, imperfect as it may be. These are the result of experience — the intelligence of the current moment is not the only intelligence from which we may derive benefit. Our political institutions need our careful attention, not our fruitless hostility.

What’s most needed, especially in the matter of infrastructure, is a better and more enlightened understanding of which kind of intelligence-focusing tool to use for which challenge. For instance, our airport authorities are defective, impotent, and corrupt. Privatizing the airports could bring market competition to bear on the ongoing problems related to airport failures — especially in places such as southern California and greater New York City, which are served by multiple airports. Replacing the current old-fashioned system of assigning landing and takeoff slots to airlines with an auction system would also bring competitive forces to bear. Current Republican plans to reform air-traffic control (reorganizing the service in a private, nonprofit corporation) probably would not bring anything in the way of competition, but might provide opportunities to streamline management and encourage innovation. Does that mean abolishing the FAA? Of course not. No more than the existence of privately managed turnpikes implies the wholesale abandonment of the concept of public roads. Getting passengers onto airplanes in a timely fashion is a job for free-market competition. Keeping terrorists off them is the sort of thing we traditionally have entrusted to government, with good reason.

Much of our discussion of these matters is distorted by public-sector/private-sector turf-war-by-proxy. The Democrats see the public sector and its employees simultaneously as client and patron, and they are not entirely wrong to do so. Anything that reduces the scope of the public sector — especially reforms that introduce competition where there had been monopolies — is seen by the Democrats as an assault on their political interests. There’s an ideological component, but it’s mostly naked self-interest: Nobody really believes the Cleveland public schools are worth a damn, but the only kind of reform Democrats will support is “reform” that gives their allies more money and power and less accountability. Republicans take roughly the opposite view: They see public-sector employees, and especially their unions, as enemies, and sometimes take the opportunity to poke them in the eye even when doing so does not serve the public interest. Like most disputes in politics, it comes down to tribalism: a philosophy of Government Can Do No Wrong contesting with a philosophy of Government Can Do No Right.

What I know about this for sure is that New York is a very different city when the subways are working, a happier and better and more productive one. I know that Hurricane Katrina was as much a political failure as a natural disaster, that the Long Island Railroad is a goat rodeo, and that I think Elon Musk probably has better ideas about how to turn this sort of thing around than Peter DeFazio probably does.

There’s a lot more to this than fixing potholes and doling out federal grants. But we’re talking about fixing potholes and doling out federal grants. Time for a different approach.

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