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date: 27 June 2019

The Free Market

Summary and Keywords

Market-based economies outperform the alternative forms of economic organization on almost every measure. Nevertheless, this leaves open what the optimal degree of government regulation, government-provided social insurance, and macroeconomic adjustment is. Most economists seem to favor mostly, but not completely, free markets. Although regulation can in principle correct certain market failures, whether it will do so in practice depends in part on how pervasive and damaging corresponding government failures will be.

Philosophers, unlike economists, tend to think that questions about the value of the free market are not settled entirely by examining how well free markets function. Some philosophers even claim that markets are intrinsically unjust. In their view, markets encourage wrongful exploitation, lead to excessive economic inequality, and tend to induce people to treat each other in inhumane ways.

Among those philosophers who are more sanguine about markets, one major question concerns the moral status of economic liberty. Some philosophers, such as John Rawls, hold that economic liberty is purely of instrumental value. Citizens should be granted a significant degree of economic freedom only because this turns out, empirically, to produce good consequences. However, other philosophers, such as Robert Nozick and John Tomasi, argue that economic freedom is valuable in part for the same reasons that civil and political liberties are valuable—as a necessary means to respect citizens’ autonomy.

Keywords: markets, socialism, economic freedom, regulation, market failure, government failure, capitalism, liberty, business ethics, exploitation

The 20th century witnessed a kind of informal competition between two basic modes of economic organization. Citizens in what were fundamentally market-based economies, such as Switzerland, Denmark, Australia, South Korea, Canada, Singapore, Hong Kong, or the United States, became rich. As of 2015, a person living at the American “poverty line” is among the top 15% of income earners alive today (Milanovic, 2007). The United States by itself in 2014, despite having a somewhat anemic economy, produced approximately 50% more than the entire world’s economic output in 1950, and close to 80 times the entire world’s economic output in 1000 AD (Schmidtz & Brennan, 2010, p. 122). In contrast, the citizens of the socialist, centrally planned economies, such as the USSR, Cambodia, China, North Korea, and Cuba, remained poor. Overall, market economies greatly outperform the known alternatives. Economists agree that that open markets and the strong protection of private property are essential requirements of sustained economic development (Acemoglu & Robinson, 2012).

For most economists, political scientists, and philosophers, the debate is thus no longer whether to have a market-based economy, but which kind of market economy to have. That question breaks down into a number of subordinate questions, including:

  1. 1. What sorts of property-rights regimes and background legal institutions produce the best forms of the market?

  2. 2. How much should governments intervene in and regulate the market?

  3. 3. How much should governments provide social insurance or other welfare programs to protect or insulate citizens from misfortune on the market?

The question of whether or to what extent a polity ought to have free markets largely concerns question 2.

Defenders and critics of free markets often treat questions 2 and 3 alike, and that often leads to ideological confusion. For instance, many Americans refer to Denmark or Norway as “socialist” countries, but the Canadian Fraser Institute, in its annual index of economic freedom, generally ranks these countries as having the same or even higher economic freedom than Canada or the United States. They are better described as free market welfare states than as socialist societies.

This article first considers the conceptual question of what a free market is. The “free market” is a cluster concept; markets are free to the extent they realize a set of related properties, such as robust protection for property rights, sound money, a relative lack of government interference or control, and widespread decentralization of economic decision-making. Second, this article reviews the economic debate concerning just how free markets ought to be. While most economists are relatively in favor of free markets, compared to the lay public, most also think well-functioning markets require some regulation and macroeconomic adjustments. Third, this article reviews some of the principle arguments philosophers have made in the past 50 years regarding whether free markets are just or unjust, and whether citizens have basic rights to capitalist economic liberties.

The Concept of the Free Market

The basic mode of interaction among participants in a market is trade. Generally, two trading partners trade because they each value what the other partner trades more than what they will trade for it. This leads to “gains from trade”: they both profit from the trade.

A market economy is, in general, an economy in which economic planning is widely dispersed and decentralized. In market economies, there is no central planner or central bureau “in charge” of what the economy does. Instead, countless individual consumers, workers, households, firms, and other decision-makers make plans on what to buy, what not to buy, how to invest, how much to save, and so on, for themselves, in light of their goals, the information they have, and incentives they face (Mankiw, 2014, p. 10).

The concept of a “free market” is a cluster concept. There are no clear necessary and sufficient conditions for a market being “free.” Instead, the concept is defined in terms of a list of features; a market is free to the degree it realizes various features on this list. These features include (Gwartney, Lawson, & Hall, 2014, p. 4):

  1. 1. Decentralization and privatization: A market is free to the extent that decision-making remains in the hands of individual agents, without control or interference from central authorities. In free markets, most or all enterprises are privately owned, by individuals, partnerships, cooperatives, or stockholders, rather than by the state.

  2. 2. Stable property rights and the rule of law: Free markets have stable, public, widely known and shared codes of law that codify and formalize property rights. Property rights are respected and stable; both governmental and nongovernmental agents recognize others’ property rights and rarely interfere with or override them. Owners do not expect their private property to be seized by the government.

  3. 3. Free trade: In free markets, agents are permitted to trade across intrastate and interstate boundaries at will, without facing punitive tariffs, quotas, or restrictions. Agents may not only purchase goods and services across borders, but are themselves free to emigrate in search of better work prospects.

  4. 4. Non-regulation: The state imposes minimal barriers to entry in starting or stopping a business, or in hiring or firing workers. The state does not attempt to control or set prices, including the price of labor, nor does it mandate the terms of workers’ contracts or of work. Businesses face minimal regulations in their daily operations, are not expected to pay exorbitant fees (or, in corrupt states, bribes) to begin and continue operating. The government may set some broad terms or rules under which commerce takes place, but it does not closely monitor and control every aspect of a trade.

Some advocates of the free market, especially libertarians and classical liberals, also oppose government-mandated and tax-funded welfare states. For conceptual clarity, though, we should distinguish the administrative state—which tries to control, regulate, manipulate, and manage the economy—from the social insurance state—which provides tax-financed education, healthcare, and unemployment insurance. The administrative state directly limits and interferes with individual’s economic freedom. (This is merely a conceptual claim; whether it is right to do so is a substantive question). A social insurance state may impose high taxes, which can reduce some individuals’ ability to achieve their ends (though tax-funded welfare may help other individuals’ achieve theirs). But the administrative state directly restricts individuals’ choices and/or imposes various rules limiting the terms of voluntary trade. Thus, the administrative state is more directly at odds with the free market than the social insurance state.

Each year, the Fraser Institute, a Canadian free-market think tank, employs academic economists to produce the Economic Freedom of the World Report, which measures the degree to which various countries realize or depart from free market economics. In the 2014 rankings, no countries qualify as a completely free market. However, the 10 most free market countries are, in order, Hong Kong, Singapore, New Zealand, Switzerland, Mauritius, the United Arab Emirates, Canada, Australia, Jordan, and (tied for 10th place) Chile and Finland. Germany, the Nordic countries, the United Kingdom, and the United States are each in the top quartile (Gwartney et al., 2014).

The Wall Street Journal, together with the Heritage Institute, an American conservative think tank, produces a similar Index of Economic Freedom (Heritage Institute, 2014). It’s top 10 include, in order, Hong Kong, Singapore, New Zealand, Australia, Switzerland, Canada, Chile, Estonia, Ireland, and Mauritius.

Both sets of rankings penalize countries for having large welfare states. However, suppose one instead takes seriously the idea that the administrative state more strongly conflicts with free markets than the social insurance state.

On both the Economic Freedom of the World Report and the Index of Economic Freedom, many European countries beat the supposedly free market United States on almost every measure. For instance, Denmark ranks much higher than the United States on property rights, freedom from corruption, business freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. Luxembourg, the Netherlands, the United Kingdom, and many other countries beat the United States on these measures as well. Indeed, neither ranking puts the United States in the top 10, despite its reputation for favoring free markets.

Consequentialism and Economic Theory

Economist Douglas North (1990, p. 3) defines institutions as “the rules of the game in a society or, more formally, [they] are the humanly devised constraints that shape human interaction.” Philosophers, economists, and political scientists spend much of their time debating which institutions are best under various conditions. Economic theory tends to focus on the consequences of various institutions, in particular, how institutions affect human welfare. Especially, economists tend to ask how different institutional changes might be Pareto superior, that is, might improve at least one person’s welfare without making anyone worse off.

Most contemporary economists do not advocate complete laissez-faire capitalism. However, they agree that it’s not merely a historical accident that the most successful economies, with the highest standards of living, including for the relatively poor, lie almost entirely within the top (most free market) quartile in both the Fraser Institute and Heritage Institute/Wall Street Journal rankings (Acemoglu & Robinson, 2012). Average income per capita in the top 25% most free countries is twice as high as in the next quartile, and about six times higher than the least free quartile (Gwartney et al., 2014, p. 21). The income share, as well as the absolute level of income, of the poorest 10%, before any welfare payments or transfers, is higher in the freest quartile than in the less free quartiles. For instance, the average income earner at the 10th percentile of income in the top quartile most free market economies earns about $11,610 (before receiving any welfare payments), which, even after adjusting for purchasing price parity, places that worker in the top 15% of income earners worldwide (Gwartney et al., 2014, p. 22).

The Price System Versus Central Planning

The central problem, in economics, is how to arrange limited and scarce resources (including time, effort, and skill) to satisfy people’s nearly infinite wants. The two basic purported solutions to this problem are the price system and central planning.

Every economic system needs three things to function. First, the system needs information—it needs some way to coordinate people’s actions, to convey to people what they need to do in light of what others are doing. Second, it needs incentives—it needs some way to induce people to act on the information they receive. Third, because people make mistakes, it needs learning—a process by which people become better at responding to incentives and information.

Central planning fails because it faces a “calculation” or “knowledge” problem. In large-scale societies, it is close to impossible to make sound economic calculations without market prices or a good substitute for market prices. Market prices are instead a function of supply and demand. Prices convey information about the relative scarcity of goods in light of the effective demand for those goods. Market prices thus tell producers and consumers how to adjust their behavior to other people’s wants and needs. Socialism dispenses with the market economy and thus with market prices. But no one can run an economy without information. Socialism thus needs some substitute for market prices. According to the calculation problem, large-scale socialist planning cannot work, even if everyone were motivated to make it work, because planners do not have a workable substitute for prices. The problem of planning an economy is too hard (Hayek, 1945).

Because central planning cannot work on a large scale, economists conclude that large-scale economies must be fundamentally based on the market. Even contemporary socialists usually concede this point (Cohen, 2008). They do not advocate central planning, but instead a system of workers’ cooperatives that buy, trade, and sell with other cooperatives on the market, with the state using tax-and-transfer to equalize incomes (Roemer, Wright, Buroway, Cohen, & Rogers, 1996).

Market and Government Failure

Economists on the whole are quite pro-market, especially compared to the lay public (Caplan, 2007), but there’s still debate about how much regulation or government intervention is best. The main questions here concern how much markets tend to fail and to what degree governments are able to fix market failures.

A market failure occurs whenever markets produce a less than perfectly efficient allocation of goods and services. In the real world, few markets are perfectly efficient, and so most markets can be said to “fail” most of the time. However, some markets failures may be severe or persistent. In particular, economists worry that markets do not easily self-correct or solve for the following problems:

  1. 1. Externalities: In certain cases, such as with carbon emissions, agents can impose (“externalize”) the costs of their activities onto distant others.

  2. 2. Public goods: Certain goods, such as military protection, or perhaps even the general protection of private property institutions, may be non-rivalrous and non-excludable. Providing the good for one person tends to mean providing it for all. Markets might under-provide such goods.

  3. 3. Paternalism and information problems: There may be certain cases where rational consumers could not be expected to have access to the information needed to make decisions that serve their self-interest.

  4. 4. Macroeconomic adjustments: It may turn out that to stabilize the economy, or to reduce the severity and frequency of recessions, governments need to control and regulate the money supply, the interest rates, and rates of inflation, and to engage in “fiscal policy” (i.e., adjust their spending and tax rates to stimulate the economy).

However, just as markets can fail, so can governments. It is one thing to claim that in principle, a well-informed, properly motivated, competent government agency could fix a market failure. It is another to assume that actual government agents, staffed by real human beings with ends of their own, will do so. For that reason, economists balance worries about market failure with worries about government failure. A government failure occurs whenever government produces inefficient allocation of goods and services. In the real world, most governments are not perfectly efficient, and so all governments “fail” all the time. However, some government failures are severe, including these:

  1. 1. Rent seeking and cronyism: When governments have the power to regulate the economy, interest groups, corporations, and others frequently compete to capture such power for their own ends. Governments often manipulate the legal and regulatory environment to favor some economic agents over others, often in net socially destructive ways. For instance, most contemporary democracies funnel a large amount of money toward farm subsidies, even though economists almost uniformly oppose such subsides.

  2. 2. Overregulation: Governments often fail to subject their regulations to cost-benefit analysis, and so impose regulations that do more net harm than good.

  3. 3. Mis-regulation and misallocation: More broadly, governments might misread macroeconomic indicators or make broadly incompetent decisions, causing more harm than good.

  4. 4. Information problems: Without the price mechanism as a means of commensurating government inputs with government outputs, governments have a difficult time determining whether their actions are worth the cost.

The degree to which a contemporary economist favors free or regulated markets depends in large part on how they balance government failures against market failures, and government successes against market successes.

Justice as Fairness and the Free Market

The dominant theory of justice in contemporary political philosophy is John Rawls’s “justice as fairness,” as defended in Rawls (1971). Rawls sees the economists’ criterion of Pareto efficiency as underdetermining which institutions are best; further, he thinks that governments may sometimes intervene in markets even when there is no market failure. Consider an initial distribution of income, in which everyone has five income units. Now suppose we can adopt either (a) a set of institutions that will lead to half the people having 10 income units and the other half having 100 income units, or (b) a set of institutions that leads to half the people having 20 income units, while the others have 40 incomes units. Moving from the initial distribution to either (a) or (b) is Pareto superior, but, Rawls thinks, there may be moral reasons to prefer one to the other.

Rawls holds that the correct principles of justice are whatever principles fully rational parties would agree to under a fair and equal bargaining procedure. Rawls (1971, p. 60) ultimately argues that such parties would accept two basic principles of justice:

  1. 1. Each person will be guaranteed an equal set of basic liberties compatible with like liberties for all.

  2. 2. Social and economic inequalities are to be arranged so that they are (a) to the greatest advantage of the least advantaged and (b) attached to offices open to all under conditions of fair equality of opportunity.

These are meant to be abstract principles to be used in judging what Rawls calls the “basic structure” of society, that is, its fundamental institutions, such as private property, the rules governing the family, money, and government.

The Institutional Requirements of Justice as Fairness

Rawls himself attempts to answer the question of which institutions best realize justice as fairness. He recognizes that the answer depends in large part on the facts about how institutions actually function. It also depends on the level of analysis. One might ask which institutions would best realize justice as fairness if human beings were perfectly moral and had an unflinching commitment to justice. One might instead ask which institutions best realize Rawls’s principles given that real human beings have imperfect moral motivation, and, in particular, what they are motivated to do depends in large part on the incentives the background institutions create. There’s little reason to assume that the institutions best in ideal conditions (in which there are no compliance problems) would be the same the institution best in realistic conditions (in which there are).

Unfortunately, Rawls (2001, pp. 136–138) himself seems to mix these two levels of analysis, and so his own institutional recommendations are unhelpful. For instance, Rawls advocates a type of mixed market economy called “property-owning democracy,” which allows for significant government regulations, and which has in place various government agencies that attempt to ensure that ownership of capital goods is widespread rather than concentrated. Rawls recognizes that in the real world, with real people, the social insurance, redistributive, and regulatory institutions he favors would lead to at least some moral hazard and rent seeking. A policy is said to cause “moral hazard” when it induces people to take more risks or make dumb choices, because the policy allows these people to externalize the costs of their decisions onto others. So, for instance, welfare state policies encourage at least some people not to save enough, to have children out of wedlock, and be unemployed instead of taking a job. “Rent seeking,” again, refers to when corporations, unions, or special interest groups lobby the government to manipulate the legal or regulatory environment in their favor.

No one (or at least no serious person) denies that in the real world, welfare states and government intervention into the economy encourage at least some moral hazard and rent seeking. Instead, as discussed above, the informed debate is over just how bad these problems will be, and whether the benefits of certain aspects of the welfare state and government intervention outweigh the costs. However, when Rawls theorizes about his own favored economic system, he dismisses these concerns. He (Rawls, 2001, p. 137) claims that he is doing “ideal theory,” in which we imagine people have a perfect sense of justice, and is thus imagining a world without moral hazard or rent seeking.

However, when Rawls then claims that laissez faire or free market capitalism cannot satisfy justice as fairness, because it might allow citizens with great wealth to buy government power for their own ends. But, by Rawls’s (2001, p. 136) own stipulations, he was supposed to be evaluating institutions in ideal conditions, in which citizens are stipulated to have a perfect sense of justice. By Rawls’s own hypothesis, buying power is unjust, and thus, if citizens had a perfect sense of justice, they would not buy government power for their own selfish ends, since by hypothesis this is unjust.

Thus, Rawls’s attempts to determine which institutions satisfy his theory are unsuccessful, as Rawls and his followers jump between levels of analysis in ad hoc ways. Thus, it remains an open question, if Rawls’s theory of justice is correct, to what degree would it allow for or even require free markets under ideal conditions, or in realistic conditions?

Are Economic Liberties “Basic”?

Rawls’s first principle of justice—the Liberty Principle—requires that each citizen be imbued with a “fully adequate” set of basic rights and liberties (Rawls, 1996, pp. 5–6). In other, stronger formulations of that principle, Rawls says that each citizen must be imbued with the most extensive set of basic liberties compatible with like liberty for all.

Rawls holds that such rights cannot usually be trumped for consequentialist reasons. For instance, suppose forbidding citizens from being Protestant somehow lead to greater equality of opportunity. Rawls would still claim that citizens have the right to join Protestant churches.

Rawls ultimately advocates a market economy with a moderate degree of economic freedom, but does so entirely for instrumentalist reasons. For Rawls, markets are a useful means to realize his second principle of justice, but nothing more. In Rawls’s theory, there is not fundamental right to participate in and trade within a free market economy. In contrast, Rawls believes that citizens are owed other rights, such as the freedom of religion, free speech, or the right to vote in democratic elections, as a matter of respect. While Rawls would not advocate that we restrict religious freedom in order to produce greater equality of opportunity, he would advocate restricting economic freedom for that reason (assuming, of course, that such restrictions actually succeed).

In contrast, libertarians and classical generally hold that economic liberties should be considered on par with civil liberties. They agree with Rawls that markets produce good consequences, including for the least advantaged. But they also think people are entitled to economic freedom for the same reasons they are entitled to choose their own religion.

In Rawls’s theory, the test for whether something counts as a basic liberty is whether it properly connected what Rawls calls our “two moral powers” (1) a capacity to develop a sense of the good life, and (2) a capacity for a sense of justice. Samuel Freeman (2007, p. 55), perhaps the most important interpreter of Rawls, claims that the connection between the basic liberties and the moral powers as follows:

What makes a liberty basic for Rawls is that it is an essential social condition for the adequate development and full exercise of the two powers of moral personality over a complete life.

Freeman clarifies that liberty is basic only if it is necessary for all citizens to have that liberty in order to develop the two moral powers. Since Freeman accepts this view, let’s call this the Rawls-Freeman test of basic liberty.

Philosopher John Tomasi (2012) argues that Rawls’s theory ought to treat economic and civil liberties the same. He claims that most of Rawls’s arguments for protecting civil liberties work equally well as arguments for protecting economic liberties. For instance, Rawls argues that freedom of religion is necessary for people to develop their conception of the good life, to be true to themselves and who they really are. Tomasi argues that this is also true of economic liberty. It’s not enough, for us to be authors of our own lives, that we choose whether and how to worship, but also how to conduct our economic affairs. Many citizens will not be able to realize their conceptions of the good life without having extensive economic freedom.

Freeman (2012) responds by arguing Tomasi has misunderstood the Rawls-Freeman Test. Freeman argues that perhaps it’s essential for some entrepreneur to own a store to realize her conception of the good. But, Freeman retorts, not all citizens need such capitalist liberties to lead their conceptions of the good life. For something to be a basic liberty, Freeman claims, it must be essential to every reasonable person’s capacity to develop a sense of the good life or sense of justice. Freeman says that Tomasi has at most shown us that these capitalist freedoms are essential to many people, but not to all. Thus, Freeman concludes, these capitalist liberties do not pass the Rawls-Freeman test.

However, it appears that Freeman’s argument for rejecting capitalist freedoms as basic liberties applies equally well against left-liberal freedoms. After all, Rawls and Freeman think people have a basic right to extensive freedom of speech, freedom of participation, to vote and run for office, and so on. But just as, pace Tomasi, it is not plausible that literally every single person must enjoy full capitalist freedom to develop and exercise her two moral powers, it is not plausible that literally every single person must enjoy the full menu of Rawlsian civil and political liberties to develop and exercise her two moral powers. Few countries, if any, afford citizens the full range of liberal freedoms that Rawls endorse, and yet many citizens in these illiberal countries do adequately develop and exercise their two moral powers (van der Vossen & Brennan, 2018).

Nozick: Do Left-Liberals Subtly Beg the Question?

Perhaps the second most important work of political philosophy in the past 50 years is Robert Nozick’s (1974) Anarchy, State, and Utopia. In Anarchy, State, and Utopia. Nozick argues, among other things, that the “more than minimal” state cannot be justified. Instead, at most, Nozick thinks, the state may provide law courts, police and military services, and a small number of essential public goods.

Part II of Anarchy, State, and Utopia is meant to explain why the more than minimal state is not justified. Contrary to some unsympathetic reviewers Nozick’s argument is not that the more-than-minimal state violates libertarian property rights. Rather, Nozick systematically examines and critiques various arguments other philosophers have offered for the more than minimal state; he tries to show these arguments fail on their own terms.

One of the main forms of arguments Nozick uses is to draw a parallel between some economic activity a left liberal would like the state to regulate and some non-economic activity the left-liberal would like to leave free. The left liberal offers some reason in favor of allowing the state to regulate or control the economic activity. Nozick responds that this reason to regulate economic activity appears, at first glance, to be an equally good reason to regulate non-economic activity. So, Nozick asks, on pain of consistency, shouldn’t the left-liberal advocate that the state extensively intrude into citizens’ civil liberties, for the very reason the left-liberal wants to the state to intrude into citizens’ economic liberties?

For instance, some left-liberals argue that we ought to subject market activities to extensive state control, because otherwise the market might produce significant inequalities. We cannot allow people to have full economic freedom, they claim, because then some people will have too much more than others, or some people will not have enough.

Nozick asks, if that’s a reason to limit economic freedom, why is it then not also a reason to limit freedom of association? After all, when people make free choices about whom they will associate with, befriend, have sex with, or marry, some people end up with more than others. Some have many friends or lovers and some end up alone. Nozick thinks this is analogous to the market: when free people make free choices about what kinds of economic interactions they will have with others, some will end up with more, and some with less. So, Nozick (1974, pp. 150–159) asks, if potential inequality is itself a reason to regulate free trade, why isn’t it also a reason to regulate free trade in friends. Nozick’s point is that Rawls’s complaints about inequality aren’t doing the real work here.

Or, to take another example, some left-liberals argue that we ought to subject market activities to extensive democratic control, because people ought to have a say over what affects them. But, Nozick points out, this line of reasoning—that things should be subject to democratic control because people ought to have a say over what affects them—leads to conclusions the left-liberal would not endorse. For instance, once again, our rights of free association in our personal lives affect others greatly, often more than our market decisions. But left-liberals do not then conclude that our choices about whom, among consenting adults, to befriend, love, date, marry, or avoid should be subject to democratic control.

In the end, Nozick notes that left-liberals and others give a wide range of reasons for limiting economic freedom. But they do not accept these as reasons for limiting civil freedom. This means the left-liberals are presupposing, rather than proving, that economic freedom is not on par with economic liberty. Nozick sees this as a tacit admission that they recognize their arguments do not succeed.

Gerald Cohen: Are Markets Intrinsically Repugnant?

While Nozick criticizes the Rawlsian orthodoxy from a libertarian perspective, Gerald Cohen launches his attack from the far Left. In Cohen’s eyes, Rawls and the vast majority of political philosophers are far too sanguine about markets.

Cohen (2008, 2009) claims that the problem with Rawls (and with most other political philosophers, thanks to Rawls’s influence) is that Rawls permits morally bad facts about human motivation to influence their thinking about principles of justice. According to Cohen, Rawls, Nozick, and most other political philosophers dumb down their theories of justice to accommodate people’s defective moral motivations. But if Rawls and others realized that that’s a mistake, then they would see that justice requires socialism and equality. Cohen thinks that this largely explains why people like Rawls and Nozick defend market-based economies, while Cohen defends socialism.

Cohen (2008) argues that deep down, most people are implicitly committed first, to the view that socialism is intrinsically desirable, as end in itself, and second, that market societies are intrinsically repugnant. They only reason they endorse markets, he believes, is that they presume human beings are too selfish and immoral to live under socialist institutions. It might turn out they are right about that—perhaps humans being just are too unjust to make socialism work—but even if so, that does not sanctify market relations or render them just. Rather, he argues, at most that shows that people are unwilling to live the way justice requires.

To illustrate this, Cohen relies on a thought experiment involving a camping trip. First, Cohen asks readers to imagine they are on a camping trip with friends or close loved ones. Because everyone loves each other, they share all their goods and all the burdens of maintaining the camp in an equitable way, working to ensure everyone has an equally good time, with no one freeriding on or taking advantage of others. In short, they act like socialists. Cohen then asks us to imagine that people in the camp begin acting the way they do in capitalist societies. For instance, suppose some of them refuse to work or use their superior talents or knowledge unless they get special privileges, greater comfort, or more food than the others. Cohen notes that most people would find this “capitalist camping trip” repugnant, and would prefer to go on the “socialist camping trip.”

Cohen then asks readers to consider whether it would be good if, somehow, the entire world, and all human relations, were like the camping trip. He expects that most readers will say that this is not feasible. But, Cohen asks, what make it infeasible? Cohen says that people could easily be kind, loving, and nice toward each other; they just choose not to be. It is not that people cannot live under socialist principles, but that they are choose not to do so, simply because they do not care enough about others and care too much about themselves. Cohen says that although people won’t choose to live under socialist principles, they easily could. In much the same way, we know people won’t choose to give more money to charity, but they could. Socialism does not ask more of people than they are able to do, just more than they are willing to do.

Cohen concludes that capitalism and markets are, at best, a useful “social technology” for recruiting low-grade motivations toward public beneficial ends. But if people had better motivations, as they easily could, they would dispense with capitalism and markets altogether.

Cohen Contra the Difference Principle

Cohen not only criticizes Rawlsians and others for endorsing markets, but also for their view of distributive justice. Rawls argues that inequality is permissible provided it is to the maximal advantage of the representative member of the least advantaged working class. Rawls then (on Cohen’s interpretation) argues that by rewarding people who possess extraordinary talents, entrepreneurial skills, or opportunity with higher incomes and wealth, we can incentivize them to use their talents and opportunities in productive ways, which in turn can lead to capital accumulation, which in turn can make the rest of us richer.

Cohen regards this argument as morally bogus. He says Rawls makes the fundamental mistake of allowing ignoble human motivations to constrain the content of our theories of justice. Now, when it comes to making practical policy in the real world, Cohen concurs with Rawls that if the only way to motivate people to work hard is to pay them greater than normal rewards, we might decide to allow some inequality. But, Cohen admonishes us, don’t call the resulting inequality just!

Rawls says that inequality is justified only if it is necessary to help improve everyone’s lot. But, Cohen (2009) claims, Rawls’s argument presupposes that talented people are selfish. However, Cohen argues, by definition, in a perfectly just society, everyone is committed to achieving justice. This implies that talented or lucky people would themselves affirm the view that inequality is justified only if it is necessary to improve everyone’s welfare. The talented would thus not demand greater income or resources. If they refused to work hard without getting paid extra, that would show, contrary to the hypothesis, that they were not committed to Rawls’s principles of justice. Instead, if people had good moral motivations, it seems to follow that they would be willing to work hard and use their talents for the common good without having to be bribed. Cohen thus concludes that Rawls’s Theory of Justice isn’t really a theory of justice at all, but at best a series of useful principles for governing societies full of unjust people.

Rawlsians (Stemplowska & Swift, 2012) have mostly responded to Cohen by claiming that his arguments, even if correct, concern not what justice requires, but how people would live if they transcended the circumstances of justice. As David Hume argued, the norms of justice apply only when (a) there is moderate scarcity, and (b) people are partly, but not completely, altruistic. Cohen, however, would regard this not as a principled response, but as nitpicking over the word “justice.” It leaves his main point intact: that if people were better, as they could be, they would dispense with markets.

Like to Like

Many have found that Cohen’s argument appears powerful, but it suffers from many of the same problems as Rawls’s argument about the institutional requirements of justice as fairness. Recall that Rawls jumped haphazardly between levels of philosophical theorizing. When Rawls discussed his favored institutional regime, “property-owning democracy,” he described how it would function under ideal conditions, where everyone was stipulated to possess a perfect sense of justice and to be immune to the temptation to abuse power or freeride on others’ efforts. But Rawls then said that a laissez-faire capitalist society could not realize his principles because people might use their money to abuse power. So, Rawls failed to compare like to like. He said that property-owning democracy under ideal conditions better satisfies justice as fairness than laissez-faire capitalism under realistic conditions, but this leaves open which of the two systems would be better under ideal conditions and which is better under realistic conditions.

Cohen makes a similar mistake (Brennan, 2014). In his argument, he asks us to imagine socialism not as we have seen it function in the real world, but as it would function if people all were perfectly moral. He then compares this to capitalism under realistic circumstances, in which people are not morally perfect. Although socialism under ideal conditions might be superior to capitalism under realistic conditions, this leaves open whether capitalism under ideal conditions would be on par with or perhaps even better, from a moral point of view, than socialism under ideal conditions. Similarly, it leaves open whether socialism in realistic conditions is better or worse than capitalism in realistic conditions; indeed, Cohen himself seems to admit that in realistic conditions, where people have imperfect moral motivations, capitalism functions better than socialism.

Cohen seems to assume that market societies exacerbate selfishness, greed, and callousness. On the contrary, empirical work by economists Herbert Gintis, Joseph Henrich, and others finds that people in capitalist societies tend to be significantly more altruistic, fair, and trustworthy than people in socialist or traditional societies (Henrich et al., 2001; see Brennan & Jaworski, 2016, pp. 96–103, for a summary of this literature).

Exploitation and the Free Market

The preceding discussions concern what might be called the “macro-ethics” of the market: Is the market fundamentally just or unjust, morally righteous or morally repugnant? However, many complaints about free markets concern micro-ethics, that is, whether markets tend to produce certain instances of wrongful behavior. In particular, one persistent worry in the field of business ethics is whether markets encourage wrongful exploitation. Exploitation occurs when one person takes pernicious advantage of another person’s misfortunate.

In particular, many see sweatshops as an instance of wrongful exploitation. They worry that because workers are desperate for a job, companies can take advantage of them, and offer them substandard wages.

However, as David Ricardo (2004) first noted in his 1817 Principles of Political Economy and Taxation, whether a capitalist can succeed in underpaying workers depends not on how desperate workers are, but on how competitive the market is. For instance, imagine a scenario in which there is one desperate worker but, say, 50 employers who are not desperate for laborers but who could profit from hiring a laborer. In this case, the laborer would possess all the bargaining power, as the potential employers would have to bid the price of labor up in order to compete with one another. In a scenario in which there are many workers and many employers, one would instead expect a normal, competitive market, in which laborers receive their marginal product. As economist Ben Powell (2014) notes, although Third World factory worker wages are low by First World standards, they are very high by Third World standards.

Further, part of the problem is that laborers are not able to move in search of a better deal. In the current era of globalization, capital goods, factories, and money can easily cross borders. However, poor, unskilled workers are for the most part forbidden from crossing borders in pursuit of higher wages. When economists attempt to measure the deadweight loss from restrictions on labor mobility, their mean and median estimates are approximately 100% of world product. That is, in a world of free labor mobility, world product would be approximately twice what it is today (Clemens, 2011; van der Vossen & Brennan, 2018).

Most economists are more sanguine about sweatshops than most philosophers or business ethicists. For instance, economist Jeffrey Sachs (Myerson, 1997) says, “My worry is not that there are too many sweatshops, but that there are too few.” Paul Krugman (1997) concurs: “While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.” Economists recognize that nearly all developing countries go through a sweatshop period as part of industrialization. Although sweatshops might provide bad working conditions and bad pay compared to what workers in developed countries get, they provide superior conditions and pay compared to the existing alternatives for their workers in undeveloped countries. Further, these jobs initiate the process of development, and, over time, are replaced with higher-paying, more capital-intensive forms of labor as the developing countries accumulate capital (Weil, 2009).

Conclusion: The Open Questions

Market economies outperform the alternatives on almost every measure. Still, that leaves open what the optimal degree of government regulation and macroeconomic adjustment is. Most economists seem to favor mostly, but not completely, free markets. Further, this leaves open philosophical questions about the justice of market economies. Some philosophers think that although markets deliver the goods, they are intrinsically unjust. Others think that property rights and the rights to trade at will in a market are justified purely on instrumental grounds but are not owed to citizens as a matter of respect. Still others think that markets and economic liberty are valuable not merely for instrumental reasons but for the same reasons that civil and political liberties are valuable—as a means to respect citizens’ autonomy.

Further Reading

Cowen, T. (2008). In praise of commercial culture. Cambridge, MA: Harvard University Press.Find this resource:

De Soto, H. (2000). The mystery of capital. New York, NY: Basic Books.Find this resource:

Gaus, G. (2012). Property. In D. Estlund (Ed.), The Oxford handbook of political philosophy. New York, NY: Oxford University Press.Find this resource:

Hayek, F. A. (1960). The constitution of liberty. Chicago, IL: University of Chicago Press.Find this resource:

Lomasky, L. (1987). Persons, rights, and the moral community. New York, NY: Oxford University Press.Find this resource:

McCloskey, D. (2011). Bourgeois dignity. Chicago, IL: University of Chicago Press.Find this resource:

Mueller, D. (2003). Public choice III. New York, NY: Cambridge University Press.Find this resource:

Rasmussen, D. (2008). The problems and promise of commercial society: Adam Smith’s response to Rousseau. University Park, PA: Penn State University Press.Find this resource:

Schmidtz, D. (1991). The limits of government: An essay on the public goods argument. Boulder, CO: Westview Press.Find this resource:

Schmidtz, D. (2006). Elements of justice. New York, NY: Cambridge University Press.Find this resource:

Stevenson, B., & Wolfers, J. (2008). Economic growth and subjective well-being: Reassessing the Easterlin Paradox. Brookings Papers on Economic Activity, 39(1), 1–102.Find this resource:

Zak, P. (2008). Moral markets. Princeton, NJ: Princeton University Press.Find this resource:

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Brennan, J. (2014). Why not capitalism? New York, NY: Routledge.Find this resource:

Brennan, J., & Jaworski, P. (2016). Markets without limits. New York, NY: Routledge.Find this resource:

Caplan, B. (2007). The myth of the rational voter. Princeton, NJ: Princeton University Press.Find this resource:

Clemens, M. (2011). Economics and emigration: Trillion dollar bills on the sidewalk? Journal of Economic Perspectives, 25(3), 83–106.Find this resource:

Cohen, G. A. (2008). Rescuing justice and equality. Cambridge, MA: Harvard University Press.Find this resource:

Cohen, G. A. (2009). Why not socialism? Princeton, NJ: Princeton University Press.Find this resource:

Freeman, S. (2007). Rawls. New York, NY: Routledge.Find this resource:

Freeman, S. (2012, June 13). Can economic liberties be basic liberties? Symposium on Free Market Fairness, Liberty. Bleeding Heart Libertarians.Find this resource:

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Rawls, J. (2001). Justice as fairness: A restatement. Cambridge, MA: Harvard University Press.Find this resource:

Ricardo, D. (2004). The principles of political economy and taxation. Mineola, NY: Dover.Find this resource:

Roemer, J. E., Wright, E. O., Buroway, M., Cohen, J., & Rogers, J. (Eds.). (1996). Equal shares: Making socialism work. New York, NY: Verso Books.Find this resource:

Schmidtz, D., & Brennan, J. (2010). A brief history of liberty. Oxford, U.K.: Wiley-Blackwell.Find this resource:

Stemplowska, Z., & Swift, A. (2012). Ideal and non-ideal theory. In David Estlund (Ed.), The Oxford handbook of political philosophy. New York, NY: Oxford University Press.Find this resource:

Tomasi, J. (2012). Free market fairness. Princeton, NJ: Princeton University Press.Find this resource:

Weil, D. (2009). Economic growth (2nd ed.) New York, NY: Prentice Hall.Find this resource:

Van der Vossen, B., & Brennan, J. (2018). In defense of openness. New York, NY: Oxford University Press.Find this resource: