KFishner

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Bi-Partisan Markets

Posted on April 5, 2012 | Leave a comment

Milton Friedman purports in Capitalism and Freedom that the free market allows the individual to express her individual desires, while the democratic system forces conformity.

“From this standpoint, the role of the market, as already noted, is that it permits unanimity without conformity; that it is a system of effectively proportional representation. On the other hand, the characteristic feature of action through explicitly political channels is that it tends to require or to enforce substantial conformity. The typical issue must be decides “yes” or “no”; at most, provision can be made for a fairly limited number of alternatives. Even the use of proportional representation in its explicitly political form does not alter this conclusion. The number of separate groups that can in fact be represented is narrowly limited, enormously so by comparison with the proportional representation of the market.”

Although Friedman argues for the benefits of proportional representation in the market, the economic system can potentially arrive at a similar conclusion as the political system. Consider the situation of the carbonated soda market, where advertising similarly enforces substantial conformity by raising the barriers to entry. Coke and Pepsi hold over 70% of the market share.[1] This sounds dangerously similar to the current political landscape in the United States, with Republicans and Democrats holding over 60% of the “voter market share.” 36% of registered voters are Democrats and 27% are registered Republicans.[2] The competitive landscape is actually slanted more in favor of Coke and Pepsi than our often-criticized bi-partisan political system.

The point that Friedman is trying to make is that 49.9% of the country may be forced to conform to a political situation to which they are opposed. Obviously, if Coke has a majority market share, you are not forced to consume only Coke. However, Friedman argues that the free market constitutes a system of proportional representation, but that is not consistent in the Coke/Pepsi situation. Due to wide awareness of Coke as a result of advertising expenditure, the consumer has a higher subconscious disposition to purchase Coke. It is not the result of actual product preference, but rather brand preference. Even if a company launches a cola competitor to Coke that is a healthier alternative with the exact taste, it will likely fail due to consumer’s requisite knowledge of the Coke brand. Essentially, a consumer purchasing RC Cola has the same effect of a citizen voting for the green party. The consumer is forced to conform to an economic situation in which they potentially are opposed, but is unable to view or obtain alternatives due to Coke’s stranglehold on the market.

One could argue that the consumer is not truly forced to consume Coke; she could simply purchase RC Cola in the supermarket. However, what about the situations in stadiums, theaters, or restaurants where there is only one option? These venue providers will rationally select the most prominent brand in order to appease the most consumers, and thus select Coke. But this leaves the consumer with a ‘yes’ or ‘no’ choice in those certain environments; the exact situation in which Friedman condemns. Thus, while liberal economists criticize the conformity in politics and espouse the virtues of the competitive marketplace, both systems are equally susceptible to the concentration of power.

[1]Esterl, Mike. “Pepsi Thirsty for a Comeback.” Wall Street Journal, 18 Mar. 2011. Web. <http://online.wsj.com/article/SB10001424052748703818204576206653259805970.html>

[2] “Fewer Voters Identify as Republicans.” Pew Research Center. 20 Mar. 2008. Web. 04 Apr. 2012. <http://pewresearch.org/pubs/773/fewer-voters-identify-as-republicans>.

Incentives and Rules: Constraints on Individual Autonomy

Posted on February 22, 2012 | Leave a comment

Posted by KevinJ

In adversarial institutions there are always “rules of the game.” In fact, these rules largely define the institution itself. If you play a game that looks sort of like baseball, but has four strikes and three balls, you are not playing baseball. In adversarial ethics we care about both how to design and evaluate the best rules; and also about what obligations “players” in that institution might have over and above those spelled out in the rules.

But surely there are many different kinds and categories of rules, and we could sharpen our normative theories by distinguishing some of them. Does it matter, for example, whether rules dictate what actors must do or must not do, on the one hand, or whether the rules are structured through the use of incentives to do or refrain from doing certain things, on the other? In a brand new book entitled Strings Attached: Untangling the Ethics of Incentives, Ruth Grant (professor of political science at Duke University) challenges a number of our standard assumptions about the use of incentives in public policy about markets and other domains.

It is commonly assumed, for example, that incentives leave the decision-maker with a free, or autonomous, choice between several options. Of course, even if all autonomous choices are voluntary, not all voluntary choices are autonomous. When given the choice between your wallet or your life, you voluntarily decide to hand over your wallet. But was the choice was not made autonomously.

The same argument could be made for properly created incentives; they place the player in a situation where only one choice is rational. The player voluntarily selects the rational choice, but may not be as autonomous as we would like to believe. Ruth argues that “Incentives ‘strictly speaking’ are a particular kind of offer: (1) An extrinsic benefit or a bonus that is neither the natural or automatic consequence of an action nor a deserved reward or compensation; (2) A discrete prompt expected to elicit a particular response; and (3) An offer intentionally designed to alter the status quo by motivating a person to choose differently than he or she would be likely to choose in its absence.” With each of these qualities, decisions are reached that are not “natural” to the individual.

The upshot: the use of incentives to get someone to do something they didn’t want to do may not be as innocent or uncoercive as we generally assume.

But how do incentives within institutions differ from other kinds of rules and regulations? They both adjust the balance of the costs and benefits of a particular choice and aim to alter an actor’s course of action. Incentives and other regulations may lead to the same end-result — but do incentives do this in a way that is less coercive or more voluntary? Ruth’s answer is: it depends! She looks at a wide variety of incentives used in public policy, and we have different “gut” reactions that are often confirmed by closer ethical analysis. Some we feel perfectly free to take or leave (say, an incentive to file tax returns on time) and some (say, a plea offer to a risk-averse and poor accused man who is in fact innocent) can feel coercive, exploitative, or like abuses of power or authority.

I can’t induce you to read Grant’s thought-provoking and highly readable new book. But I’m pretty sure you will never again assume that incentives are necessarily more freedom-enhancing alternatives to other forms of regulation and rules.