Free markets and utility

One particularly influential critic of Smith was John Maynard Keynes. Keynes argued that government interference was necessary because there is a mismatch between aggregate supply and demand, which inevitably leads to a reduction of supply. Government, according to Keynes, can manipulate the propensity to save, which lowers aggregate demand and creates unemployment. Government can stop excess savings through its influence on interest rates, and it can influence interest rates by regulating the money supply. The superior the supply of money, the lower the rate at which it is lent. Second, government can straight away affect the amount of money households have available to them by raising or reducing taxes. Third, government expenditure can close any gap between aggregate demand and aggregate supply by taking up the loose in demand from households and businesses. Keynes' arguments became less convincing after the stagflation of the 1970s, though. It has been replaced by a post-Keynesian school of thought, which argues for even more governmental intrusion in the market.

Social Darwinists had a diverse take on the utilitarian justification for free markets. They argued that economic competition formed human progress. If governments were to interfere in this process, they would also unintentionally be impeding human growth. Weak firms must be weeded out by competition, they claim. The basic trouble underlying the views of the social Darwinist, however, is the primary normative assumption that survival of the fittest means survival of the best. That is, whatever results from the workings of nature is necessarily good. The myth, which modern authors call the naturalistic fallacy, implies that whatever happens naturally is always for the best.

Free Trade and Utility: David Ricardo

Adam Smith's major work, the Wealth of Nations, in fact, was primarily aimed at showing the benefits of free trade. There he wrote:

It is the maxim of every sensible master of a family never to attempt to make at home what it will charge him more to make than to buy. The tailor does not make his own shoes but buys them from the shoemaker... What is caution in the conduct of every family can in short supply be folly in that of a great kingdom. If a foreign country can supply us with a product cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own manufacturing, employed in a way in which we have some advantage.

Adam Smith's point here is straightforward. Like individuals, countries differ in their ability to produce goods. One country can manufacture a good more cheaply than another and it is then said to have an "absolute advantage" in producing that good. These price differences may be based on differences in labor costs and technology, equipment, land, skills, climate or natural resources.

Assume that because of these differences, our nation can make one product for less than a foreign nation can and suppose the overseas nation can make some other product for less than we can. Then clearly it would be finest for both nations to specialize in making the product each has an "absolute advantage" in producing, and to trade it for what the other country has an "absolute advantage" in producing. It was Ricardo's genius to realize that both countries could benefit from specialization and trade even though one can make everything more cheaply than the other. Specialization increases the total yield of goods countries produce, and through trade all countries can share in this added reward.

Ricardo's clever argument has been hailed as the single "most important" and "most meaningful" economic innovation ever made. Some have said it is the most "surprising" and "counterintuitive" concept in economics. It is, without a qualm, the most important concept in international trade theory today and is at the heart of the most important economic arguments people propose today when they argue in support of globalization. Ricardo makes a number of simplifying assumptions that clearly do not hold in the actual world, such as that there are only two countries making only two products with only a fixed number of workers. But these are just simplifying assumptions Ricardo made to get his point across more easily and Ricardo's conclusion could still be proved exclusive of these assumptions.

There are other assumptions also that are not so easy to get around. First, Ricardo assumes that the assets used to produce goods (labor, equipment, factories, etc.) do not move from one country to another. Yet today multinational companies can and easily do, move their productive capital from one country to another. Second, Ricardo assumes that each country's production costs are steady and do not decline as countries expand their production or as they acquire new technology.

Third, Ricardo assumes that workers can easily and completely move from one industry to another. Yet when a company shutters down because it cannot compete with imports from another country that has a comparative benefit in those goods, the company's workers are laid off, need retraining, suffer heavy costs and often cannot find comparable jobs.

Finally Ricardo ignores international rule setters. International trade inevitably leads to disagreements and conflicts and so countries must be of the same opinion to abide by some set of rules and rule-setters.

Marx and Justice: Criticizing Markets and Trade

Karl Marx offers the most serious view of modern private property and free market institutions. Marx claims that free-market entrepreneurship necessarily produces extremes of inequality. Since industrialist systems offer only two sources of income, owning the means of production and selling one's labor. Workers cannot produce anything without the owner of the productive forces. But owners do not pay the complete value of the workers' labor; they pay workers what they need to live, keeping the rest for themselves and gradually becoming richer as a result.

LESSON 18

The result for workers is enlarged alienation. Rather than realizing their human nature and satisfying their real human needs, they are divided from what is actually theirs in four ways:

1.   Capitalism alienates people from themselves by instilling in them false views of what their real human needs and desires are.

2.   Capitalism forces people into work that they find dissatisfying, unfulfilling, and that is controlled by someone else.

3.   In capitalist societies, the products that the worker produces by his or her labor are taken away by the capitalist employer and used for purposes that are antagonistic to the worker's own interests.

4.   Capitalist societies alienate human beings from each other by separating them into antagonistic  and  unequal  social  classes  that  break  down  community  and  caring relationships namely the Bourgeois and proletariat.

Conclusion

Though utilitarians assert that people would be lazy without private property, Marx counters that by this argument the bourgeois owners should long ago have exhausted away: they do not work while those who do cannot get hold of any real property.

The real intention of government according to Marx is to protect the interests of the ruling class of owners. The forces of invention of a society its substructure always has, historically, given society its class and its superstructure (government and popular ideologies). Those in power support the ideologies that justify their position of privilege. This view of history is called historical materialism.

The result of uncontrolled free markets and private ownership will be a series of disasters for working people, leaving them immoderate. Three general tendencies will combine to bring this about:

First, capitalist societies will experience repeated cycles of economic downturns or crises. Because workers are organized into mass assembly lines, the firm of each owner can produce large amounts of surplus.

Second, modern capitalist systems will exhibit an increasing concentration of industrial power in relatively few hands. As self-interested private owners struggle to increase the assets they control, little businesses will gradually be taken over by larger firms that will keep expanding in size.

Third, Marx argues, the position of the worker in capitalist societies will slowly worsen.'  This gradual decline will result from the self-centered desire of capitalist owners to increase their assets at the cost of their workers.

Though many of Marx's predictions have turned out to be truthful, the immoderation of workers has not occurred. Still, many claim that inflation, alienation, unemployment and false desires do portray much of modern capitalist society.

Defenders of free markets oppose that Marx makes an un-provable assumption that just means equality or allocation according to need. They claim that justice really means distribution according to contribution (which requires free markets). Even if private possession causes inequalities, defenders of free markets still uphold that the benefits of the system are greater and more significant than the incidental inequalities.

Whether the free market argument is influential depends ultimately on the importance one gives to the rights to freedom and property as opposed to a just distribution of income and wealth.

Conclusion: The Mixed Economy

Which side, free markets or government intrusion, will ultimately win? Neither the collapse of the Soviet Union nor the rise of muscular collectivist governments like Japan proves one side or the other. Indeed, it may be the case that neither side by itself presents a whole picture of how the modern economy ought to run.

Many economists now support retaining the market system and private property while modifying their workings through government bylaw, a mixed economy that attempts to remedy the deficiencies of a free market system. Such policies can be very triumphant, as they have been in Japan, Norway, Sweden and many other countries. Even though the U.S. is more flourishing economically than the majority of other countries, studies do indicate that mixed economies have some benefits.

New technologies are also sacking the debate over the balance between Lockean private property and communal ownership. Modern technologies, as computers, create new forms of intellectual property unlike other kinds of property, can be copied and consumed by a number of different individuals at once. Locke's view, and the view of some utilitarians, is that the  mental  work  that  creates  the  property  creates  the  property  rights  over  that  product. Socialists point out that writers, artists and thinkers have always created works without any monetary incentive.

Should new scientific and engineering discoveries be confined as private property? Should these things be shared by the society that made their finding possible? The debate continues. Still, critics of Marx contend that Marxism is dead, many socialist trends and theories remain influential. Locke and Smith's form of capitalism has the higher hand, but many nevertheless maintain that a mixed economy comes adjoining to combining the utilitarian benefits of the market economy with a apt respect for human caring, rights and justice.