The free market is not a policy device

This has to rank as one of the stupidest remarks I’ve ever heard:

Mike Gilles, a former president of the Oklahoma State Home Builders Association, said that he built safe rooms in all his custom homes, and that even many builders who build speculatively now make them standard. But asked whether the government should require safe rooms in homes, he said, “Most homebuilders would be against that because we think the market ought to drive what people are putting in the houses, not the government.”

But, as is pointed out here, does that include electrical and plumbing codes, circuit breakers, grounded outlets, and all the other safety codes the government mandates? I wonder what “the market” would say about these things if left to its own devices? I think we all know the answer to that.

The free market (in most cases) is an excellent tool for increasing efficiency. But as a method for identifying and promoting safety, it is notoriously horrific. Take your pick – worker safety, automobile safety, child safety, public safety, disaster preparedness – and “the market” has fought any and all initiatives tooth and nail. So no, the market ought not to “drive what people are putting in their houses.” That is better determined by organizations for which safety is more important than profit. What the market “ought to drive” is the efficient application of the safety codes and regulations these organizations determine.

The government should define the framework for public safety and policy; the market should implement it. That is the partnership that has historically proven to be the most efficient enactment of policies that serve the best interest of the public.

16 Comments

Filed under General Grunting

16 responses to “The free market is not a policy device

  1. Another case of “Scratch my head at Americans”

    I’m a Queenslander by birth, home to some mighty nasty cyclones. It’s been code since Year One to build all houses with extra-whatever brackets that strengthen the entire structure. It’s just common sense.

  2. I agree. Wearing seat belts in cars is required by law as it should be, not the free market.

    • Indeed. Specifically with automobile safety, the car companies have fought safety regs tooth and nail, even if later they used these to differentiate their products as safer than their competitors!

  3. I think you’re misunderstanding how a free market in housing would operate, and you seem not to appreciate the argument against government safety mandates.

    Most homes in Oklahoma don’t have basements. This is partly due to high water tables, but they also don’t have safe rooms. Despite living in tornado country most people have decided the cost of the safe room doesn’t outweigh the risk. Mandating such safe rooms would increase the price beyond what most could afford.

    As for requirements for wiring and plumbing, the market could easily account for these safety issues. People would be free to weigh their options and decide between landlords that offered quality homes or those with safety hazards. Assuming people valued safety high enough, they’d choose the former home.

    The market responds to what consumers want and are willing to pay for.

  4. Thank’s for your comment! It’s always good to receive a contrary opinion to stimulate discussion 🙂

    In regards to your point on the free market, I think it makes a great textbook definition of the fantasy free market that lives in the classroom, and where the so-called rational actors utilized by economists to propose their theories make decisions based on factual knowledge and their economic interests. However, one need only think back to Hurricane Andrew to see this thinking in action.

    As you may remember, when Andrew hit Florida, it laid waste to thousands of homes; in no small fault due to shoddy building codes. Now, where would your “safety conscience” consumers go when all the building contractors provided the same shoddy products? Those with the means could demand higher quality, but most people can only take from the choices they are provided. So, obviously, someone needed to intervene to raise the bar on safety standards, since the contractors — in the name of the “free market” — had no desire to, and the majority of the population did not have the means — nor desire — to do so.

    Which the government did, by improving the safety codes after the hurricane, and — lo and behold — the Florida housing market did not suffer, and people were rewarded with safer homes that were more storm-proof.

    In theory, people can band together and demand higher standards. In reality, an unrestrained free market often results in a “tragedy of the commons” where “entrepreneurs” seek to maximize profit at the expense of everything else. Unless a countervailing entity intercedes whose priorities are to preserve the commons, then the result is a race to bottom that usually, ultimately, requires government intervention to recover from, as we have seen repeated many, many times over.

    • You’re making some assumptions regarding the hurricane that don’t necessarily follow:
      1) You’re assuming that consumers were either unsatisfied with the quality of housing, or had no desire to live in such higher-quality homes.
      2) You’re assuming that contractors were “providing shoddy products” without regard to consumer preferences.
      3) You’re assuming that government regulation could correct for these situations.

      We can’t know exactly which is correct, but the principle of revealed preference indicates that consumers were indeed okay with these conditions, similar to the way in which most residents in Oklahoma don’t have tornado shelters. They likely would have preferred better protection against hurricanes, if cost were not a concern. But cost is a concern, and simply requiring builders to provide certain products doesn’t make it possible, ipso facto.

      The people of Florida did get new homes, but they did so at a cost. Because this cost was imposed on them, we can’t really say they were better off. We can only know that someone is better off when voluntary exchange occurs.

      The government could require all homes to be made of steel-reinforced concrete, and have steel shutters and doors. But this would push the cost of housing up dramatically, and mean consumers would have to sacrifice other spending. The trade-off may be worth it to some, but not others, and forcing this on everyone is neither moral nor an efficient means of resource allocation.

      • Indeed, the government could require all homes to be made of steel-reinforced concrete, just as it could mandate that we all drive tanks to work. But it doesn’t. What it does is require some level of safety designed to improve the outcomes of both individuals and the community, and it requires the free market to figure out how to implement these safety requirements in an efficient and affordable way 🙂

        Contrary to popular opinion, government regulations are not just “willed” into existence by faceless government bureaucrats who have nothing better to do than make capitalism hard. In most cases, government regulations result from the thoughtful and scientific study by career scientists of the problems they are designed to help solve. It is usually mostly the free marketeers who want unrestrained access to profit without regards to social cost who have problems with this.

        Often times, people have to accept what is provided to them. In Florida, those who lived on the poor side of the tracks had no choice but to live in the cheaply built, shoddy homes and apartments provided through a lack of adequate safety standards. Those more fortunate will always have more choices than those who are not; improving housing standards improves conditions even for those who have no other choice 🙂

        • Actually, your first description of government regulations is more accurate. Even if “thoughtful and scientific [studies]” were used to design regulations these can’t work. This is because the typical methodology used in scientific studies is inappropriate for human action – the essence of economic life.

          Human choice and behavior cannot be modeled like inanimate objects in the natural sciences. There are no constant variables; there is no way to separate these variables, holding them constant, and empirically testing them to discover the best use of scarce resources.

          As for this idea that free marketeers want “unrestrained access to profit without regards to social cost,” this is a common misconception. All too often, it is business leaders who clamor for government intervention, which serves as barriers to entry, thus insulating them from competition. Those who oppose such regulation do so because they either recognize the inherent moral hazard or see how inefficient this system is.

          Going back to this notion of disregarding social cost, on a free market firms necessarily must satisfy consumer demands in order to earn revenues. While they my get away with upsetting some customers, they can’t continue such a practice indefinitely. Competitors with a better handle on consumer needs will be free to move in and take the under-performing firm’s business.

          • “This is because the typical methodology used in scientific studies is inappropriate for human action – the essence of economic life.”

            I believe that there are many economists and, indeed, many computer scientists who would vigorously disagree with that statement, as well as the next one 🙂

            “Human choice and behavior cannot be modeled like inanimate objects in the natural sciences.”

            While individual behaviors cannot be accurately modeled (although there is some research that, given enough information, even individual responses can be predicted with pretty good accuracy), the trends of groups or people can be statistically predicted with fairly high accuracy. Indeed, modern economics could not exist with the ability to do this.

            And while I agree that “clamoring” for government intervention is a business tactic often used to stifle competition, it has also been used by businesses who have desired government regulation to prevent the race to the bottom endemic to modern business. For example, the outbreak of e coli in spinach in 2006, after which which the food industry begged the FDA to regulate growing practices to protect them against low-cost producers who were contaminating the food supply.

            Finally, the main problem with using the free market as a policy device is that it is reactive instead of proactive. If we know, for example, that certain safety standards save lives, then why do we have to wait for the free market to decide on this after hundreds or thousands of people have been injured or killed? Aren’t we smart enough to proactively say “you know, insulated wiring would probably result in fewer electrical fires, so we should proactively adopt that in our building codes?” Do we really need to wait for the free market to make that decision for us?

            I don’t disagree with the concept of a free market. It is a proven, efficient way of bringing goods and services to market. What I do disagree with is using it as a policy device for not making the hard decisions required to sustain a safe and productive society. “Let the free market decide” seems to me to be a cop-out, when we are more than smart enough to propose proactive solutions that we can then task the free market to efficiently implement. The free market works for us, not the other way around.

            This has been a valuable discussion, and I have very much enjoyed debating this topic with you! I hope to hear more from you in the future 🙂

    • Terry Morris

      Uh, no. The fantasy you’re indulging in is that we can have all of this government interventionism at little to no cost to the individual and society at large, economic or otherwise. Where do you think our (now beyond reach) national debt and debt to “unfunded liabilities” came from. How do you suppose it is that virtually everytime you go to the grocery store now prices have been raised a few cents or more on every item in the store? What is your solution to this problem that must, at some point in the not too distant future, reach critical mass – more government interventionism?

      • Actually, I suspect that the rise in food prices has more to do with the increase in transportation costs due to the increasing scarcity of oil, and crop failures caused by drought and reduction in available water supplies, than any regulation caused by those faceless bureaucrats. Indeed, perhaps better mandates for alternative fuels and more efficient water usage would have helped keep food costs down.

        And don’t forget that cheap food — specifically cheap corn — is only possible through billions of dollars in government subsidies. If you want to get ride of that, then by all means do so. But be prepared to pay much higher food prices!

        • Terry Morris

          I understand why you chose to address the secondary point in my comment while evading the primary one, but I will ask again: Why do you insist on piling more bad debt on top of the already existing mountain of bad debt while indulging the Polyannish fantasy that we can just keep doing this without the whole system eventually collapsing on itself? At which point, what’s it going to matter whether you live in a cardboard box or a sturdy, well built home with all of the newest safety features you want the government to mandate?

          • Well, because the government is not like a household, and government debt is not like household debt.

            Household debt is measured against income, and generally, the lower the debt ratio, the better off the household. Government debt is measured against economic growth, and the higher the growth ratio, the better off the government’s financial situation, because growth means a bigger “taxable” economy, which improves the ability of the government to service its debt. This is why governments should spend in a recession, because the sooner they can turn around the economy, the faster they can get the economy back to a healthy growth rate and improve the debt/growth ratio.

            The government’s debt ratio was much higher at the end of WW2 than now, and, believe it or not, we are still paying off that debt. Why hasn’t the government collapsed in ruin? Because it went even deeper in debt to finance the longest and most highly sustained period of economic growth in history. And because of that, the size of the absolute debt became a much smaller fraction in relation to the total size of the “taxable” economy.

            There is much economic evidence that suggests that economies run best when governments run a certain amount of debt. This is because that debt is used to keep the economy primed and growing. When the economy is strong and the private sector is keeping itself more or less primed, then government debt should be lower. When the economy is weak and the private sector can’t keep itself primed, then government should step in, and debt should be higher. But when you try to reduce debt in the middle of a recession, then you find yourself in an extended period of economic malaise while the economic engine sputters and fitfully tries to prime itself, as we are now.

            So, what is crippling us right now is not the level of debt, but the anemic rate of growth. Because we are more focused on lowering absolute debt than repriming the engine, we are stuck in a downward spiral, and will be until until we can break out of it.

            And to get back to your rant about safety, at some point you have to weigh the individual costs against the public costs. Is it better to pay some more individually to reduce the bigger social costs if we don’t pay? I think so. Safety is like insurance: we can all pay into the system to reduce the risks to everyone, or we can opt out and pay a lot more later when an unmitigated catastrophe happens.

  5. Pingback: Building Codes and the Free Market | economicharmonies

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s