Monday, March 05, 2007

Just deserts

In this post, Chris Dillow links to an older blog entry - a favorite of mine.
The great virtues of a market economy are that it respects individual freedom and fosters dynamism. Too many people who root for the free market, however, believe that markets also consistently reward virtuous behavior, so that people who succeed in a marketplace do so because they are better at spotting what people want, are better at working with other people, and work harder. Free markets probably encourage such behavior, in that being a successful businessman in a sufficiently competititive marketplace requires you to practice the bourgeois virtues. However, Chris quotes Hayek as arguing that this is no argument for Capitalism:

[The function of the price system] is not so much to reward people for what they have done as to tell them what in their own as well as in general interest they ought to do. …To hold out a sufficient incentive for those movements which are required to maintain a market order, it will often be necessary that the return to people’s efforts do not correspond to recognizable merit…In a spontaneous order the question of whether or not someone has done the ‘right’ thing cannot always be a matter of merit.

And many people who worship Hayek as the prophet of free markets would suffer apoplexy if they read this by him

There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need to descend. To enter into such an insurance against extreme misfortune may well be in the interest of all.

Just consider the recent boom in the market for programmers in India. This was triggered by a whole host of developments, mostly in the United States: mainly the introduction of the (publicly provided) internet in the late 1990s and the dotcom boom. None of these could have been foreseen by those high-school kids in India who chose to study programming in the 1990s, and yet they were the major beneficiaries of these developments. These were not necessarily the best engineers- the brightest and most hard working- of their cohort. It so happens that this particular field is easy to join, and so those engineers who studied other subjects did not face too much of a barrier if they wished to become computer programmers.
The price mechanism did its job of reallocating resources- now the best brains in India are more likely to become software engineers. In case of a software "bust", caused by some as yet unanticipated development- they would find it hard to get out.
A well-designed system of social insurance- like Chris' old favorite, the Citizens' Basic Income -would actually increase the dynamism of the free market by subsidizing experimentation- mitigating the risk of launching a new business, or of trying an unusual career.

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