More markets please, by Scott Sumner

August 12, 2017

I’ve devoted much of the past ten years to advocating the creation of a highly liquid nominal GDP prediction market. I believe this sort of market would eventually revolutionize macroeconomics. Over time, people would stop thinking of the stance of monetary policy in terms of interest rates and begin focusing on what really matters, expected future NGDP. We could begin monitoring the efficacy of monetary policy in real time.

But NGDP is not the only area where we need more markets—there are hundreds of other areas crying out for reform. Legalizing markets in drugs, prostitution and gambling could radically reduce our prison population, save enormous sums of money, reduce violence in Latin America and reduce authoritarian tendencies in our own government. Markets for organ transplants could save tens of thousands of lives. (Why do progressives seem so upset by the health cost of repealing Obamacare, but not the ban on organ markets?)

In Europe, they are far ahead of America in many areas, with much more widespread privatization of airports, air traffic control, airport security, passenger rail service, postal delivery, toll roads and many other activities. Hong Kong has one of the world’s best subway systems, and its privately run. Imagine what private enterprise could do with NYC’s abysmal system.

Given the need for many more markets, I was surprised to see Noah Smith make this argument:

Taken to its ludicrous extreme, marketism would incur far too many transaction costs. Imagine having to pay a fee for the air you breathe, or to walk down the street where you live. Such a free-market paradise would feel more like a prison.

The late 20th century saw an expansion in the scope of human relations that take place in markets. But the early 21st century should be a time for rethinking this trend. The idea of markets in everything is bumping up against its natural limits.

If you expected the article to justify this claim with many horror stories about actual failed markets, you would be disappointed. Instead Smith points to some rather far-fetched examples of possible overreach, such as privatizing the air we breathe. Smith’s right that markets are not appropriate in all areas of life, but I don’t agree with his claim that we are bumping up against the natural limits of markets. In my view the neoliberal revolution of the late 20th century didn’t go nearly far enough.

Smith refers to Coase’s argument that some activities are better handled within firms than through markets:

Within companies, people often prize loyalty to coworkers or to an organization. That may explain the surprising yet common finding that direct monetary incentives often reduce work performance rather than increase it. Privatizing the army, tax collectors and prisons is a bad idea, because it ignores the crucial function that loyalty, dedication, idealism and commitment play among combat troops, bureaucrats and prison guards.

That’s a good argument, but in the US combat troops and tax collectors are generally employed by the government. There are some private prisons, but I’m not sure there is any evidence that government prison guards have more idealism or loyalty than private sector prison guards. One part of San Francisco has a very successful private police force. Perhaps prisons should not be privatized, but that’s an empirical issue that needs to be studied–appeals to loyalty, dedication, and idealism do not answer the question.

Again, markets are not appropriate everywhere, and I don’t rule out the possibility that there has been overreach in a few areas. But overall, there is still a massive need for more markets, not to mention a need for more deregulation of existing markets in areas such as zoning, occupational licensing and many other activities.

Check out this CNN story on the HK subway, which earned a 2 billion dollar profit in 2014. It carries 5.2 million passengers a day, and has a 99.9% on time rate. (Hong Kong has only 7.4 million people.)

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Why can’t we have nice things?

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