Markets and deciding what the good life is
Part 2 of: What would make life better?
If you want to make life better, you need a means of deciding what the good life is. But does anyone actually agree on what the good life looks like? People in most societies have different values, different tastes and preferences, different ambitions for their lives. Some of our individual preferences overlap — especially on big questions like civil liberties or universal healthcare — but many do not. Some people like loud music and some people like silence — there is no single volume control that can make them both happy. The challenge I’ve set myself in this series is not so much about how to make a generic life better, but how to make many different lives better.
Economics has a pretty simple solution to this problem: the market. People buy the things they value. Suppliers respond and sell people more of the things they value. You add up all the money they spend and you get an answer about what the good life looks like for a society, expressed in pounds and pence.
This is more than just a neat solution to an arithmetic problem. When it works, the market allows everyone to pursue their own version of the good life. Some people go to music festivals (and use headphones when they’re on the train); some seek out the wilderness (and maybe ear plugs too). Unless you want to force a single concept of the good life on everyone, you need to let people make choices.
Of course, there are alternatives to the market, and we already use them quite a lot — in healthcare, education, policing and many other public services. In a democratic society, the main alternative to the market is to try and aggregate people’s preferences — and their vision of the good life — through the political process. While this approach works for big issues in society — laws, values, foreign affairs — it gets far less effective when you get close to the details of everyday life. Choosing leaders once every few years does not seem like a valid way to make choices about the food we eat, the homes we live in or our choice of leisure activities. Unless you want to be very prescriptive about what the good life is, you need markets in some form. For all people complain about them, markets are hard to escape.
My aim in this piece, though, is to look at the way markets let us down or limit us in our pursuit of the good life. My hypothesis in this series is that the economy, market-driven as it is, has stopped making our lives much better, and that more collective action is needed to correct that. But this is not a critique of markets in general — rather, it is a critique of specific markets, and an attempt to find ways we can fix the ones that don’t work well.
For all their elegance, there are many ways in which markets let us down. Some are well-known, the kind of problems that economics exists to tackle. But some are widely overlooked, or conceived in ways that makes it hard to tackle them.
First, there is consumer surplus: the value we get from something but don’t pay for. Think of Google. Most of us get enormous value from their various products, but as consumers we don’t pay for them. While businesses do pay for these services — motivated by advertising — there is ultimately a huge amount of value we get that is recorded as zero consumer spending the national economic accounts. Consumer surplus is generally regarded as a good thing in economics, a happy spillover from the rigour of the market. But it also leads to a lot of good things not being counted, and sometimes not paid for or provided at all.
Next, there are supply constraints. When something is in short supply — like gas and petrol in our current energy crisis — the price we pay for them goes up. But this doesn’t mean we value them any more than we did before — just that supply constraints have raised their value. You might say this is the flip side of consumer surplus — suppliers claiming back all that free value they gave us — but that’s not always the case. Many goods are price inelastic because we get locked in to them. Once you’ve splashed out on a new car, you can’t easily cut back on petrol spending, even if the price soars.
Then, there are the bad choices we make and the bad choices we get tricked in to. I’m generally reluctant to question the choices other people make — there’s not much chance of me knowing what’s best for other people — but there are situations where we all make the wrong choices. What I’m more concerned about, though, is where we’re tricked into making bad choices by those who sell things to us. Where we’re locked in to over-priced subscriptions that are deliberately made hard to cancel; where our emotions are manipulated by marketing tactics; where people’s vulnerabilities or addictions are exploited. There are plenty of situations — possibly made more common by the internet — where the price we pay for things does not reflect our values at all.
There is also a whole series of well-known market failures which can lead to bad outcomes from markets. Information failures — where one side of the market lacks the information to make good choices — seem to have been reduced in many cases by the internet. But this doesn’t apply to all markets — compare the experience of trying to find holiday accommodation with trying to get a reliable tradesperson to do work on your home. Externalities — costs or benefits which happen to other people — are another classic market failure, and in my view one that isn’t always framed very helpfully. The common economics framing of externalities doesn’t, in my view, work very well for its most famous example: carbon emissions. Carbon emissions are not a side effect that needs to be gradually reduced through taxation; they need to be eliminated entirely by finding substitutes for activities that generate carbon.
So far, this list is a pretty standard set of what economists call market failures. This is the bread and butter of economics — market failures are there to be fixed by good policy. But there is also a wider set of problems which markets throw up which are sometimes less appreciated.
First is that people and communities sometimes get locked in to buying certain things that are not necessarily what they want. The car is a classic example of this. People buy cars because there are few other options for getting around in many places. Once you’ve made the big initial investment in a car, it makes sense to use it. Even if occasionally there are alternative options for travel, even if petrol prices make it very expensive to run a car. This lock-in problem operates on a society scale as well as an individual one — societies become locked in to certain ways of doing things, like using cars. Once everyone has a car, the ability to develop alternatives — like public transport or cycling infrastructure — is much more limited. But without developing alternatives, you can’t persuade people to get out of their cars. In this way, it is easy for societies to get locked into less than ideal outcomes.
This lock-in problem might apply to some business models as well. Many of the world’s largest businesses have become very effective at locking in their customers. Sometimes this is due to network effects — where services like WhatsApp get more effective as more people use it. Sometimes it is a deliberate strategy — think of cheap to buy but costly to run Nespresso machines, or the difficulties of switching away from an Apple phone if you have many devices set up on their system. These lock-in strategies often make complete sense in the short term — often for customers as well as businesses — but they can prevent new, better, more life- and growth-enhancing products emerging. Even if Google became a bad search engine (and I have my suspicions), or Twitter became a bad place to have policy debates (more than suspicions), their ubiquity makes it hard for other, potentially better alternatives to emerge.
Second, markets sometimes fail to emerge altogether. There are plenty of new technologies and ideas that ought to make people’s lives better, but never manage to emerge. Where are those self-driving cars I was promised? Why is vaccine development so much slower outside of pandemics? These are not, as far as I know, technology problems but market problems. Sometimes this is a challenge of regulation — either too much of it blocking a new market, or too little making it hard for consumers to have confidence about new products. Often, it is a problem of risk. Markets for new things are risky until someone proves they work, and that makes it harder for businesses to enter and to get finance, and puts many customers off. Trusting the market too much to aggregate people’s preferences can deter businesses from taking the leap into new, potentially more valuable territory. As Henry Ford didn’t say: “if I’d have asked people what they wanted, they’d have said a faster horse.”
These many failures of the market give us two types of problem: a measurement problem; and an allocation problem.
The measurement problem is in many ways superficial, but it matters when thinking about how to make people’s lives better. If our main mechanism for counting the amount of “good” is so flawed, what chance do our policies have of succeeding? If you want to explain why we’ve suffered such a sharp slowdown in economic growth in recent years, mismeasurement — specifically that we’re under-counting the value of recent progress — is a reasonable argument to make.
But the allocation problem is a deeper one: what if the real reason for the economic slowdown is that we’re directing our economy towards the wrong things? What if markets sometimes lock us in to patterns that prevent us making progress? These are important questions that I think economists have to confront.
How can I square the obvious benefits of markets with these almost-as-obvious flaws? On the one hand, I maintain that choice is good, and important in seeking the good life. The market may have flaws, but so do the alternatives, particularly where they involve imposing a single version of the good life on people. On the other hand, it is clear that the market — and the GDP statistics it informs — is not entirely accurate in aggregating our preferences. It gives us a view of the good life that is filtered through price fluctuations, imperfect information and more. It may even trap parts of the economy in persistently bad outcomes.
For me, that means that if you’re trying to work out what’s good for society, you can only trust what markets and people’s preferences tell you only up to a certain point. Where markets lead to situations that clearly reduce wellbeing or block a route to better outcomes for people, we should be prepared to correct it.
But this is not just a classic call to tackle market failures, or to replace them with state provision. We need to find a space in between these two approaches — a mixed economy does not just have to be divided between market-led and state-led sectors.
My belief is that markets are not neutral forces of nature; they are social institutions. Markets are made up of people and institutions, and they are swayed by lots of things besides basic economic rationality. The location, the terms of trading, the relationships between buyers and sellers, social norms and many other things besides influence how the market works.
I acquired this belief from the academic literature on Marketing, which seems to me seriously underestimated by economists. Marketing professionals in businesses understand the social nature of markets and use them to their advantage — though not always to the advantage of their customers. Policy makers, for the most part, do not. If we’re more open to understanding how markets really work, we might find new ways to make lives better, and even make the economy grow again.