The “Miracle” of the Market Can't Save Us From Ourselves

They say that nobody in the whole world knows how to make a pencil. But how can that be true?

Well, actually, a guy by the name of Leonard Read said it, in an essay he wrote back in 1958 called I, Pencil. Then in 1980 the idea became more famous when Nobel Laureate economist Milton Friedman used the essay in his book and television show Free to Choose. The argument is that even for something as (seemingly) simple as a pencil, not one person has the know-how on their own to acquire and bring together the long list of ingredients needed to create it. Instead, as if by a “miracle,” the free-market's price mechanism guides the process by introducing buyers to sellers, allowing the pencil to be made.

Okay, maybe that description is a bit rich. Is it really a miracle that innovative people would, over time, find a way to collaborate to create goods and services that benefit them? Put that way it seems more inevitable than miraculous. But the free-market's ability to coordinate people's actions and allocate resources more-or-less efficiently is impressive nonetheless, and we have it to thank for much of the material comfort we take for granted.

Unfortunately, it's far from perfect. We also have the free-market to thank for giving us certain things we don't need, and even for failing to produce things we need badly. It's not just the infamous “negative externality” that we must beware, either, because that term only refers to losses suffered by parties external to a transaction. It's deceiving to employ romanticized words like “miracle” to describe the free-market because a miracle is by definition an inhuman action, whereas the market is a most human phenomenon. It wasn't discovered, and it didn't descend from heaven. Far from a monolithic entity, a free-market is nothing more than the aggregate of human desires expressed in monetary terms. And since we human beings are frail creatures whose desires can be manipulated by appealing to our most primitive instincts and emotions, the free-market is only as good – or as faulty – as we are.

In order to understand how human desire influences market behaviour, it's worth briefly exploring a longstanding debate in microeconomics over which side of the coin has more primacy, supply or demand. Someone who believes that supply is the key driver might say something like this:

Every so often a company invents a new product and people clamour for it. Remember when Apple released the first iPod back in 2001, and the first iPhone in 2007? The new supply created its own demand! Isn't entrepreneurship incredible?!

Yes, entrepreneurship is quite excellent indeed. But an advocate of demand-side economics would push back:

Of course it's true that you cannot buy something before it's supplied and available, or even be aware of it, for that matter. But it's also true that (intelligent) companies will only attempt to sell a product or service for which they can reasonably anticipate demand. Why do you think nobody tries to sell blueberry-mushroom-habanero ice cream? Sellers supply in reaction to demand or expected demand.

This distinction might seem like splitting hairs, but it makes a difference. It's true that companies can expect to manufacture a demand for their specific brand through clever advertising, which in the US alone is a $200 billion industry. But the fundamental reason that sellers enter a market is simply because they identify a demand that already exists and is waiting to be satisfied, even if that demand is detrimental to public well-being.

There's an assumption that participants in the market act rationally in their own best interest, and the primacy of demand means that consumers' desires determine what the market provides. But we don't always act in our own best interest. Everyone knows that cigarettes contain carcinogens, but people still smoke. Is that rational? People also tend to love eating tasty junk food, which is why a recent report by the Global Panel on Agriculture and Food Systems for Nutrition warns that one-third of the global population is at risk of being overweight or obese by the year 2030. Another example is the trade of illegal commodities like weapons, drugs, animals, and people. There are an estimated 21 million people in slavery worldwide – some for sex, most for labour. And a new database published at the meeting of the Convention on International Trade in Endangered Species (CITES) suggests that the illegal trade of great apes has been dramatically under-reported, with the market price for a live gorilla reaching $45 000. The list of black markets is as long as it is tragic. In each of these cases, sellers are more than willing to indulge the vices we crave relentlessly, regardless of how damaging they are to us or the environment over time.

The celebrated “miracle” of the market is that it uses the concept of price to quantify the value people put on a commodity. But the value we place on something reflects how much we want it, which is frequently different from how much we actually need it. No one needs to own jewellery made from ivory, eat shark-fin soup, or do cocaine, but the free-market is concerned only with desire as reflected by purchasing power, not with considerations of social justice or ecological sustainability.

The fact that the market equates buying-power with desire also leads to another weakness: failure to incentivize the production of goods or the provision of services needed by people who are too poor to be competitive bidders. Take tuberculosis, one of the world's deadliest diseases. It infects one-third of the global population and caused 1.5 million deaths in 2014, yet the World Health Organization says there is a $1.6 billion annual funding shortfall needed to treat worldwide cases. How could such a serious and widespread disease be so badly neglected?

The answer is that TB mostly afflicts people living in the Global South who cannot afford to purchase expensive drug treatments. Bringing a drug to market is a very expensive process that involves years of research and testing to ensure that it's safe for humans and that it can actually deliver the results it promises to consumers. But this reality means drugmakers won't spend the time and money to develop a product unless they can expect to sell it for a large profit. People in developing parts of the world don't have the money to pay for drugs that cost thousands of dollars, so there's no commercial incentive to produce them. Instead, the pharmaceutical industry disproportionately focuses on ailments like cancer because people in the West can and will pay for the astronomically expensive drug treatments it often requires.

Or consider the growing fears of an impending antibiotic resistance crisis, which reflects both types of market shortcoming. In an effort to be commercially competitive by getting the most product out of each animal, some farmers overuse antibiotics to accelerate growth and prevent infections in their livestock. There is an established link between reckless antibiotic use in animals whose products we eat and antimicrobial-resistant bacteria in humans. However, said farmers are simply following the signals that the market is giving them: maximize production or go broke.

We know that new classes of antibiotics will be needed in the future to overcome superbugs. But that robust demand isn't present yet, so again the market fails to incentivize the expensive but necessary pre-emptive research. As with many domains of scientific research, it would not happen in the absence of government subsidies and intellectual property guarantees. Even then we're still not out of the woods, though, because patents create monopolies that drive up prices on drugs that people desperately need, but patents that are too short encourage companies to sell as much of the drug as possible while the patent still enables them to charge a high price for it – even if that contributes to the very antibiotic resistance we're trying to overcome.

Finally, let's not forget that our rightly cherished democratic electoral system is itself free-marketism of the purest kind. (Actually, maybe that title technically belongs to a Proportional Representation electoral system specifically. But you get the idea). Yet the past twelve months of American electoral campaign circus has showcased democracy's greatest weakness once again, reminding us that sometimes people don't make the best choices.

Thus is the conundrum. One the one hand the free-market is, in a great many cases, a remarkably efficient mechanism for allocating an economy's resources. On the other hand, we need more than just efficiency. The market's governing logic is based on efficiency through competition, but human survival in the future will require cooperation, forethought, and discipline. The free-market is poorly equipped to succeed at providing those latter necessities because it is us, and we are it. It obeys our commands when instead it should question our logic, and it unquestioningly adopts our myopic views when we would be better served by a prudent second opinion. Unchained, the market leaves us exposed to the worst of our own primal devices.

There's a fine balance to be struck, of course, because excessive market regulation has its own demons: the economic policies of Joseph Stalin, Mao Tse-tung, and even present-day Venezuela have demonstrated that all too clearly. But it's impossible to escape the fact that supply deficiencies, be they too much or too little, can also be symptomatic of excessive market freedom. In each of the cases explored, the market is functioning at its finest, allocating resources to those willing (and able) to pay the most for them. That's just not good enough. Key issues like climate change mitigation, nuclear disarmament, and anticipatory drug research demand enormous cooperation and advanced planning; past challenges of such magnitude always involved state intervention.

Some preach the miracle of the free-market, but it would be foolhardy to take it as gospel. Market fundamentalism sings the praises of human freedom, but neglects to account for human frailty. We are indeed our own masters, and the free-market is a net-benefit to humanity. Nonetheless, it bears reminding that being one's own master is sharp at both ends.