The Merciful Maximization of the Market

An excerpt from Chapter 2 of *Unbeatable*

Here’s another excerpt from my next big book.

[from Chapter 2: Tragically Underrated: Why Economists Are Wrong About Free Markets]

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For all its faults, the textbook theory of market failure refuses to echo some of the most popular complaints about markets. For non-economists, one of the worst things about markets is that they coldly strive to conserve valuable resources. Markets are, in a word, cost-conscious. “The market downsized thousands of workers because they weren’t profitable anymore.” “They don’t offer health insurance for their part-time workers.” “The CEO doesn’t recycle because his time is too important.” Psychologically normal humans pronounce such sentences with sarcastic contempt.

Another widespread grievance against markets is that they heartlessly refuse to make products unless people spend enough money on them. Markets are, in word, consumer-conscious. “The internet’s bankrupting small business.” “We used to build things in this country; now they’re closing the factories because Chinese products are cheaper.” “They’re turning the old farm into condos.” All pronounced with sarcastic contempt.

Critics also denounce markets for the way they gamble. Sometimes markets take chances with not only human livelihoods, but human lives – just because “the danger is low.” Other times, they refuse to gamble on activists’ hopes – just because “it seems like a long shot.” Markets are, in a word, risk-conscious. “Big Pharma sells drugs when they can’t be sure they’re safe.” “The car companies waited years to install air bags.” “Markets won’t switch to renewable energy because it’s ‘unreliable.’” Pronounced, again, with sarcastic contempt.

Still, the overarching anti-market complaint goes to motivation: “Markets only care about money” or “Markets only care about profits.” When critics are short on speaking time – or space on their picket signs – they trim such accusations down to single words pronounced with maximum sarcastic contempt: Greed. Selfishness. Profit.

Once in a while, textbooks use the theory of market failure to rationalize these popular accusations. Conceivably, there are negative externalities of downsizing, or positive externalities of farms. Normally, however, intro econ texts ignore the accusations. They can’t really endorse them, because cost-consciousness, consumer-consciousness, and risk-consciousness are major building blocks of the theory of market failure. At the same time, intro econ texts rarely go out of their way to praise markets for being cost-conscious, consumer-conscious, and risk-conscious – much less to accuse the accusers of dire economic illiteracy.

What’s afoot? A secret war fueled by Social Desirability Bias. Downsizing superfluous workers sounds callous: “So it’s all about money?” Yet basic economics highlights a major upside of downsizing: When a business discharges unneeded workers, those workers have a strong incentive to find something more productive to do with their lives. Rhetorically, as usual, Social Desirability Bias wins. Pop culture damns the market for downsizing, and even econ teachers rarely challenge this damnation. Practically, however, markets prevail. They keep chugging along despite the one-sided misguided rhetoric. Instead of vocally defending downsizing, they just do it. Which is a great unsung triumph of the free market. Markets don’t merely conserve precious resources. They conserve precious resources when it sounds bad to do so. Even when critics keep screaming, “That’s bad!”

Such great unsung triumphs are legion. If firms felt obliged to give health insurance to every part-time worker, insurance costs would dwarf such workers’ actual earnings. Most part-time jobs would vanish – and millions of man-years of labor would go to waste. Though the CEO who snaps, “Recycling isn’t worth my time” is unlikeable, his time really is especially potent. So yes, society – not just the CEO – flourishes if he can focus on his job without distractions. Even if the distraction is, like recycling, drenched in Social Desirability Bias. Bottom line: Saving precious inputs is a good thing that often sounds bad. What’s great about markets is that they stay cost-conscious despite the condemnations.

Cost-conscious – and consumer-conscious. Prosperity isn’t merely about producing a lot of stuff. Prosperity is about producing a lot of stuff that a lot of people appreciate a lot. So yes, society – not Expedia alone – does better if travel agencies suffer mass bankruptcies. Agencies ceased being helpful, so they ceased to exist. Offshoring jobs to China – like international commerce generally – really is mutually enriching. So yes, society – not just Chinese industrialists – does better with specialization and trade. Converting a dying farm into condos may bring tears to the eyes of a few nostalgic neighbors, but definitely puts smiles on the faces of hundreds of new residents. Giving consumers what they pay for is another good thing that often sounds bad. Markets are amazing because they spurn poetic laments in favor of concrete results.

Risk-consciousness works the same way. Prosperity isn’t about producing what you hope will work, or avoiding what you fear will fail. Prosperity is about counting cards and betting accordingly. If companies treat best-case and worst-case scenarios like sure things, they’ll fritter away valuable social resources. Trading safety for money only sounds like a sin. As an old saying goes, “A ship in harbor is safe, but that is not what ships are built for.”[i]

Stepping back, “profit-maximization” itself sounds bad. Indeed, even the word “profit” sounds bad; that’s why anti-capitalist protestors paint the word on their signs. Logically, profit-maximization is what happens when firms are cost-conscious, consumer-conscious, and risk-conscious at the same time. Advanced textbooks call this “duality”: “Squeeze as much consumer value per dollar of cost as possible” is equivalent to “Spend as little cost per dollar of consumer value as possible.”[ii] Which markets keep doing despite strong self-righteous social pressure to stray from their mission.

Don’t most economists already praise markets for maximizing profits? Hardly. Yes, economists know that markets care about costs, consumers, and risks – and they affirm that costs, consumers, and risks matter. But most economists take profit-maximization for granted – and barely notice widespread, impassioned attacks on cost-consciousness, consumer-consciousness, and risk-consciousness. As a result, my peers rarely award markets credit for prioritizing what works well over what sounds good. Credit that markets richly deserve.

Maximizing profits feels merciless. You’re going to shutter a children’s museum just because the financials keep coming out wrong? But imagine a world where markets took popular complaints about the evils of profit to heart. Every time a firm figured out a way to cut costs, they’d have to ask, “Will cutting costs hurt anyone pitiable?” Every time a firm realized that a product was losing money, they’d have to ask, “Does anyone lovable like the product?” Every time a firm noticed a great opportunity, they’d have to ask, “Is there a chance that something will go terribly wrong?” The weight of these loaded questions would crush progress itself – and it would be poetic justice. Thankfully, markets grant us mercy we don’t deserve. Instead of heeding the childish carping, it’s “business as usual.” Markets swallow our abuse and make us rich – day after day.

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[i] https://quoteinvestigator.com/tag/john-a-shedd/

[ii] Cites on duality.