Arnold Schwarzenegger as Mr. Freeze, Batman & Robin, Warner Bros., 1997
Conservatives favor the free market as the best solution to economic problems. Conservatives also insist that people have the right to what they have earned. Together the market and the right to keep what one has earned produce persistent and substantial inequalities in income and wealth. These inequalities don’t trouble conservatives. They are the unavoidable and morally permissible outcomes of the combination of the market and our natural rights.
But this conclusion is based on two oversights: one about how free markets work, and the other about whether income inequalities are really earned. Once we detect these oversights, it becomes clear that even if we accept the conservative’s claims about the market and about earned inequalities, we should reject their anti-redistributive conclusions.
The trouble with real markets is that left to themselves they always find their way to market failure of one kind or another: monopoly, price-fixing collusion, insider trading, free-riding, even bail-outs. Real markets may start out allocatively efficient, but they never stay that way. That’s why a real commitment to the market requires an equally strong commitment to periodic redistribution.
The market coordinates people’s diverse wants with people’s equally diverse abilities and willingness to meet these wants. The world beats a path to those who are best at meeting its wants and more interested in working hard to so. The inevitable result is ever-increasing wealth among those with the abilities and ambitions the market rewards. But increasing wealth confers market power, and produces market failure. Besides using their resources to undercut and restrict competition, the rich can and do buy favorable judicial decisions, government regulation, and deregulation. They can buy strategically useful “insider” information that enables them to make more or avoid loss. In extreme cases they can corner markets altogether.
So, the market harnesses self-seeking to the general good, but not forever and not by itself. Preserving its benefits requires periodic government redistribution to check the persistent accumulation of price-setting power. The need to eliminate the market-failure-producing disparities in wealth raises an empirical policy problem: to figure out how much redistribution will prevent market failure—progressive income tax, consumption tax, estate tax–without destroying the incentives the market harnesses to make us all better off.