Free Markets, Externalities, and A Question of Integrity

Preface: ClimateEthics has frequently examined ethical problems with many economic arguments made in opposition to climate change policies. See, for example, Ethical Issues Entailed By Economic Arguments Against Climate Change Policies. Also see, Ethical Problems With Cost Arguments Against Climate Change Policies: Increased Costs May Not Justify Human Rights Violations. Economic arguments against climate change policies often have been made by people and organizations that believe in “free market fundamentalism” or the idea that unfettered markets will solve virtually all social and environmental problems. This post by guest blogger Jeff Huggins examines the unstated assumption of many free market fundamentalists that laissez-faire markets are always free.

I. Introduction

One of the defining premises of any “free market” is that parties participate in transactions voluntarily.
Shoving, imposing, and force–not allowed.

Indeed, voluntary participation is a vital part of the justification–and defense–of free markets. Why are free markets supposedly “free”? Because people participate in transactions freely, voluntarily, as free human beings. Why are free markets considered beneficial? Because the outcomes are often beneficial to the participants and, often, to a broader community.

But what if the nature of a transaction forces you to take part? What if someone else’s so-called free market imposes costs or harmful consequences on you involuntarily? What if ambitious aliens from another solar system were to run their economy as a free market that utilized Earth as a cost-effective dumping ground–ignoring the concerns, rights and pleas of mere humans?

More concretely, what if someone’s free market forces harms–such as a destabilized climate and associated problems–upon someone else who wants nothing to do with those harms and hasn’t agreed to suffer them?

Ultimately, as I’ll explain, we arrive at this question: Can a free market retain any credibility, coherence, and integrity if it violates the deepest principles upon which its own existence is justified?

II. The Man and A Stream

The problem becomes obvious once you think about it carefully, but let’s begin by considering an interesting source.
In his book Capitalism and Freedom, Milton Friedman wrote about one of the principal limits of free markets that justify and sometimes necessitate government involvement. Here’s a passage:

“A second general class of cases in which strictly voluntary exchange is impossible arises when actions of individuals have effects on other individuals for which it is not feasible to charge or recompense them. This is the problem of ‘neighborhood effects’. An obvious example is the pollution of a stream. The man who pollutes a stream is in effect forcing others to exchange good water for bad.” (Friedman, 1962)

Friedman’s main focus here was on “neighborhood effects” that occur within a market system and that represent a limit, or failure, of the market. Most present-day economists use the term ‘externality’ to refer to such effects. Friedman’s ultimate point was that neighborhood effects often justify government regulation, the aim of which is either to prevent them (if they are unwanted) or to ensure that benefits and costs are borne fairly by the responsible parties. If participants in a market and others who are subject to the market’s consequences all fall under the auspices of a particular government or regulatory authority, that government or authority can–and often should–act to regulate such effects.

Let’s revisit, however, an obvious and consequential point in Friedman’s passage:

“The man who pollutes a stream is in effect forcing others to exchange good water for bad.”

Friedman’s observation here holds whether the “others” are within a nation’s border or beyond it, whether they’re participants in the market or not, and whether they accept the values of a particular type of market economy or not. In other words, just as a man who pollutes a stream in his own town forces others to exchange good water for bad, so also a market economy that undermines climate stability forces those consequences upon the entire world. Markets, of course, can fail people within them or outside of them.

III. A Problem of Existential Integrity

The point I’m leading to is not that externalities exist among people who agree to participate in a free-market economy in their own country, who may agree to live with externalities that their system creates, and who at least have an ability to regulate externalities through their government. That point is clear. Friedman made it, and hundreds of other economists have been making it for years.
Instead, my point today is this: A so-called free market that imposes costs or harms on people who are not party to it, have not agreed to it, have not agreed to the costs or harms imposed on them, and have no effective way to regulate those externalities egregiously violates the very principles used to justify its own existence.

Why? Because the justification for the existence of free markets is based, in no small part, on an appeal to the vital ideal of human freedom. But a market that imposes harms on others, against their will, infringes on their freedom in harmful ways. And if something habitually violates a principle upon which its own existence is justified, it has a problem.

Put another way, the existence (and appeal) of free markets is justified on the basis of their voluntary nature: “Free human beings participate voluntarily. What can be wrong with that?” So if they impose harms on other peoples involuntarily, there’s a problem of integrity–and it’s a huge one.

It could be called a problem of existential integrity.
Rationally and ethically speaking, a free market that insists on imposing harms on other peoples, without their voluntary agreement, pulls the rug out from under itself. It refutes its own basis. Its actions dissolve its integrity at the deepest possible level. It becomes an emperor with no clothes–and with faulty justification.
If a free market–justified in part because people participate freely–forces harms unfreely on others, we can correctly say that someone’s got some explaining to do.

IV. Not Mere Hypocrisy

It’s important to note that the problem is not merely one of hypocrisy. A person may be hypocritical by saying one thing and doing another, but such hypocrisy doesn’t undermine the justification for that person’s existence, of course. In the case of actual people, hypocrisy isn’t the same as suicide. But with systems, institutions, contracts, and other such things the situation is different. For example, systems and institutions can be used in ways that undermine the justifications for their existence. A democratic government ceases to be democratic–and ceases to enjoy the justifications of democracy–if it cancels elections and acts in totalitarian ways. A democracy can’t consider itself a democracy if it doesn’t hold fair elections. Similarly, a free market can’t consider itself a free market if it habitually violates important principles of freedom.

What can one reasonably conclude about any version of free-market thinking that demands–in the name of freedom, no less–freedom from the harms it perceives in any regulation of its own activities, and then uses its freedom to impose harms un-freely on others? What can one conclude about any version of free-market thinking that, in the name of freedom, demands unconstrained freedom to pursue profits for itself in ways that impose losses on others?

To be plain about it, a free market that imposes harmful consequences on people who don’t want those consequences is not a credible or responsible free market. In effect, such a market ignores the rights, freedom, and perhaps even existence of people on whom it imposes harms.

V. Some Might Say

Some might argue that a free market only needs to be “free” and beneficial to people within it in order to be considered a genuine, justified, and healthy free market. But there are at least two problems with this argument in relation to the problem of harms.

First of all, benefits and harms are two different things. A free market that generates benefits for participants and for people within its geographic/economic boundaries, and does not impose harms on others, can consider itself to be living in accordance with its principles, at least with respect to our focus here. The present issue is not whether benefits accrue only to participants and communities within a market’s boundaries, or also to others in the broader world. Instead, the present issue is whether harms are imposed on others un-freely. Put another way, the issue is freedom from being harmed. A free market doesn’t necessarily have to share benefits with people who don’t participate, but it certainly shouldn’t impose harms on them.

Secondly, consider a definition of free market that would include the ideal of “voluntary participation in transactions as free humans” for insiders but would allow the forced imposition of harms on people outside the market’s boundaries. Such a definition would clearly be incompatible with more than one American and human ideal, with realities of an interdependent world, and even with arguments made by proponents of globalization. After all, Americans don’t merely believe that all Americans are created equal: We believe that all humans are created equal. We don’t believe in freedom only for ourselves: We believe in responsible freedom for all.

And those who fervently support globalization do so on the argument that it will benefit people broadly and will facilitate freedom, human rights, and well-being. But if the free-market system being globalized remains perfectly content to impose costs and harms–such as those that will accompany climate change–on people without their consent, how does that relate to the idea of facilitating freedom, human rights, and well-being?

This might help illustrate the point: Millions of people cheer the demise of dictators and the resignation of regimes that don’t respect the rights of citizens. But are we and the so-called free market respecting the rights of all 6.9 billion people of Earth if we insist on continuing practices that destabilize the climate, melt glaciers and ice caps, raise sea levels, and acidify oceans?

Of course, there was a time when human life was not so globally interdependent; when actions in one place had no substantial impact on conditions elsewhere. There was a time when humans were not aware of dangers to the commons–atmosphere, climate, oceans, and biosphere. There was a time when globalization was not even an idea, let alone a debated issue. And there was a time when humans were not considered equally human by each other, and when democracy was not an ideal. But those days are gone. What might have qualified as “free-market thinking” back then would not, in many cases, survive even the most basic critique in light of responsible modern understanding. Today, there is no credible way for a free market to claim that only insiders matter and that harms can be imposed on others un-freely. Such a claim would be preposterous.

VI. A Question of Integrity

So our modern free market–as presently construed–faces a major test of self-understanding and integrity. Will market pundits, promoters, and participants insist on perpetuating a so-called free market that imposes harms un-freely on others? Will we try to preserve a definition of “free market” that blatantly violates a core principle in the justification of the very existence of free markets? Will our free market pull the rational and ethical rug out from under itself?

Or instead, will we admit that any market system that purports to respect and strive for freedom must responsibly respect the freedom of everyone, including the freedom to not be harmed by it?
My freedom to move my fist must be limited by the proximity of your chin.
– Supreme Court Justice William O. Douglas
If a man take no thought about what is distant, he will find sorrow near at home.
– Confucius
… and it has to be concluded that the greatest source of harm to man is man.
– Cicero, On Duties II, 44 BC

Jeff Huggins

Friedman, Milton, 1962, Capitalism and Freedom, University of Chicago Press