The Economic Question Voters Should Ask Themselves

Forget loaded terms such as socialist and capitalist. Focus on this: Are markets friendly?

The Dow Jones Industrial Average after the close of trading on the floor of the New York Stock Exchange in December
Jeenah Moon / Reuters

The 2020 presidential candidates will argue strenuously about important economic questions relevant to all Americans. These include wealth and income inequality, the design of health-care insurance, systems for financing higher education, and the relative tax burdens imposed on capital and labor. Even the Green New Deal is at bottom a proposed solution to an economic problem—that of “externalities,” where market prices do not reflect the full cost of human actions, in this case the costs of burning fossil fuels on the environment and society.

Many journalists, campaign operatives, and activists lately have framed debates around these issues as a struggle between “capitalism” and “socialism.” But these words have no meaning for most voters. We are not a nation of political theorists or economists; we are ahistorical and poorly read. We can no more discuss the views of Karl Marx and their continued relevance today than we can chat about quantum mechanics with a kangaroo.

Voters need a simple organizing principle for evaluating all the economic policy proposals, arguments, and counterarguments that blossom at campaign time. In this way, they might see past some of the rhetorical tricks and misleading phrases to understand better what they really want from the political process.

I propose that voters should ask themselves a simple question: Are markets friendly? Do they exist today to serve society’s best interests, or are they currently a hostile force? If voters believe the latter—as, I’ll explain, I think they should—they ought to support candidates who back more government intervention, and vice versa.

Are markets friendly? riffs on Albert Einstein’s famous (but apparently apocryphal) observation that to him the only important question was Is the universe friendly? His question addressed our relationship to cosmic forces beyond our control; mine addresses our relationship to economic forces that seem beyond our control but that, in fact, are within our powers to alter.

My question will cause economists to choke on their cereal, because a “friendly” market is not an economic term. But it does work, I think, as a device to help organize voters’ thoughts along margins that otherwise are too abstract and too overwhelming to comprehend.

My question focuses on “markets,” not “companies” or “businesses,” because markets are where investment and production are allocated through the mechanism of prices. Companies act in markets, but they are not themselves the market. The question also ignores the useless term the economy. Most individuals care about jobs; some lucky ones care about their savings; entrepreneurs care about opportunities; and companies care about profits. “The economy,” by which pundits usually mean the gross domestic product, is just the sum of all these inputs. Policies act on these inputs, not on “the economy” as such.

A “friendly” market does not necessarily mean a kind one, but it does mean a market that is fair, open to all, efficient in allocating investment and production through the signaling mechanism of prices, and bound by rules that reflect Americans’ values. The economist’s shorthand for these requirements is that markets must be competitive and complete.

In competitive markets, no business can dictate prices to customers; all fight for survival in environments where profit margins are slim. A friendly market is not a synonym for a “business friendly” environment, where firms make fat and easy profits, but rather signifies a marketplace where businesses scrap for every little advantage.

As Adam Smith observed, businesses often are the enemies of genuinely competitive markets. A business cannot help but want to make things easy for itself, for example, by co-opting government to protect itself from market competition. Contemporary politicians eager to protect or subsidize some company or industry—for example, through tariffs—in fact have been co-opted in the same way that Smith warned about almost 250 years ago.

Abundant evidence today indicates that American markets are not as competitive as they could be. An excessively narrow interpretation of antitrust policy, for example, has led to greater concentration of market power than ever before, with the result that the remaining giants earn enormous profits beyond that which is necessary to fuel their growth.

Individual markets may be competitive, but are American markets taken as a whole complete? That is to say, can reasonable economic desires find outlet in markets open to all under fair terms of participation? If the focus is on mobile phones or table lamps, the answer obviously is yes. But what about the local labor market, or private markets for health insurance or a college education?

Health care is a good example of a market that is necessarily incomplete in the absence of government intervention. Truly private health-care markets that do not discriminate against preexisting conditions will always fail, as people delay buying insurance until they absolutely need it, and private markets that do discriminate leave millions without any insurance at all. For these reasons, every other developed country has adopted some form of government-sponsored health care to advance the welfare of its citizens. Only government can bring into the insurance pool the young and healthy as well as the old and sick. This intervention can take many different forms, but the point is that free enterprise alone cannot make this crucial service a complete market.

As another example, college education would be even more unaffordable without any public (government) institutions and financing arrangements. The underlying problem is that students can’t literally mortgage their future today to some private lender at reasonable interest rates to buy the higher education they need; government support is necessary to bridge the gap between the requirements of private lenders and students’ legally unenforceable plans for their careers.

Labor markets also are incomplete and uncompetitive, in that the negotiating power of employers is wholly disproportionate to that of employees. The result is full employment but an absence of jobs with dignity; instead, millions of Americans perform work that is just not cost-advantageous for robots to do—yet. And private markets famously fail in the absence of government intervention to reflect in prices the costs of pollution and similar externalities, as demonstrated by the accelerating pace of climate change.

If voters set aside charged and unfocused terms such as capitalism and socialism, and simply recognize that private markets are necessarily incomplete in areas that directly touch their welfare, they may then appreciate the need for greater involvement by the state in the form of public investment or insurance. Recognizing the importance of addressing otherwise incomplete markets also puts tax policy in the right context. The United States needs higher and more progressive taxes not simply to cut the rich down to size, but to fund public programs to round out markets that otherwise would be incomplete.

Too much energy is wasted on both the left and the right obsessing over tax policy in the abstract, as if the business of government were just to collect taxes and then set all those dollars on fire. It’s what government does with the money that’s important. By examining the conditions required to establish markets that are friendly to all Americans, the focus shifts to the positive side of things—those policies that would enable citizens to obtain affordable child care, health insurance, and higher education, by way of example. Genuine equality of opportunity requires these sorts of public investments. (In turn, these investments must be funded through higher taxes. The surprising result is both faster growth and more equal sharing of that growth.)

Competitive and complete markets can exist only in cooperation with government. Markets are creatures of the state, not laws of nature. Policy makers design rules that govern markets to make them work better for citizens, and thereby to offer citizens the opportunity to lead meaningful and productive lives. Pounding the table to eliminate “job-killing red tape” or claiming that everything would be great if only government got out of the way is like arguing that baseball would be better without the infield-fly rule. That rule was created to make the game work better, and the same is true of many of the rules that drive markets.

Friendly markets—markets bounded by rules and complemented by government where private markets are incomplete—advance the welfare of citizens, but will be unkind to businesses that cannot keep up in a world of fierce competition. That is unavoidable, given that in the American system there is no central command to allocate investment and production.

There’s a pervasive and pernicious myth that private markets, if left to their own devices, solve all problems. Adherents appeal to fuzzy memes such as “free enterprise” and “capitalism” to urge voters to drive government entirely out of markets. They still maintain that what’s good for General Motors (or to update, Apple) is good for America. And they see markets as largely complete and gaps as inconsequential. (After all, one can always find an example of the kid from a hardscrabble background who has graduated from Harvard, so that must prove that the market for a Harvard education is open to all.) Inequality becomes a feature, not a bug—or at worst, a necessary side effect.

America has come as close as a developed country can to instantiating that myth, and the results are obvious: a dysfunctional health-care system that costs 50 percent more as a percentage of GDP than the next most profligate country; rising market concentration and corporate profits; runaway growth in top-end inequality; job insecurity and poor job quality; and many other ills. Voters can make better political decisions, and encourage a better direction for the country, by asking whether proposed policies will lead to business-friendly markets, or instead to markets that are authentically friendly to their own values and aspirations.