Saturday, January 19, 2008


ABC News's John Stossel:
Why are so many people so hostile to free markets?

Markets provide miracles that we take for granted. Clean, well-lighted supermarkets sell 30,000 products. Starvation has largely vanished from countries where private property and economic freedom are permitted. Free markets have rescued more people from poverty than government ever has.

And yet, when innovators propose extending this benign power, people shriek in fear.

This was clear reading The Wall Street Journal not long ago.

The "Letters" section led with complaints about Bob Poole's column on well-maintained private highways that keep traffic moving. One writer complained that such highways exist for "the privileged … who can afford surprisingly large … fees … to drive a very boring 45 minutes around metropolitan Toronto. Highway 407 is certainly a great success -- for its bondholders."

Surprisingly large fees? Only if you are clueless about what you pay for "free" roads. And why is success for the bondholders a bad thing? Is the writer envious? If the ride is boring, he doesn't need to take it. No one forces anyone to use a private highway. Why do so many begrudge the successes that voluntary private exchanges bring?
(via Sigmund, Carl & Alfred)


OBloogyhell said...

I personally advocate a high measure of private enterprise in the maintenance of highways -- I'm not so sure that they work themselves as a functional private property system. They tend to be non-competitive, so there are strong limitations on how much anti-gouging tendency there is in any market.

The Fla Turnpike is a key example. The fees for it have gone up massively in the last 20-odd years, despite the fact that the system is long since fully paid for, and all that remains is upkeep. The road, however, provides a key linkage from the west side of Florida to the east side, essentially mirroring I-4 in its functionality. There is no alternative route which does not involve a considerable increase in mileage, so they can, in fact, gouge the user for a much higher rate than the upkeep expenses justify, simply because there "is no competition".

Free markets don't function anywhere near as well in the absence of competition, and roads have alternatives, but not always ones which put "sufficient" pressure on the tollway owners not to gouge for the privilege of using their roads.

There is always the counterclaim of "who defines gouging?" -- I don't use the term in an "it oughtta be illegal" sense -- I mean there are margins of profit which you inherently don't object to, they represent a reasonable charge for the addition of convenience for whatever is being provided to the user. There are situations which allow higher margins of profit which you DO object to (even though willing or forced to pay by circumstance). You feel cheated. Every individual has their own level of this, but there is, I'd argue, "a reasonable consensus" about markups over-and-above-layout-expenses which defines what I mean. In no sense do I suggest such things should be regulated, but I think most people would agree that there is a vaguely defined notion of what constitutes a fair markup and an unfair markup.

In the absence of competition in a free market, it is far more likely that there will be "unfair markups".


Sigmund, Carl and Alfred said...

If terminating a fetus is a private decision, why shouldn't we be able to sell organs?

Surely the 'It's my body' argument applies to kidneys, right? If there is a difference, what is it?

Carl said...


There is a difference between the right to sell property and the right to destroy it--and courts recently have been hostile to an un-bounded right to destroy. Some countries have low rates of organ donation reflecting "strong religious sanctions or cultural inhibitions with respect to 'brain death' or the improper handling of the dead body." So I usually do not rely on legalized abortion in justifying a free market in organs.

That being said, I agree with you. I have long supported creation of a free market for organ donations--it's a favorite example in the "Law & Economics school" to which I subscribe. And as pro-choice proponents argue, if selling kidneys is "repugnant," don't sell yours. I'm not persuaded by the claims that a free market will disadvantage the poor--that's classic and insulting liberal paternalism. Still, it's worth noting the experiences of relatively free organ markets in India, the Philippines and Iran--mostly good, punctuated by horror stories.

But the bottom line is this: research suggests that "monetary incentives would increase the supply of organs for transplant sufficiently to eliminate the very large queues in organ markets, and the suffering and deaths of many of those waiting, without increasing the total cost of transplant surgery by more than 12%." That's a good thing.

Carl said...


I've spent about 30 years studying and/or working in regulated industries. I agree that the absence of competition creates the opportunity for suppliers to earn monopoly rents. And I agree that that condition, called market failure, often is used to justify government regulation of prices. Services where no competition is possible -- because price declines with increased output over the relevant range -- are labeled "natural monopolies."

I have come believe that true natural monopolies are rare, and I strongly doubt any road in the United States could qualify. Thus I question the need for regulation of private turnpike rates. Part of my doubts stem from the near impossibility of calculating a "fair price." I could supply chapter & verse about "rate-of-return" regulation vs. "price caps" and "long run incremental" vs. "fully distributed" costs. But my experience is that the least intrusive regulation usually is best.

If you must regulate toll roads, set a relatively high price cap and let the owner set the tolls anywhere below that. If drivers object to the cost, they can grab the Garmin and find alternate routes. That choice obviates the need for most private toll regulation.

Carl said...

Norman Geras has two recent posts on the organ transplant policy debate.

OBloodyhell said...

Here's a specific example -- why are Fla's Turnpike fees so high?

Because the fees don't reflect the cost of maintenance, they are being used for other purposes:
the Florida Transportation Commission (FTC), a civilian oversight group of the Florida Department of Transportation (FDOT) appointed by the Governor, supported a visionary financing plan for Florida's Turnpike system to use the bonding capacity of the Turnpike to finance new Florida Intrastate Highway System projects. In time, the tolls collected would help finance future statewide transportation projects.

Right. Florida has a balanced budget requirement in its Constitution (Thank God and the former voters!), so the FT is being used to circumvent that requirement to pay for additional road building projects. It's a scam, just like NY State did with Attica prison.

I see nothing, given the above example, to stop a private corporation from building a road (often using land obtained at lower prices using government confiscation rules) and charging tolls which are used to fund outside projects having nothing to do with the tollway.

As far as roadways not constituting a "natural monopoly", I'd argue that anytime there is no competitor, or a "worthless competitor" (i.e., the competitor is clearly no substitute at all for the product or service -- and limit this to where there is a demand for another service) then a defacto monopoly* is in play.

The FT is a natural monopoly. There are other routes, but the time and cost of them (extra fuel) are sufficiently prohibitive as to strongly discourage that choice. The fees are not set to represent the nominal cost of the usage of the FT, they are set to produce a minimum utility value for the resource. Any more and they would lose most customers to alternate routes.

The existing line, however, represents a serious barrier to the creation of an alternative, since they CAN vastly undercut any competition created before it could recoup its investment expense. The creation of an alternative would fail because the new competitor would have to charge more (to pay off interest, maintenance, and principle) though it could be far less than the FT currently charges, but, since the FT only has to pay maintenance, they can easily undercut any new competitor from investing in the idea.

*Sorry, Microsoft has a defacto monopoly. Linux & Leopard are no competition for it. It may not last, but as long as it does, the industry, and the public, suffer massively. Literally billions of man-hours are wasted worldwide on M$ stupidity and incompetencies.

Carl said...


If the FT is owned by the state -- and tolls set to augment taxes -- that's outside the scenario Stossel, and S,C&A, are addressing.