Review: The Tyranny of the Market, by Joel Waldfogel


Cambridge: Harvard University Press, 2007. 216 pp. $35.00 (cloth).

 

According to Joel Waldfogel, a professor of business and public policy at the Wharton School of Business, “a dominant strand of current thinking” regards markets as superior to government when it comes to providing consumers with what they want. When government undertakes the provision of goods, the products offered are limited to those that meet with the approval of the majority, whereas “[m]arkets are thought to avoid the tyranny of the majority because in markets each person can decide what she wants.” According to this dominant argument, he writes, “what’s available to me in markets depends only on my preferences, not on anyone else’s” (p. 2).

In his recent book, The Tyranny of the Market, Waldfogel challenges this assumption. When one considers what actually happens in free markets, when one considers the products available therein, says Waldfogel, “it’s clear that you can be better off in your capacity as a consumer of a particular product as more consumers share your preferences” (p. 4). In other words, you are more likely to get exactly what you want if your tastes are shared by the majority and less likely to get exactly what you want if your tastes differ from the majority. Thus, Waldfogel contends, when it comes to providing the goods that people want, “the market does not generally avoid the tyranny of the majority” any more than does a democratic political system that allocates goods (p. 6).

Waldfogel’s goal is to examine “how markets actually work” in order to allow policy makers and citizens to balance the shortcomings of markets against the shortcomings of government and “to determine an appropriate mix in each arena” (p. 36). Toward this end, he leads the reader through a series of examples in which there appears to be a breakdown in the market provision of goods.

The main examples that drive Waldfogel’s argument involve what he calls “differentiated products”—products that are quite similar in all but one small respect (p. 13). For example, instead of selling only one type of soda, beverage companies offer hundreds of variations. Even within one category of soda, cola-based drinks, beverage companies offer dozens of choices to satisfy almost every preference in taste, sweetener, and caffeine content. Waldfogel is “concerned about people’s access to differentiated products, such as books, restaurant meals, movies, and cars, that are well suited to their tastes” (p. 13). He explains that “we want our economic system to guarantee that things that ought to get done do get done,” including making differentiated products available for what he calls “preference minorities”—small groups of people with atypical preferences (p. 23).

The problem with market allocation, according to the author, is that it fails to provide such differentiated products for “preference minorities” in situations where the production of a good involves high fixed costs. A fixed cost is simply a business expense that does not vary in relation to the level of output. For example, the rent on a factory building is the same whether a company makes two units of a product or two thousand in the course of one month. By contrast, a variable cost is a business expense that varies with production levels. For example, more or less soda output requires more or less raw materials such as sugar and more or less hired labor.  When fixed costs are low, Waldfogel explains, producers can profit by targeting as many consumer preferences as possible by offering goods with as much variety as possible. When fixed costs are high, however, producers remain profitable only by offering a small variety of goods that corresponds to mainstream tastes.

For example, in a given small town most consumers may favor American-style cuisine, while only a small “preference minority” favors Asian food. Facing high fixed costs such as rent and kitchen equipment, most restaurateurs in that town would need to specialize in American cuisine in order to remain profitable. The town might be able to support a burger joint, a steakhouse, a barbecue place, and a seafood restaurant, but it could support only one Chinese take-out and no sushi bars or Thai restaurants. Waldfogel argues that consumers belonging to a numerically larger group—here, those who prefer American-style cuisine—enjoy a wider variety of options that satisfy their preferences. In this case, the majority can choose from among four places to eat while the “preference minorities” who favor Asian food have only one option.

Waldfogel walks the reader through further examples to demonstrate how the product choices offered by the market are affected by majority preferences. People who suffer from rare medical conditions, for instance, will probably find only one expensive drug available to treat them. However, people with a common ailment such as acid reflux have multiple products from which to choose for the treatment of their symptoms. Another example given is minority-oriented media outlets in urban areas. Where there are more people generally and more blacks proportionally, he notes, there will be more black-targeted radio stations; conversely, where the black population is proportionally smaller, fewer, if any, stations will target their tastes in radio programming. Similarly, Hispanics who prefer Spanish-language newspapers benefit from living in places where large numbers of newspaper readers share their preference.

Summarizing his examination of markets, Waldfogel explains that “markets share the [same] fractious features of allocation through politics” (p. 73). In other words, people often only get what they want to the extent that they want what the majority wants. When fixed costs are high relative to the size of the market, he argues, the dichotomy between markets and government provision of goods is not so clear. With this in mind, Waldfogel turns to assessing the balance that he believes we should strike between market allocation and government allocation in order to ensure that people can get what they want, even when they are part of a “preference minority.”

Waldfogel notes that in markets, trade across geographic areas is the most basic way that “preference minorities” can avoid the “tyranny of the market.” Through Internet shopping, satellite-TV service, and international trade, consumers in a “preference minority” have more opportunities to satisfy their idiosyncratic tastes than they might in their local market. Waldfogel nevertheless warns that the scope of this benefit is small and does not always
overcome fixed costs, and he argues that for products such as commercial air service in small markets, telecommunications or electricity in remote areas, or books in rural areas, government subsidies provide better “satisfaction” than markets.

Citing everything from the U.S. Postal Service and the Corporation for Public Broadcasting to municipal libraries and the Essential Air Service program, Waldfogel argues that government subsidies and mandates provide high fixed cost goods where markets do not. “These interventions” he notes, “may in fact enhance efficiency”—where “efficiency” means that the goods consumers want are available to them (p. 146). Waldfogel concludes that, for products with high fixed costs, “the market solution has no claim to optimality,” that government intervention is required to make them available to those who want them (p. 163).

Waldfogel’s analysis of fixed costs is flawed, and reveals his conflation of government allocation with market forces. The book fails to address the myriad ways in which his solution—focused government intervention—artificially drives up fixed costs. In the author’s opening example of the variety available in broadcast radio, for example, no mention is made of the high costs imposed on the industry by FCC regulations. Thus, in the book’s analysis, the fixed cost of maintaining a radio transmission tower is no different from the high cost of obtaining an FCC broadcast license. Likewise, in the example of pharmaceutical products, the author equates the fixed cost of research facilities with the high cost of satisfying burdensome FDA approval procedures. Neither the high fixed costs of FCC regulations nor of FDA approval would exist without government intervention in the economy. Not surprisingly, Waldfogel also fails to account for the easily observable fact that industries with more freedom and less regulation, such as Internet retailing, have overcome fixed costs through technological innovation. Tellingly, Waldfogel is murky about how we should draw the line between cases where government intervention is needed and where it is not, claiming that “there are no pat answers” and therefore failing to provide a principle by which to limit the expansion of government into all sectors of the economy (p. 170). This points to the deepest flaw of The Tyranny of the Market.

From the outset, Waldfogel’s characterization of the differences between free market and government allocation ignores a primary and fundamental difference. In a free market, all transactions are voluntary. Under a system of government allocation, subsidy, or mandate, transactions come under the coercive power of the state. If high fixed costs are associated with a particular product, consumers in a free market are free to choose whether to incur those costs themselves in order to attain that product. Under government control of a market, all citizens must bear such costs through coercive taxation whether or not they would choose such products.

Although Waldfogel attempts to support his case by pointing to the (supposed) inherent flaws of a free market, his argument in fact rests on something more fundamental than economics; it rests on a particular morality—namely, altruism: the notion that the individual must sacrifice or be sacrificed for the sake of others or society.

Waldfogel’s switch from the language of economics to the language of morality clues us in to the underlying ideas driving his thesis. “The reason for resorting to government,” he contends, “is that something worth doing is not being done in a market” (p. 169). For instance, he justifies postal subsidies as “worth doing”—meaning, good—on the grounds that they “give consumers the same level of satisfaction from letter-delivery service regardless of their decisions about where to live” (p. 148).

The reason, of course, why some things are not being done in the market is that people have voluntarily and self-interestedly chosen not to foot the high cost of doing them. Waldfogel’s argument amounts to the claim that some “preference minorities,” namely those in rural areas or those of limited means, have a right to the satisfaction of their desires in defiance of the cost of doing so—and thus that the government must force other individuals to sacrifice for the sake of these minorities. The real “tyranny” that Waldfogel rejects is that of each individual’s moral right to act on his own judgment for his own sake—a truth based not on the principle of altruism, but on the principle of egoism: recognition of the fact that each individual should act in his own best interest and is the proper beneficiary of his own productive actions.

In essence, Waldfogel seeks to further institutionalize altruism in politics by increasing government intervention in the marketplace and forcing some people to satisfy the desires of so-called “preference minorities” through further taxation.

Thus an important lesson can be learned from The Tyranny of the Market. It inadvertently shows why proponents of capitalism cannot succeed while accepting the premise of altruism. If it is morally right for the individual to sacrifice for the sake of others—whether “preference minorities” or one’s neighbor or one’s community or society as a whole—then the efficiency of a free market is morally irrelevant.

There is no way to escape the “tyranny” that Waldfogel fears—the “tyranny” of capitalism, freedom, individual rights, and egoism—except by forcing individuals to sacrifice for the sake of others. And there is no way to defend the idea that individuals should be forced to sacrifice for others except by relying on the widely accepted idea that self-sacrifice is moral. Waldfogel and his ilk know this and proceed accordingly. And they will succeed accordingly until those who wish to defend capitalism are willing to reject altruism and embrace egoism.

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