We may be quite aware of various ways we are constrained in life-biology, social norms, authority-but one area we are told embodies robust, unlimited choice is the free market. The free market allows us to choose among approximately 45,000 items in the typical grocery store, millions of songs on iTunes, and more than twenty different flavors of Coca-Cola. The story of markets, whether supermarkets, flea markets, or capital markets, is a story of choice.
The conventional wisdom is that markets embody and nurture choice, and choice embodies and nurtures markets. If people can freely choose, they become better off over time. Rational people will buy products only if the purchase makes them better off. If having a Big Mac makes you happier than keeping the four dollars in your pocket, then you buy it. You are by definition better off after the purchase.
One benefit of the free market is the "price mechanism"- the translation of the preferences and choices of millions of us into prices and wages. If we like a product, we are willing to pay for it. The more who are willing to pay, the more the supplier can charge; if fewer are willing to pay, the price will drop. In this way, prices themselves embody information about people's desires and tastes. If we value something, it has a high price; if we don't, it doesn't. As long as the prices for those things are allowed to reflect the choices and preferences of those who want to buy them, these goods will flow to those who are willing to pay most for them.
This story about the markets helps explain why economic libertarians hold up free choice as a fundamental value. Markets embody choice - look at how many things you can choose! And equally, markets depend on choice - if we all are free to choose, the market allocates resources to those who desire them. If choice is limited, the story goes, then people are less able to satisfy their preferences and thus worse off. What's more, if choices are limited or certain preferences declared off limits, markets themselves work less efficiently because prices - and therefore resource allocation - will be skewed.
But much conventional wisdom about the glory of unfettered markets is simply wrong. We should be less confident about the benefits of markets bestowing choice, or of choice empowering markets, than economic theory would suggest. The market also limits choices. Rather than being the locus of freedom and individual empowerment, markets may be constrictive, manipulative, and invasive. Perhaps ironically, markets need to be controlled in order for people to enjoy genuine choice.
Let me offer an example. My grandfather worked his entire adult life as a coal miner in Kentucky, beginning each day riding a tram deep into the earth. One of my earliest memories is shopping with my grandmother at her town's general store, which was owned by the coal company. When it came time to pay, she retrieved from her purse a booklet of coupons, emblazoned with the coal company's name and various dollar amounts. She used the coupons to pay for her groceries and sundries. I asked about the coupons, and she explained to me that they were a kind of money that she could use only at the company store.
Only later did I come to understand that those coupons were scrip, a medium of exchange then used in mining communities. The mining companies would pay the miners in scrip instead of cash, and the scrip was redeemable for goods only in stores owned by the company. Because of the closed system, the company could charge a premium for its products. If a miner ran out of scrip, he could ask for an advance on his wages, which was also paid in scrip. The system often drove miners deep into debt to the company: low wages paid in scrip, scrip used to buy overpriced goods from the company, loans from the company paid in scrip. This cycle created an obligation on the part of the miner to continue working to pay off the debt.
Coal companies cannot lawfully pay wages in scrip any longer. It even may have been illegal to pay my grandfather in scrip back in the 1960s, when I saw my grandmother carrying her coupon books. Scrip was outlawed because it was exploitative. The power the coal company exerted over its employees was too great.
But notice something. The scrip system was not a market perversion but its perfection. No one was coerced, and economists would say that no one was acting irrationally. The coal miners were not prisoners--they could quit at any time. And because they were acting voluntarily, the theory is that they were better off working for scrip than whatever the alternative was, which probably was not working at all.
This is why economic reasoning often seems obtuse and out of touch. To say that coal miners in the days of scrip and debt servitude were acting voluntarily is a misunderstanding of what "voluntary" means. There was coercion everywhere, even though miners were never marched to the mines at gunpoint. But my grandfather had to feed his family; there were few other jobs to be had, and no better ones for someone with his skills; he had no way to move on; and the wage came in the amount and form the company offered. "Take it or leave it" is not a real choice when "leave it" is not an option.
This example shows why markets do not necessarily provide a way for people to improve their lot. They simply enable people to engage in exchanges. Those exchanges inevitably benefit the parties that are already more economically powerful, because they can extract more from the exchange. If you have little economic power, there is nothing inherent in the market exchange that makes you better off than before. All an exchange ensures is that the deal you "voluntarily" agree to is better than your other options. If you have no other options, then an exchange can make you worse off. You spiral downward, little by little, as the unfavorable exchanges add up. You have to make some kind of deal, and all the choices are bad. There is nowhere else to sell your labor, nowhere else to go, and no way to subsist on air and dirt.
Markets are amoral. There is no good or evil in markets, no just or unjust. There is only "willing and able to pay for" and "not willing and able to pay for." You don't get out of markets what you deserve - you get what you can negotiate for, based on the information you have and what you have to offer in exchange. And if you don't have much or know much, you don't get much.
Your wage is not based on what you need but on what your employer is willing to pay you. And your employer's willingness to pay may not depend on the added value you create for the company. If markets have their say, your wage would depend not on what you produce but on how much the company would have to pay your replacement. If you're a coal miner, your wage does not depend on the value of the coal you dig but on what the company would have to pay the guy standing outside the gate looking for work. If you're an associate at a law firm, you make the market rate for associates, not what the firm bills from your work. And if you're a recent liberal arts graduate, you might be lucky to make a couple bucks an hour plus tips at Joe's Crab Shack. Wages are competitive only in a competitive market, and a worker is not guaranteed anything other than what he or she can get by threatening to walk away.
This applies whether we are talking about your labor or your money. What we have to pay for bread and milk is not based on how much we need them but on how much everyone else is willing and able to pay. Just as your wage is pushed down if someone will do your job for less, the costs of things you buy will go up if someone will pay more.
So markets are not the perfect embodiment and celebration of choice. What we have to pay for things is dependent on others. What we earn is dependent on others. What products are available is dependent on others. What jobs are available is dependent on others. Moreover, an empty wallet is not a problem that markets race to fix. By definition, if you have nothing to trade in an exchange, markets ignore you. If your resources are thin, the market is no longer a source of abundant choices. Since markets allocate even basic necessities according to our ability to pay for them, if you cannot pay then the market does not provide them. The market becomes a way to limit choice.
In fact, if we remove the hazy presumptions of economic deism from our eyes, the world around us reveals the limits of markets. There is nothing magical about markets that raises the living standard of any given person over time. Billions of people are desperately poor and not getting better off as markets reach them.
All this is to say that markets provide choice only if you have something to pay with. Nothing limits choice like scarcity. For millions of people in the United States and billions throughout the world, markets are a source of powerlessness.