The Choice Illusion

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In the mainstream debate both for and against a free market, one argument that appears continuously is that the free market is predicated upon choice and the ability of the individual to choose. Those in favour will argue that more choice promotes competition and increases the freedom of the individual to meet his ends, and so the increasing of choice and stifling of monopoly wherever it appears is a good thing. Opponents will counter that choice can be wasteful, costly, inefficient and overwhelming particularly when it concerns supply of provisions as basic as water, and, furthermore, that often the appearance of choice is merely an illusion conjured up by private companies that basically operate in a profit-maximising cartel.

Wading into this debate as a libertarian we can see that the basic statements on each side are not incorrect. However they either overlook or misunderstand the true nature of choice in a free society. The kernel of truth in the pro-choice argument is that voluntary behaviour, expressed through choice, leads to market outcomes that provide the most benefit to the consumer. But such an advocacy is formal only – people choose voluntarily not only which suppliers they are willing to patronise, but also the extent of choice itself in a particular industry is the outcome of voluntary action. In some industries, for example, particularly those that are growing and innovative, consumers are willing to support multiple suppliers with a large range of different products and all of these may be viable. We might say that smartphone manufacturing is representative of this kind of industry. In other industries, however, which are perhaps maturing or consolidating and reaching the end of their innovative stage, the benefits to be gained from economies of scale and simple and straightforward products with little differentiation might be what consumers desire. This is particularly true of the supply of commodities where the only differentiation is price and the only benefit to consumer can be reduced costs. This kind of supply naturally lends itself to one or only a bare handful of suppliers and choice in such an environment may be reduced to minor differences in customer service but is otherwise likely to be stressful, wasteful and unnecessary.

However, pro-choice advocates often are not arguing in favour of this formal meaning of choice, but rather they assume and press ahead for a choice that is substantive. In other words, for every single industry there must, necessarily, be several suppliers from which a consumer can choose, however basic the product and however costly the splintered operations. We have already examined the economic fallacies of this belief from the point of view of competition law and the shibboleth that increasing competition is always a boon to the consumer. However, it is also a dangerous ruse that can be used to create nominal or illusive choice while preserving an overarching government monopoly or control that allows government favoured private companies to line their pockets, at the same time allowing all of the blame for the waste and inefficiency to be directed not to the governmental element but to the “free market” vestige of the particular industry. In the UK the privatisation frenzy of the Thatcher and Major governments was often justified by the need to give “choice” and “competition” to the consumer. Britain’s railways for example, are now “privatised” and whenever you board a train there will be a private company’s logo emblazoned on the carriage and you will see front line members of staff wearing uniforms that indicate their representation of these private companies. But the track, stations and signalling are wholly owned by Network Rail, a statutory company that has no shareholders and is under the de facto control of the government. The train operations themselves are not subject to the forces of natural competition but are parcelled out by the government into geographical monopoly franchises to private companies chosen by the government and who, with the government’s blessing, are allowed to operate the franchise for a set number of years before they must retender. This cauldron of public and private activity blended together led to the UK’s railways being judged the worst in Europe from the point of view of cost and efficiency in early 2012. Yet it is “privatisation” and “competition”, those fancy public-facing corporate logos on the timetables and uniforms, that are lumbered with the blame, rather than the government string-pulling. The energy industry is just as bad, if not worse. The electricity infrastructure is owned by National Grid, with six dominant, government-licensed suppliers sending their product through the same wires in what is a ridiculously regulated and cost-heavy sector that is not only seeing rising prices for consumers and talk of fuel poverty but is also on the verge of collapse. Indeed the Soviet-style description of the regulatory framework by Energy UK, the industry’s trade association, only scratches the surface but it is a succinct summary:

The electricity and gas markets are regulated by the Gas and Electricity Markets Authority, operating through the Office of Gas and Electricity Markets (Ofgem). Ofgem’s role is to protect the interest of consumers by promoting competition where appropriate. Ofgem issues companies with licences to carry out activities in the electricity and gas sectors, sets the levels of return which the monopoly networks companies can make, and decides on changes to market rules.1

All of this is before we even go near the odious and destructive high street banking cartel.

Given all of this is, is it any surprise that people lay the blame for poor service, for high costs, for inefficiency, for waste, and for private companies lining their pockets at the door of free marketers’ obsession with choice and competition? Is it any surprise that, not realising that it is the underlying control and forcing of substantive choice to the benefit of its favoured friends in “private” industry, that there are calls for renationalisation of public communications networks and utilities? There is a strong case to be argued, not only from the point of view of its danger to the reputation of the free market but also from that of the level of service offered to consumers, that private companies operating government controlled services is often worse than explicit and outright nationalisation.

As libertarians who cherish the free market our devotion to choice is encapsulated by our commitment to voluntary behaviour and interaction and is only a subset of this wider concept. We do not mean a controlled and enforced, substantive choice in every industry, nor do we mean the illusion of choice created by the government that rips off the consumer and leaves the free market to bear the brunt of their ire. Leave the consumers alone entirely to express their preferences through voluntary action. Leave them alone to determine how much choice they want. Only then will we see industries that are genuinely able to meet the needs of consumers with ranges of products that are suitable to their ends at prices that they are able to afford.

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1http://www.energy-uk.org.uk/energy-industry/the-energy-market.html. Emphasis added.

Social Utility and Envy

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In a previous essay the present author commented on the role of envy in relation to greed. This short post will seek to comment on the relationship between social utility and envy, elaborating on a position put forward by Murray N Rothbard.

Rothbard treated the problem of envy and societal wealth in the following way:

If A and B trade two goods or services, they each do so because they will be, or rather expect to be, better off as a result of the trade. Surely it is legitimate then to say that A and B are both better off, and “therefore” that “society is better off,” since no one demonstrably loses by the exchange. It is implicit, and even explicit from the use of the value-loaded term “optimal,” that this exchange is therefore a “good thing.” I am sympathetic to the view that this exchange is a good thing, but I do not believe that this can be concluded merely from the fact of exchange, as the Pareto Optimum does. In the first place, there might well be one or    more people in existence who dislike and envy A or B, and who therefore experience pain and psychic loss because the object of their envy has now improved his lot. We cannot therefore conclude from the mere fact of an exchange that “everyone” is better off, and we can therefore not simply leap to the valuation idea of social utility. In order to pronounce this voluntary exchange as “good,” we need another term to our syllogism: we must make the ethical pronouncement that envy is evil, and should not be allowed to cloud our approval of the exchange. But in that case we are back to the need for a coherent ethical system. I believe, as an “ethicist,” that envy is evil, but I see no willingness among economists to admit the need for, much less set forth, any sort of coherent ethical position.1

In an earlier article he provided an elaboration as to why the potential for envy does not prevent us from saying that societal wealth increases from free exchange:

But what about…the envious man who hates the benefits of others? To  the extent that he himself has participated in the market, to that extent he reveals that he likes and benefits from the market. And we are not interested in his opinions about the exchanges made by  others, since his  preferences are not demonstrated through action and are therefore irrelevant. How do we know that this hypothetical envious one loses in utility because of the exchanges of others? Consulting his verbal opinions does not suffice, for his proclaimed envy might be a joke or a literary game or a deliberate lie. We are led inexorably, then, to the conclusion that the processes of the free market always lead to a gain in social utility. And we can say this with absolute validity as economists, without engaging in ethical judgments.2

In other words because of the concept of preference demonstrated through action it is not possible to determine whether a third party is envious:

Actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis.3

Nevertheless I believe a stronger and more precise elaboration can be made. From the fact of action we are able to deduce that a person acts to bring about a set of circumstances that he prefers to those that exist prior to the action. But this valuation of circumstances is made ex-ante, a fact to which Rothbard alludes but passes over, in the first passage quoted above. It is an assessment of the value of that which is against that which he/she wants to bring about. It is only in this ex-ante sense that we are able to say that if A and B participate in a voluntary exchange that they are “better off”. The envy of a third party, however, can only arise at the ex-post stage, that is after the completion of the action – the envy is of the circumstances that have arisen as a result of the action. In the ex-ante position the action exists only in the mind of the acting individual/s. Any feelings of third parties must necessarily arise because of the state of the world as it is prior to action, not because of it. When we say that societal wealth increases from a voluntary action we mean that this is true only ex-ante.

The situation ex-post is markedly different. At this point we are, in fact, not able to deduce if anyone is better off, even the parties to the exchange let alone potentially envious third parties. So not only may third parties be envious and bitter at what has arisen from A and B’s exchange but A and/or B themselves may feel that they have suffered a psychic loss and, if they could have their time again, would not repeat the exchange. Once the actions are completed and the desires of the minds of the acting individuals have expressed themselves through real actions we move into the ex-post world where nothing more about the action can be said.

Why are we not able to determine this ex-post situation? Precisely because of the concept of demonstrated preference elaborated above. Unless valuations are expressed through action we cannot deduce at all the ex-post position. A person may be profitable, loss-making, envious, hurt or whatever but this is merely hypothetical without the specific evaluation of the individual being deducible through his actions.

It follows that when different methods of economic organisation are being compared, it is only the ex-ante consideration that is relevant as this is the only one that can be deduced through actions. For the actions of all individuals, whether they are of an individual, a corporation, a Government or the Central Planning Board only demonstrate their ex-ante valuations. And it is only with free exchange that both parties to the transactions expect to be better off. All other forms of organisation necessarily involve involuntary actions where at least one party does not expect to benefit (otherwise they would have made the action voluntarily), the impossibility of measuring this loss meaning that we cannot conclude there has been any increase in societal wealth.

In sum, therefore,

  • Under conditions of voluntary action all parties to an action will benefit ex-ante;
  • Ex-ante an action exists only in the mind of the acting individual/s. Third parties can neither gain nor lose ex-ante as nothing has happened in the world for them to assess;
  • It can therefore be said that voluntary action will increase societal wealth ex-ante.
  • Under conditions of involuntary action at least one party will not benefit ex-ante. It cannot be said, as a consequence, that societal wealth increases;
  • Ex-post it is not possible to deduce whether anyone has gained or lost; this can only be evaluated through further, concrete actions which themselves can only be analysed according to the criteria just elaborated.

Nevertheless it must be stressed that this is insufficient to justify free exchange unless we insert ethical norms that state why we should want societal wealth to be increased; indeed, why should we want everyone to be better off? Why not a majority or a minority? There is nothing to stop someone from saying “I accept that free exchange makes everyone better off but I don’t want everyone to be better off. I think that a person should make sure that himself and his friends are better off regardless of the consequences to everyone else.” Rothbard again:

The fact that the free market maximizes social utility, or that State action cannot be considered voluntary, or that the  laissez-faire economists were better welfare analysts than they are given credit for, in itself implies no plea for laissez-faire or for any other social system. What welfare economics does is to present these conclusions to the framer of ethical judgments as part of the data for his ethical system. To the person who  scorns social utility or admires coercion, our analysis might furnish powerful arguments for a policy of thoroughgoing Statism.4

Such a possibility cannot be ruled out from the fact of free exchange alone. They can be ruled out praxeologically but this must be the subject for a later essay.

1Murray N Rothbard, Value Implications of Economic Theory, Ch. 12 in Economic Controversies, p. 243.

2Murray N Rothbard, Towards a Reconstruction of Utility and Welfare Economics, Ch 14 in Economic Controversies, p. 320.

3Ibid., p. 290.

4Ibid., p. 333.

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