May 15, 2012

Michael Sandel Is Wrong on Markets...

...and (no surprise!) Tom Friedman is wrong, too.

Rich in unintended commercial irony, Thomas Friedman proudly proclaimed in the New York Times this weekend that “This Column is Sponsored by No One.” He then went on to give a huge publicity boost to his childhood friend Michael Sandel, through his uncritical and free endorsement of the Harvard philosopher’s recent book, What Money Can’t Buy: The Moral Limits of Markets

It would have been easy to write a different and more informative book under Sandel’s evocative title, by stressing the many principled limits on buying and selling that are, and should be, accepted all across the political spectrum: It is wrong to buy and sell other individuals, because it necessarily compromises their individual autonomy; it is equally immoral to hire a hit man to kill another person; less dramatically, it is wrong and illegal to pass off one’s own goods under the brand name of a superior competitor; it is also flatly illegal today to enter into collusive agreements to rig markets by dividing territories or fixing prices; and it is flatly wrong and illegal to bribe public officials for permits or to buy votes in a public election.

 Epstein  
 Illustration by Barbara Kelley

The set of prohibitions on market transactions also extends to a broad class of “merit goods” that lose all value if they are bought and sold. To take one simple example, high school seniors are surely entitled to pay for instruction on how to improve their SAT scores. But it is beyond the pale for them to send in a large check to the Educational Testing Service to receive a high SAT score. The same is true for grades on every kind of test imaginable, which only have value if they measure the intellectual ability of the people who take them.

The operation of all educational markets necessarily depends on accurate predictors of performance so that colleges and other institutions can make their admissions decisions. It is just for that reason that no graduate student is allowed to hire a third person to write his thesis, and no professor is permitted to publish under her name the work of another scholar. What is true of academics is also true of bridge, chess, and athletics, whose lifeblood depends on the reliable rankings of their players.

The multiplicity of social norms against various forms of manipulation are rigidly enforced in every voluntary market that depends on reliable information. Yet Friedman and Sandel are silent on these institutional constraints. Why? Because a nonstop Jeremiad against modern civilization, which describes Sandel’s book in a nutshell, reliably outsells a more cautious defense of current practices.

What we need is a more theoretical book that explains both the uses and limits of market institutions. Such a theory rests on a strong presumption for private voluntary transactions—both commercial and charitable—on the grounds that they produce gains for the parties to them. That presumption is overridden in the cases set out above because the effects that these transactions have on third parties are systematically negative. Yet the same theory that condemns those transactions also refuses to allow disappointed sellers in a competitive market to claim that “ruinous competition”—i.e. lower prices and better products—should be stopped by government action.

Classical liberal theory offers a powerful rebuttal of Sandel's argument.

The admitted losses to disappointed competitors is always overshadowed by gains to an increased number of consumers, which international and domestic trade barriers and other protectionist policies always throttle. Stated more generally, a coherent classical liberal theory does not cede the world of social justice to Sandel’s naïve communitarianism. It offers a more powerful alternative of its own.

The failure to develop a coherent overarching theory leads Friedman and Sandel to a misguided attack on the profusion of product placement rights increasingly found in films and television shows. Is it really one of the great social ills of our time that a noted writer agreed to refer to Bulgari jewelry a dozen times in a novel, or that New York Life Insurance Company received a plug every time a runner slid safely into base?

Originally these short plugs were intended to create positive associations between commercial products and public causes. More recently, this advertisement technique has found still greater use because it offers a creative response to the increasing ability of online programs to bypass advertisements on, for example, many television shows. The close integration of advertisement with narrative preserves a vital revenue stream without interrupting the show. Even the New York Times helps fund Friedman’s salary by surrounding his column with well-placed rotating advertisements from, among others, Aetna Insurance, Mazers, SmartTV—and a plug for a new Fox Searchlight Film with the title of “Lola Versus: Sex. Love. Lola. The World.”

These ubiquitous advertising arrangements make eminent economic sense even for our cultural elites. The days of families reading Life magazine or sitting down to watch the Ed Sullivan show are over. Market segmentation is the order of the day, and the New York Times is a eager participant in the new information order. Powerful algorithms allow the Times to match high-priced products with the demographics of its educated customer base.

A close monitoring of clicks on various sites allows both the Times and its advertisers to determine the effectiveness of the various ad placements with a targeted customer base. That information generates accurate information on prices and placements for online advertisements, which in turn leads to more high-brow intellectual content. To these eyes, the entire transaction is win/win/win for consumers, advertisers, and websites. It is a strange brand of moral philosophy that reserves its greatest indignation for our most fruitful social innovations.

Voluntary markets enforce social norms against manipulation.

What is true of product placements is also true of naming rights to stadiums, universities, concert halls, and hospitals. Should anyone be reluctant to attend a conference at Carnegie Hall, read a book in Widener Library, occupy a bed in Johns Hopkins Hospital, or attend a class taught by the Anne T. and Robert M. Bass Professor of Government (that would be Professor Sandel’s appellation)? People and foundations want to attach their names to institutions that they think make positive contributions to society precisely because they too understand that social welfare is not measured solely in terms of dollars and cents.

Put otherwise, the entire system of charitable and religious activities succeeds precisely because most of our cultural leaders turn out to be the very individuals who have excelled in making their fortunes in market environments. The activities of the Gates Foundation don’t count for less because Bill Gates has been subjected to more than his fair-share of unwarranted abuse for Microsoft’s various marketing practices.

This is not to say that all naming opportunities or gifts are appropriate. There will never be an Osama bin Laden Institute for Religious Toleration in Manhattan. The private and reputational constraints that operate in this area should insulate it from Friedman and Sandel’s broad- based attacks.

Their imperfect account of how private institutions work leads Friedman and Sandel to dangerous policy prescriptions. Given their warped vision of the social landscape, they find undue dangers in the voluntary segmentation of groups by income. Advertisements in schools, writes Sandel, “teach students to be consumers rather than citizens.” Shorter lines at airports for first class passengers lead the rich and the poor to lead separate lives, such that the want of “class-mixing institutions and public spaces” erode a base of common experience and shared citizenship. It is as though the greatest peril to a common social fabric lies in the creation of stadium skyboxes, first class airline lounges, and gated-communities, and not in our failing public schools, which all too often teach nothing at all, and certainly not civics.

Blinded by their own snobbery, Friedman and Sandel miss some real advantages that come from the creation of the elite institutions they’re so quick to disparage. All human activities take place in a combination of public and private spaces. The pressure for individuals to move in circles with persons of like income and tastes is driven in part by the need to form coherent neighborhoods, where all parties want the same quality and type of public goods. It is difficult to plan for common amenities in buildings whose tenants are very rich and very poor. Separation by groups, however, allows each to receive a superior mix of public and private goods. Those same forces help drive, now as in earlier times, the separation of rich and poor neighborhoods.

These are trends, however, not absolutes. In many settings, of course, that rigid separation is not desired. That’s why virtually all of the elite private schools and universities have adopted a complex system of scholarships and affirmative action programs on their own. All systems of voluntary sorting are hard to predict. Ride the New York City subways, and it is clear that people from all walks of life mix together on a daily basis.

Why does the moral philosopher disdain our most fruitful social innovations?

Perhaps the greatest danger of Sandel’s vision of the world is that it ignores the single-most dramatic trend of recent years—the decline of market institutions and the rise of government power. To read Friedman and Sandel is to get the impression that powerful private players have driven from the field the strong social and government institutions that are needed to constrain the appetites and abuses of private wealth.

But we do not live in that society. By any measure, the share of government control over all areas of life has increased, whether we measure the change by the increase in the percentage of Gross Domestic Product that is under government control, by the rate of transfer payments, or by the number of pages in the Federal Register. The success of any society depends on its expanded capital base, which alone makes both private investment and public service possible.

It is very hard to think of a single government initiative in the last dozen years that has helped to improve this basic economic climate. Instead we have major government interventions in financial markets with Sarbanes-Oxley and Dodd-Frank, where the former weakens the venture capital market for new firms and the latter leads to the excessive concentration of capital in large banks. Then there’s the Patient Protection and Affordable Care Act (aka ObamaCare) whose likely effect is to make it more difficult for individual patients to protect themselves in a health-care market in which the cost of care will ultimately become ever less affordable.

A sound system of political economy operates with this simple proposition: All new extensions of government power are examined under a presumption of error. Friedman and Sandel go, therefore, in exactly the wrong direction. By unduly criticizing a set of innocuous or useful social practices, they divert public attention away from the one issue that now dominates all others: How can this nation reignite the engines of growth and prosperity? That will never happen if we fixate on the product placements and naming rights that raise the hackles of our cultural elites.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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