Visible Hands in the Economy
4. Markets may be unfair or unethical

When people consider close-to-home cases, the workings of the market can seem unfair. Unemployment in your own community is a potent example. Likewise, the market price can be too high or too low, according to some non-market ethical standard. Especially when prices of necessities such as bread and fuel soar, you will hear cries of outrage.

The pro-market economists praise the efficiency of markets, in the sense that competitive markets generate the lowest price for any given quantity to be supplied. But when the market for flour generates an enormous price in the midst of a famine, the poor may starve. Accordingly the market indirectly decides who stays alive and who will die. Many people consider such an outcome horribly unfair. Should the invisible hand be allowed to play God?

When market outcomes are considered unfair the people stop accepting them. Even a person with little interest in fairness would be concerned about a breakdown of faith in the market, because the eventual result can be revolutions and the seizure of property, and the disasters of centralized planning and its corruptions.

Consider, for example, housing in Central London, which is among the most expensive in the world. During a particularly bad stretch for the British economy, so-called "squatters" would seize unoccupied housing and live in it for the long time that it took to get them out legally. The price of housing was so high, some argued, that people had to steal it. A property owner in Central London could take the view that the police should intervene to eject the squatters. Or one could take the view, more fearful of the revolution, that the market ought to be supplemented, perhaps with more public housing. In other words, markets depend in the long run on a political agreement to respect their outcomes. In London the rights of property owners were eventually reasserted. Not so in Amsterdam: to this day squatters will seize properties that are not occupied, and the courts and the police will not enforce what laws there are. Not surprisingly, apartments sell for less in Amsterdam than in London: who wants to buy an apartment that may be stolen by squatters next week? What's fair? To whom?

The judgment of unfairness might be also made of the distribution of income. The debate turns on the highs and lows of income earned by people who work for pay - whether as dishwashers or as chief executive officers of large corporations. Is the distribution fair? In the United States in 2000 the median family income was about $50,000. (The "median" is simply the number that half of the distribution exceeds: so half of the family incomes were below $50,000, half above.) About twenty percent of all families earned less than $14,000. In contrast, the top twenty percent of households earned over $155,000 per year. Wealth and poverty exist. This is what the invisible hand serves up. Is it justified?

A related matter is discrimination in the labor market. The claim is that certain groups such as African-Americans, Latinos, Moslems, and women in the U.S. have a harder time finding jobs than others, and often end up with lower wages for the same job performance. If you think this was a problem once but is now completely solved, think again. Experiments have been run in which resumes are sent out to employers with only the name changed. Result? "George" gets many more call backs than "Nancy" or "Jamal" or "Mahmud." In a paper called "Are Emily and Greg More Employable Than Lakisha and Jamal?" the economists Marianne Bertrand and Sendhil Mullainathan reported that in 1300 ads for jobs in the Boston Globe and Chicago Tribune newspapers "White-sounding" names like "Carry" and "Kristen" got 13 percent responses. "Black-sounding" Aisha, Keisha and Tamika got 2.2 percent, 3.8 percent and 5.4 percent. A market outcome that says in effect "white Christian males preferred" is hard to defend as fair.

An especially sharp case of fairness is "executive compensation," that is, what the Chief Executive Officer of a company gets in salary, company stock, country-club memberships, and so forth. In 2005 in the U.S. the average CEO of a Standard & Poor's 500 company (that is, the 500 largest corporations) earned a whopping $11,750,000 a year. Not bad. Compare the basketball player Kevin Garnett of the Minnesota Timberwolves, who is set to earn $24,000,000 for the 2008-09 campaign, merely twice what the average big-corporation CEO earns. And the average CEO can't even make a jump shot.

Back in 1980 the average CEO earned 42 times what the average worker in the company earned. That sounds a little shocking. In the Big Guy really worth to the stockholders 42 times what the guy who repairs all the machinery on the floor is earning? But wait. In 2005 he (they were mostly "he," alas) earned. . . 411 times! (In the year 2000, at the peak of the boom and of the 20-year alliance between management and stock owners, he earned 525 times!). Anger about executive compensation is nowadays widespread. The French economist Pierre Bateau argues that in the 1950s in most rich countries the workers and management were allied against the stockholders. In the 1980s new techniques in finance changed the alliance: now it was the stockholders and the management against the workers. Bateau sees the birth of a new alliance, of the stockholders and the workers against the management. What's fair?

Ethics raises a further set of concerns. One may have no strong feelings about the rich buying luxury yachts and mink coats - let them have them their toys. But what about the market for body parts? Suppose your beloved aunt is in need of a kidney transplant. A few people are willing to provide a kidney that matches, but only if they are paid, and paid a lot. Your aunt's insurance doesn't cover the cost; your family is broke and can't help her. Is the inability of your aunt to buy the kidney a fair outcome? Is it fair that she dies while someone who can pay for the organ will live?

Paul: Kidney or renal failure is strictly speaking not a life-and-death issue. An uncle of mine has received dialysis treatment for a long time. He can't find a match for transplantation.

Ziliak: Good point. The next available substitute for kidney transplant is dialysis, not death. And notice that the market for dialysis is profit-oriented.

Klamer: So transplants are artificially removed from the market so that medical companies can profit from long-lasting dialysis treatments?

Ziliak: Maybe. But as Paul said, blood matching is crucial, and a free market in kidneys would not necessarily solve the problem. Today kidneys are transplanted on a first-come, first-served basis, weighted by a "point system" administered by the United Network for Organ Sharing (UNOS). African Americans suffer disproportionately from renal failure; compared to whites, African American kidneys fail at a rate of about 4:1. But African Americans donate far fewer kidneys than whites do, in proportion to population. Since white and African American kidneys suffer from matching problems-there's some matching but it's far from perfect-African Americans are disproportionately destined to pay through the nose for dialysis treatments, and to live with an unhealthy kidney or two.

A market for body parts exists. People in poor countries are willing to sacrifice a kidney for a price. But such a market is generally considered unfair, or at any rate distasteful, even though the exchange of body parts for money is voluntary. In the U.S., therefore, you can sign up as an organ donor - charity outside the market - but you will not earn money doing so. The allocation of scarce body parts is decided by medical authorities and committee, not by the invisible hand of the market. Whether the authorities and committees are in fact any fairer than the market remains an open question.

Concept Check 3: Bayla's mother is working for an insurance company as an underwriter. She just found out that she gets paid 10 percent less than her male counterparts even though she is doing at least as good a job as they are. Bayla cries foul play. But it's a market outcome. What do you say, oh student?