The greatest battle: Command vs Free markets

The conflict between free market and command economies is perhaps as old as time, best portrayed through an arm-wrestling match with Jesus and Satan, wherein devout believers will allocate whose who on their own volition, regardless of reason or nuance. It is a controversial topic to address and it has been pondered for centuries now. The very fact that there

appears to be no consensus as of yet, is evidence as to how nuanced the issue can prove to be. Yet to endeavour to search for an answer, the prime areas of contention that we must consider are the reason behind work, the existence of market failures, the role of profits and the efficiency of a commander.

Why do we work?

“Poor, nasty, brutish, and short.” When Thomas Hobbes wrote this in 1651, he wasn’t talking about his moustache, but rather how he envisioned life would be should humans be left to their own devices. Stripped of social norms and any form of governing body, man is at supposed war with everything. His portrait of humans as selfish and largely individualistic animals underpins a portion of the economic argument for a free market. This idea is what allowed Smith (1776) to argue that it wasn’t through the benevolence of the baker that we could purchase his bread but rather the baker’s own self-interest, he supplies us bread not through our appeal to his humanity or our need of it, but rather because it is in his advantage to do so. Thus, a truly free market would operate only by appealing to our selfish desires. In a free market we only work because it gains us some benefit, oftentimes money and thus working harder is rewarded through a greater salary or better perks. If one were to spend years in medical school in order to become a doctor they would expect to be paid higher for their toils. Of course, the amount of effort it takes to do a job or gain the sufficient skills isn’t the whole equation, as it is equally a case of demand and supply. Should there be large swathes of doctors graduating in any particular year, then each individual doctor would be paid lesser. However, this trend of matching incentives is often evident in the US where doctors get paid more as they specialise into more niche areas of medicine, which requires a lot more work from their side whilst also cutting short the available pool of supply. In the US some of the best paying areas of specialities such as Orthopaedic surgery and Cardiology can pay up to 120 percent more than the low paying specialties, they often require years of work and dedication and thus the equal reward is one of the perks of a free market economy.

The true benefits of a freer market are visible especially when compared to the system in the UK where the government sets the salaries of doctors and thus those working in the NHS gain a lesser reward for their hard work than those in the US. As a report by the British Royal Infirmary stated “unprecedented number of graduates applying for jobs outside of the UK...this is due to UK doctors’ increasing concerns about whether they feel valued in the UK.” Due to government control on doctor’s wages, many choose to work elsewhere. This is clearly a failure of providing appropriate incentives at the hand of a more command economy model. And this issue is constantly recurring, as displayed for example, in the difference in productivity of companies pre and post Hungary’s 1968 shift from a centralised economy to a decentralised economy. The research found that the companies given most liberty to apply wage differentials had better productivity, as they could employ a smaller number of highly motivated workers rather than a large number of medium waged inefficient workers who have little to no incentive to work harder. While this isn’t an argument for a perfectly free market, it is certainly one against a perfectly command one wherein all factors of production including labour are owned by the ‘state’. The state herein could be a representation of the collective people or the government and its civil body. In either scenario the excess fruits of one’s labour, take the Cardiologist, couldn’t be awarded to him/her because their labour (and thus the years of work they put in to train) doesn’t necessarily belong to them. Their reward comes in the form of a net positive effect in society, wherein people may have better health due to their expertise, but not any personal benefit. The question for providing incentives does accurately come down to whether sufficient number of workers could be voluntarily mobilised under a pure command or command leaning economy to ensure that the good and services that society at the very least needs can be satisfied. It can be argued that while certain individuals would be willing to work harder for the good of others, many, as represented through the example of doctors in the NHS vs US, would prefer to have additional personal rewards for their additional hard work. In a command economy without incentives the only way to ensure people work is through force, as there isn’t any option to take away any of the privileges they may have gained from working ie. wage, perks or bonuses. Thus, oftentimes to ensure people work hard or even work their fair share, incentives must be provided, which an economy leaning to the free market does more efficiently than one that is purely command or even command leaning.

Similar to the loss of doctors in the UK, India is facing an issue of ‘brain drain’ wherein talented individuals leave the country to work and study somewhere they believe their talents and hard work would be better rewarded. But they also go to places where they believe they can achieve a better quality of life for their family. A popular destination for many Indians has been Canada and a reason cited is the provision of a welfare state and the better ‘quality’ of living. Which perfectly leads to the next concern:

Do we care if people die? (The need for the government)

Within India 4 in 10 people are exposed to air which is 5 times more harmful than the air that is considered to be ‘breathable’. Teenagers show lungs of smokers, schools have often shut down because of winter ‘smog’ and ‘oxygen bars’ have opened up in the cities with worst condition such as New Delhi, offering pure air for 300 rupees (or approximately 3 pounds). 18 percent of all deaths in 2019 in India were as a result of pollution, which meant 1.7 million people died prematurely purely because of bad air quality. Pollution is one of the key contributors to the lower ‘quality of living’ that many Indian NRIs cite as their reason for leaving and this is because despite the continued existential threat it poses, the government won’t do anything about it. India is after all a free market economy (or at the very least it leans towards it). The government has actively worked to play down the concerns of this health crisis and refused to step in because of the potential effect that it will have on the large industrial sectors that contribute large parts of this pollution including the automobiles industry. In this particular scenario huge industries can produce negative externalities that kill millions and get away with it because they contribute to economic growth, the government’s unwillingness to step in clearly exemplifies the effects of market failure in a free market. In a free market, when someone is driving they only consider the costs to themselves, which might be the cost of the oil, but not the costs to those around them such as congestion and pollution. As such we tend to overconsume and concur a deadweight welfare loss on society.

This is just one example of a market failure that exists in a completely free market as well as a market that is leaning towards free and thus exists without a lot of the legislation and government intervention that helps protects against it. Many of these failures do seem to be intent on killing people, including things such as demerit goods like cigarettes. Demerit goods occur when people underestimate the true cost of a good and in a perfectly free market or a freer leaning economy, companies- anticipating inelastic demand and high profit margins- would be able to market such an addictive product into oblivion. Before governments in many major countries forced cigarettes to be sold in plain packaging and banned most forms of advertisements, brightly coloured ads with often exaggerated claims, enticing messages and recognisable brand ambassadors (including Ronald Reagan) would be commonplace. And as such they promoted a product that has now been identified as a ‘cancer stick’ and continues to kill millions worldwide. Under a true free market, the government would also have no right to stopping cigarettes from being sold to young children and thus the long-term damage to the labour force would become insurmountable- not to mention the welfare of the children.

Another way the free market kills is through inequality, one of the most evident qualms of the modern world. If the industrial revolution of the Victorian era was defined by the satanic mills then our hyper-capitalistic, free market economies are defined through the pictures of extremes. Solid golden toilets exist at the same time as homelessness persists, an obesity crisis alongside world hunger, a former taco bell modelcontrols over 130 billion dollars whilst children in Bangladesh drop out of school to work at sweatshops- only in a free market. The gap between the richest in the UK and the poorest has been widening and according to the ONS in 2020 the share of wealth held by the 1 percent rose from 7% to 8.3%. It’s even worse in the US and in many other countries where government regulation is limited. A sense of hierarchy is needed in any society to ensure that people feel that desire to keep growing and climbing up, however, levels of relative poverty that still exist in many developed countries as well as cases of absolute poverty in many developing or under-developed countries ensure that many people can’t participate in the economy. A free market left to its own devices would ensure that many people, including women, racial minorities and others that may come from underprivileged background would be unable to tap into the many possibilities that come with having a system of freedom. This is why any free market leaning economy would still need things like the welfare state to provide a safety net to ensure that all people can afford to take entrepreneurial risks that help advance the economy, or at the very least to ensure that they don’t die. This is partly the reason why huge supporters of minimal government such as Milton Friedman (who was even against the FDA) supported a system like a ‘negative income tax’ that ensures that everyone is given a basic income, so that a benefits system like the one that exists doesn’t interfere with work by creating stigma or by disincentivising harder work- by avoiding scenarios such as in which people lose up to 70p for each pound they earn for example.

The idea of Adam Smith’s invisible hand' for example has long been touted by proponents of a command economy as 'bourgeoise' or ‘neoliberal’ nonsense and supporters of a completely free market as a 'holy-grail' fix. Yet oddly enough it has only been mentioned once in his book, ‘the wealth of nations’. That doesn’t appear to be a coincidence, for while being a loud voice for how seemingly selfish actions can turn to the best interest of 'society', Smith also very clearly recognised its shortfalls. Smith, while certainly being a proponent for smaller government (justified considering just how big government was when he was writing, having seen the shortfalls of the East Indian company, or the crashes akin to those of the south sea company), was still a champion of welfare. He advocated for a government that supported education, and other areas that would serve the 'common good' but might not be rightly undertaken by the private sector. A lack of such public services under a free market is yet another example of market failure. Along with establishing certain public bodies, Smith saw only two roles for government. The first being the protection of its sovereignty and the second the justice system. This is the strongest case for the government in society and the economy and does strike as Hobbesian, perhaps he was onto something.

All of these market failures appear to be driven by this insatiable thirst for profit over all else that the truly free market promotes. Profit from its very existence to its extreme importance, is undoubtedly controversial:

The sin of profits

While a lot of Smith’s cherrypicked ideas have proved useful he did get a lot wrong, including many things that are still topics of quarrels amongst economists. Perhaps one of Smith's ideas I'd argue against are those on ‘wages’ being the primary income. When he wrote in his book that, “The produce of labour constitutes the natural recompense or wages of labour. In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him,” for example he affirms the idea that labourer came before the profit hungry capitalist. He further explains that such a ‘rude’ state of society was demolished when the ‘ownership’ of private property was introduced and thus giving the way for Marx to argue his theory of labour exploitation. If one agrees that before the existence of capitalist and the accumulation of capital, all the worker created was rightfully his, then you can truly sympathise with idea that profit is theft.

Since the time of Marx however, many economists have tried to argue against this. First by referring to the risk a capital owner carries, wherein the profit is assumed to be his reward for single-handedly carrying the weight of this risk. Others have pointed out the profit serves as a reward for the spending the capitalist forgoes to build and acquire his capital while others have argued the 'time' theory which says a dollar today is worth more than a dollar tomorrow, thus by forfeiting his dollar now the profit exists to make up the difference for the capitalist. And as such all this argues that, yes, the capitalist is taking away a portion of the labourer’s initial value but it is for the right reason and thus labour isn't exploited. Here I'll boldly venture to disagree with these economists, Smith and of course Marx in saying that the original income wasn't ‘wages’ but rather profits. This is something supported by many economists such as John Stuart Mill originally, when he said “Demand for commodities, is not demand for labour.” As such the demand for labour is dependent upon those that hold the capital, rather than those that demand the output of that labour. Thus, in the ‘rude’ state of society as Smith put it there existed only capitalists rather than labourers, when there existed no landlord or master the entirely of your spoils were your profits, not your wages. When put in perspective it does make sense. Marx’s arguments depend on the labour theory of value, wherein the exchangeable value of tradeable commodities exists because of the various amounts of labour that go into them (largely because labour was a common factor of production amongst most commodities). However, as value is now recognised as subjective, as in determined by the amount of satisfaction it provides someone, goods remain exchangeable because the garner equal utility from the consumer, not equal labour. Or as Wicksteed wrote, he is willing to pay the same for a family Bible and a dozen of brandy because they will give him equal satisfaction. Additionally, the concept of marginal utility also deems it null, as each additional unit is less valuable despite using the same amount of labour, surely value can’t be underpinned by this singular factor of production. As most modern economists have abandoned the labour theory of value, the labour theory of exploitation appears to be standing on less firm footing. Thus, there is no strong argument for a command economy on the basis that the existence of capitalist profits is exploiting workers.

Yet the singular pursuit of profit that often proliferates in a pure free market is still contestable. There exists a strong argument as penned by Friedman, for a pursuit of pure greed. His opinion piece in the New York Times in 1970 was explosively titled “The social responsibility of a business is to increase its profits.” The pure and unfiltered chasing of profits is now socially unacceptable; no company can just sell something in order to make its owners rich- even if that is its true intentions and even the true consequences. There must exist window dressing to garnish over its desire to increase derivatives, it must be environmentally conscious, it must give back to local communities, it must be fair trade, sustainable, cruelty free, help solve world hunger and eradicate war. It doesn’t matter your company’s ‘conscious’ line of clothing includes dresses in which the only thing sustainably made is the small tag attached denoting the size whilst the rest is made from fracked plastic (H&M) or that you’re essentially a short-term real estate company who took Saudi Arabian oil money as long as your mantra is to “elevate the world’s consciousness.”(WeWork) Friedman’s argument however was that if an individual company whose leaders are privately selected by shareholders and who are only accountable to those very shareholders, attempt to use their private company to achieve social objectives in the image of your own morals, it is undemocratic. Essentially, if your actions somehow reduce the profit handed back to shareholders, raise the price of your product or reduce your worker’s pay (often as a countermeasure to keep prices down upon making socially conscious changes), then you as an unelected leader are effectively taxing these people. As such you are dictating how this taxed money is spent, playing the role of a civil servant, without any elected authority. Companies should work to maximise their profits and this is not a critic of a free market economy. If that profit maximisation includes raising your workers wages to 15 dollars an hour after consumer backlash as Amazon did and if it includes making your paper cups recyclable as Starbucks did, then that is perfectly compatible with the Friedman doctrine and the free market economic model.

Once again, whilst profit maximisation is certainly an argument that leans towards a free market, it doesn’t argue for an absolute free market. This is because profit maximisation should of course be within the bounds of what is legally acceptable, something the government must enforce. This idea of the government being able to unleash the innovative forces of the free market towards desired objectives can also be applied to a lot of the issues we are now facing today, such as climate change. By enforcing things such as carbon taxes to allow companies to pursue the goal of higher profits whilst working in a way that advantages the greater society, is surely a way that a free market economy can be made fit for purpose in the ever changing complexities of our world.

However, an argument for the command economy often stems from its success amidst the post 1940s war years, where the government was able to take control and work effortlessly towards a common objective in the UK. It has been credited often as the reason we won the war and thus is brought up as an effective path of action to deal with other existential threats such as climate change. However, this is overlooking a key component, which is that those on the other side, such as Germany, also had command economies. Did the allies win because of their command economies, and how might that look today?:

Clunky, dull and limited

The biggest critics of command economies stem from the fact that they are often grossly mismanaged, aren’t efficient and don’t encourage innovation. In 1936 not long after Hitler first came to power he put in place his first 4 year plan for the economy, which worked to micromanage major economic sectors of the economy. His dictatorship was defined by his iron fist on the economy, which included faking employment records and investing in vast public infrastructure schemes. In contrast to Germany, the UK economy in the late 1930s was already seeing some recovery from the great depression partly because of its abandonment from its gold standard, but it was still leaning towards a free market, as was the economy of many of the allies. It is true that the UK saw more state spending in build up to the war and further control amidst WW2 itself. However, giving credit to the command economy for an allied victory would require ignoring the fact that the UK had a bigger wealth pool to start with, including resources from its large colonial empire, as well as ignore that its rivals also followed a similar system of economic government. Thus, it can’t be the command economy that are to thank for achieving that one singular large goal: winning the war. And in scenarios when the goal isn’t agreed upon by the planner and the people, it gets even messier. The free market is remarked upon for its ability to most efficiently match the various demands of people to the available supply and distribute resources in the market in a way that reflects what people want. In a pure command economy, it would be impossible to effectively track people’s demands thus any production that would take place must be done arbitrarily on the basis of the central planner’s quotas and whims, rather than the people’s wishes. There would effectively be no variation in supply because once the choice of the individual is disregarded, the most ‘efficient’ method of production is homogenous. Choosing who will supply what and how much is equally hard, all these decisions rely on an educated and impartial central planner and thus risks gross misuse and mismanagement.

Finally, command economies come with the mandate that what we have right now is enough. If the aim is to simply keep reproducing the extent of quality and innovation we have already achieved then a command economy may be able to replicate it. However, in order to keep innovating and keep growing, one would require a free market. Even Marx himself admitted that a capitalism was required to acquire wealth, before any changes can be made and thus he viewed ‘wealth’ in a reductive way that put a limit to what we can achieve. Often this begs the question, ‘do we need to keep growing?’ It can be argued that we do, should we have stopped growing before, then we wouldn’t have amassed the comforts that we take for granted today. Should we stop growing now, millions of children growing up in developing countries will fail to realise the same comforts. By putting a stop to it we are limiting our own potential, which appears to be a very limiting view on what humanity is capable of achieving under the right circumstances.

This was in no shape or form a treatise in the footsteps of the Austrians or another page to add to the communist manifesto. The arguments laid forth in regards to what makes us want to work, the value we place on progression as well as the role the government must play in countering market failures are all largely subjective. They must however be acknowledged today as we struggle to find the right amount and right kind of government in our economies, in other words, the Goldilocks. If the porridge if ever too hot or too cold, you'll either see gross mismanagement of resources and stagnation of economies or you'll see millions of people unable to participate in the economy due to insufficient safety nets (or inconveniently, death). Encouraging creation of value and rewarding it with profits is what forms the underlying fabric of a free market, which is by no means seamless. It’s kinks however, I believe, can be smoothed out without taking away from the foundations that make it ‘free’.