If the Market Is Efficient, Why Did Congress Act in the First Place?

While I was browsing in the bookstore this weekend, I happened across a new SF hardback which purported to tell a future history tale of the "Second American Revolution", an armed revolt against a government that had become oppressive and fascist.

I'm more susceptible to wish-fulfillment fantasy than the next guy, so I thumbed through the book out of idle curiosity-- was it well-written, did it grind my political axes, etc. My initial impression as to the latter was favorable, because the basic description of the oppressive, fascist government was one that was a lot more plausible coming from the right wing than the left, and my first glance at the text featured the execution of an evil attorney general. But then I hit the text and quickly recognized somebody who'd read Atlas Shrugged at exactly the wrong age.

Then I flipped to the back of the book, where after the sensual, and thus fairly creepy, description of a couple of executions, I found a section detailing a couple dozen constitutional amendments "considered" at the "constitutional convention" that followed the victorious re-revolution.

The author's a lawyer, which makes his amendments more farcical. One, for example, mandates that the federal government's roster of employees shrink by 10% per year. That one's got some complicated business in it about forbidding the delegation of Congressional authority, which would cripple virtually every aspect of the modern federal government. Other amendments revoke the income tax (with the curious locution "for living persons, whether natural or artificial"), limit the size of the standing military, strengthen the 2nd amendment, repeal Social Security and Medicare, and so forth. Basically, it's a small-government, anti-socialist wish list.

I won't particularly discuss the merits of a socialist government, but I will discuss one related aspect. It will not surprise you to find among the proposed amendments one that restores the pre-1936, laissez-faire, idea of "freedom of contract". It's a favorite idea of cheap-labor conservatives and other anti-socialists. The basic complaint has at least two levels of sophistication, one being how dare the government interfere with two persons' ability to decide on mutually acceptable terms, e.g. of employment, and the other being that the market will efficiently decide, moreso than the government, what are acceptable terms for employment.

Both are wrong to the point of absurdity. Now, as a liberal intellectual, my instinct would be to try and explain my opinion, to listen to the other side's ideas, and try to discern a common truth. This, of course, doesn't work. Instead, it occurs to me that it might be more productive to try a Socratic approach. I'd begin like this: If freedom of contract is so fundamental or the market so efficient, why did Congress and the state legislatures try over and over and over again, from the mid-1800s until the Supreme Court finally ended the debate in 1936, enacting hundreds of laws that restricted child labor, limited working hours, mandated safety requirements, promoted unionization, and otherwise attempted to restrict the ability of the worker to freely negotiate conditions of employment? I know what I think is the answer to that question, but it might be more productive to hear a cheap-labor conservative try to explain it.

Now, as it happens, only people with a vested interest on the non-employee side of the contract can pretend not to understand that the market isn't efficient and that employees are not the beneficiaries of freely-negotiated conditions of employment. Out of pure hubris, I call it Morrow's Law, and it says In the absence of appropriate regulation, some companies will not regulate themselves. There are short-term advantages to immoderate behavior, and the consequences of immoderate behavior accrue on a time scale much shorter than the corrective power of an efficient market. See, for example, the Enron debacle, where the market did not act to correct Enron's excesses in time to save it from destruction.

It is a proper role of the government to intervene to regulate and prohibit immoderate behavior. Historically, the power in the employment relation has been on the side of the employer, and so most government regulation is aimed at protecting the employee. (When it is not, as in the case where unions have grown especially strong, it is the proper role of the government still to intervene on the weaker side.)

It is not the efficiency of the market that causes mining and manufacturing companies to provide expensive safety equipment. Mine workers rarely have the luxury of choosing between competing employers, so mine companies don't suffer worker defection if their employees lose too many limbs or lives. Even when there are multiple employers in a locality, collusion between employers is universal, and people need jobs too much.

It is worth noting that the past century of relatively tight federal restriction on conditions of employment has not notably impaired the strength of the American economy. Indeed, by assuring good working conditions and emphasizing other "socialist" concerns like health and education, the government has created long-term market efficiencies that an unfettered market would never have found.

Posted by Greg at December 15, 2003 3:11 PM