Chapter 1 — A World Of Choice
We live in a world of choice.
We make choices every day. We choose the clothes we wear, the way we travel, the movies we watch, and the places we shop. From time to time we make bigger choices as well: the neighbourhoods we live in, the jobs or universities or schools we go to, and even the cultures we identify with. These choices give us a measure of control over our lives, and it seems natural to believe that individual choice is, almost by definition, a good thing.
Members of the political right have long believed in its virtues, but now individual choice has also gained a much broader appeal. Individual choice is being promoted, to different degrees, across the political spectrum as a key ingredient in the recipe for economic prosperity and political freedom.
The recipe has an appealing common-sense simplicity. First, let the people choose. Second, let suppliers compete to give us what we want. Finally, let the invisible hand of the free market provide efficiency, innovation, responsiveness, and growth.
What's more, individual choice appears to be on the side of the powerless. No one, after all, makes you eat at McDonald's, drive Ford cars, wear Nike shoes, or shop at Wal-Mart. In our role as consumers, we can choose to walk away from the sales pitches of even the largest multinational corporations. Consumers are sovereign, and multinationals are their subjects.
It sounds so straightforward, and when faced with a less than adequate school or an intransigent bureaucracy even the most cynical might agree that the opportunity to vote with our feet is attractive. Perhaps opening up government and other institutions to choice and "the discipline of the market" will provide the stimulus needed to make those institutions responsive?
Yet individual choice has not delivered on its promise. A reliance on individual choice has not helped the poor or even average-income citizen, but has instead given more power and wealth to those who are already at the top of the heap. Economists Thomas Piketty and Emmanual Saez, in a detailed analysis of trends in U.S. income, found a "period of falling inequality" during the first half of the 20th century was "succeeded by a very sharp reversal of the trend since the 1970s."[i] There are any number of ways to describe this reversal. For example, Piketty and Saez compare CEO compensation to that of the average American employee: while the average income increased by just 13 per cent between 1970 and 2003, the average compensation for the top 100 CEOs grew by 1,300 per cent. In 1970, the tenth-ranked CEO would have had to put in a week of work to earn an amount equal to the average annual income. In 2003 he would have to work only half a day--he could go home by lunchtime on the first day of the year.
Other English-speaking countries have also experienced sky-rocketing incomes at the top, although this trend has been seen "not at all in continental Europe countries or Japan".[ii]
The usual counterargument to these observations is that the increase in inequality generates increasing wealth: that it is a rising tide that lifts all boats, even if it lifts the luxury boats most. But the evidence for that rising tide has been increasingly hard to find. For example, Piketty and Saez also showed that between 1973 and 2002, while those in the top 0.1 per cent of U.S. taxpayers saw their real incomes increase by a healthy 227 per cent, the average real income of the bottom 90 per cent actually dropped by 9 per cent.[iii]
Of course, the details vary depending on the years, groups, and measure of income or wealth that you use, but the broad picture is clear: in the last few decades the earnings growth in the United States, Canada, and United Kingdom has gone disproportionately to the already wealthy, and many people at the middle or the bottom end of the income scale have failed to become any better off over that time.
Somehow, individual choice has turned out to be on the side of the powerful. And somehow we have ended up making choices that make us worse off. What has gone wrong? Why is it that with more choices than any society in history, we do not get what we want? This book is an attempt to answer these questions.
A Short Modern History Of Choice
Over the last half-century, the idea of individual choice has moved steadily to the centre of the economic and political stage. At the end of the Second World War, the citizens of the victorious allied countries rightly felt a tremendous sense of collective accomplishment. The war had demonstrated the power of people working together for common goals. Indeed, the success of the war effort was built on a foundation of collective struggle and shared individual sacrifice--a foundation perhaps best expressed in Britain's "spirit of the Blitz."
This sense of the strength of co-operative, collective action found political expression in the years after the war. These were years that saw the expansion of the welfare state, broader access to health care and to higher education, new housing programs, a new standard of unemployment insurance and old-age pensions, and the recognition, and growth, of unions as bona fide institutions. These years also delivered a consistent pattern of economic growth and improved living standards for most people in the industrialized world.
The 1970s saw the long years of growth come to an end, a condition highlighted by the oil crisis of 1973. Societies everywhere started to look for new approaches. Choice, as writer and commentator Janice Gross Stein points out, is "a luxury of an affluent society,"[iv] and it is no surprise that prosperity had brought with it a demand for increased individual choices. Individualistic ideas drove out the postwar communal ideals and found their own conservative political expression at the end of the decade in the elections of Margaret Thatcher in Britain and Ronald Reagan in the United States, with Brian Mulroney of Canada and Helmut Kohl of Germany following not far behind. As they took power, these neo-conservatives needed theoretical guidance and inspiration, and they found it in a group of economists from the University of Chicago, of which Milton Friedman was the most prominent member.
What became known as the Chicago School had been busy attacking the then-dominant Keynesian ideas that government spending could be used to carry economies through recessions and even pull them out of depressions (U.S. President Richard Nixon famously declared in 1971, "We are all Keynesians now"), and the election of conservative parties gave the Chicago school ideas a chance to be put into practice. One weapon that the school used was the idea of "rational choice." It took the idea of self-interested exchange--a theory introduced in the 18th century by Scots economist Adam Smith--to, and many would say beyond, its logical extreme. The members of the Chicago school insisted that all decisions, including even non-economic ones, could be understood as the product of self-interested rational individual choices, and they therefore announced that the market was the pathway to prosperity and growth.
During the "Me Decade" of the 1980s these ideas found their way out of academic journals and into the public arena. The centrality of the individual and the rejection of community found its voice in Thatcher's famous declaration, "There is no such thing as society. There are individual men and women, and there are families."
The way forward for economies, according to this view, is to privatize and deregulate, a program implemented within the industrialized world and later exported to the rest of the world in the form of the International Monetary Fund's "Washington Consensus." The role of government is to get out of the way and provide space for the energy of the entrepreneurial classes, who are to be amply rewarded for their efforts. Unregulated private industry is the best provider of choice and efficiency.
The 1990s saw the meeting of choice and technology. The new economy of the Internet extended the realm of choice beyond national borders: information that people could use to make better decisions was on the Web, and purchasing choices were now just a click away, apparently ensuring fiercer competition among businesses, to the benefit of consumers.
In the new century choice continues to hold a special place in the heart of conservative parties, and is presented to the public under the down-home guise of common-sense revolutions and the ownership society. But the true success of this favouring of individual choice is reflected in the Third Way--the adoption by social-democratic and liberal parties of "public markets," "public-private partnerships," and other choice-driven and market-driven approaches to solving social problems.
Choice, it seems, is everywhere.
An obvious problem with building a society around individual choice is that self-interested corporations could choose to plunder rather than to drive growth. But in a free-market economy, many would argue, the corporations are not in charge, consumers are. Even the largest multinational corporations are powerless, so they say, in the face of consumer choice and competitive markets. Here, for example, is Sam Walton, founder of the world's biggest company: "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else."
It is now conventional wisdom that individual choice tames the wild tigers of private industry, and that free markets provide the mechanism for it to do so. Our ability to walk away, to choose not to buy what they are trying to sell, is the ultimate source of power in a free-enterprise society. The economy is a great democracy in which we cast our votes not once every few years, but each and every time we make a purchase. In the face of our choices, business has no choice but to respond to our demands, or even to our whims. Adam Smith's "invisible hand" of the market guides them to carry out our bidding. Brand-name companies, for example, are powerless in the face of individual choice. The British business magazine The Economist points out that "Brands do not rule consumers; consumers rule brands." According to one corporate consultant the magazine quoted, "When we like a brand we manifest our loyalty in cash. If we don't like it, we walk away. Customers are in charge."[v]
In a later issue of the magazine writer Clive Crooks argued:
The point of a liberal market economy is that it civilises the quest for profit, turning it, willy-nilly, into an engine of social progress. If firms have to compete with rivals for customers and workers, then they will indeed worry about their reputation for quality and fair dealing--even if they do not value those things in themselves. Competition will make them behave as if they did. . . .
There is no question that companies would run the world for profit if they could. What stops them is not governments, powerful as they may be, but markets.[vi]
The magic combination of individual choice and the market has taken centre stage in today's political conversations. It has moved from rational-choice Chicago school economists to official government economic policies and from there to political discourse. It colours the views of newspaper columnists and TV commentators and, indeed, everyday conversations. It has become a complete worldview. In this book I call this worldview MarketThink.
In the world according to MarketThink, the combination of choice and the market is a mechanism for solving problems and improving outcomes in areas as diverse as education (school choice will provide incentives for schools to improve), city growth (individual homebuyers make choices that ensure they get what they want in a city), and culture (individual choice ensures we get the culture we want).
Most of all, MarketThink is a way of interpreting the world. The success of a company proves that customers like it. If the unemployed want a job badly enough they will find one. Once you adopt the MarketThink worldview, there is no longer a rationale for collective approaches to social and economic problems. Seen through the lens of MarketThink, national content regulations for TV and film limit viewers' choices; compulsory union membership limits workers' choices; city planning limits homebuyers' choices. Affirmative action programs are redundant because companies that fail to hire and promote based on merit will be driven out of business by those that do. Government-imposed standards for rental accommodation get in the way of free exchange between landlords and tenants; employment standards get in the way of free exchange between employers and employees. Such "red tape" only impedes the working of the market. The discipline of the market is the only discipline that is needed.
A corollary is that, as long as the government gets out of the way, each individual's situation is a result of the choices made by that individual. And once you accept that our situation is the result of our choices, there really is no need for sympathy or solidarity with the poor or disadvantaged. That point might seem extreme, but there are those who do apply MarketThink in such broad strokes, even to entire nations. Here, for example, is New York Times columnist and market enthusiast Thomas Friedman:
Countries, like companies, can now increasingly choose to be prosperous. They don't have to be prisoners of their natural resources, geography or history. . . .
Today there is no more First World, Second World or Third World. There's just the Fast World--the world of the wide-open--and the Slow World--the world of those who either fall by the wayside or choose to live away from the plain in some artificially walled-off plain valley of their own, because they find the Fast World to be too fast, too scary, too homogenising or too demanding.[vii]
My intent is not to set up a straw man here: not many people hold to all the aspects of MarketThink that I've outlined here. But the logic that is common to these arguments can be found liberally sprinkled through most of today's political debate.
In the United Kingdom, for instance, Prime Minister Tony Blair set out the legislative agenda on public services in June 2004:
I believe people do want choice, in public services as in other services. But anyway choice isn't an end in itself. It is one important mechanism to ensure that citizens can indeed secure good schools and health services in their communities. And choice matters as much within those institutions as between them: better choice of learning options for each pupil within secondary schools; better choice of access routes into the health service. Choice puts the levers in the hands of parents and patients so that they as citizens and consumers can be a driving force for improvement in their public services. And the choice we support is choice open to all on the basis of their equal status as citizens not on the unequal basis of their wealth.[viii]
The political atmosphere in Canada is captured by Janice Gross Stein in her book The Cult of Efficiency. Stein asserts that we "talk about choice more now than ever before." She points to the wide appeal of individual choice: those who dislike one side of the choice coin ("our consumer society, its glorification of material pleasures, and its endless stimulation of public wants--wants, not needs--through advertising") may find that the other side appeals ("Distrust of authority leads . . . to an assertion of the right to choice"). She also highlights how choice "is fundamental to the political language of those who look to markets as models for the configuration of public space."[ix]
It is here, in the magic combination of individual choice and markets, that ideas of choice have changed most in recent years. Stein argues that choice has moved from being a "freedom" to become a more basic "right." Individual choice has also increasingly been presented as an instrument of individual power; and the right to spend your money somewhere else is the source of this new type of power.
In the United States, here is John Kerry from the third presidential debate on Oct 13, 2004.
The fact is that my health-care plan, America, is very simple. It gives you the choice. I don't force you to do anything. It's not a government plan. The government doesn't require you to do anything. You choose your doctor. You choose your plan. . . . Here's what I do: We take over Medicaid children from the states so that every child in America is covered. And in exchange, if the states want to--they're not forced to, they can choose to--they cover individuals up to 300 percent of poverty. It's their choice.[x]
George Bush's "Ownership Society" is also built on a core of individual choice. The plan calls for "More Access and More Choices in Health Care." When it comes to retirement savings and social security:
The President's proposal would ensure that workers who have participated in 401(k) plans for three years are given the freedom to choose where to invest their retirement savings. The President has also proposed that choice be a feature of Social Security itself, allowing individuals to voluntarily invest a portion of their Social Security taxes in personal retirement accounts.[xi]
In the disputatious world of politics, such a wide spectrum of agreement is rare indeed. With this level of support it would seem that the virtues of individual choice are broadly appreciated. Ironically, many of us seem to have no choice but choice.
Wanted: A Better Way of Thinking about Choices
To understand what is wrong with MarketThink, we need a better understanding of the dynamics of individual choice. And fortunately, while MarketThink has been grabbing the limelight, other ideas have been developing within academic economics, and those ideas present a different message: they show us why individual choice so often fails to give us what we want.
Many of these ideas have achieved recognition within the economics literature, but they have not yet become as widely known outside economics as they deserve to be. There are several reasons for this. One is that, unlike the seductively simple tale of MarketThink, they do not represent a single story. Leo Tolstoy told us, "Happy families are all alike; every unhappy family is unhappy in its own way." Similarly, the idealized markets of MarketThink are all alike, but many real-world markets prove to be not so happy, and in their own ways they fail to match the ideal picture. Instead of a single big idea, they entail a collection of ideas with a similar theme. As a result, not all of the economists who have been busy developing these ideas would agree with each other, or with the slant the ideas are given in this book.
That modern economists cast these ideas in an abstract mathematical language adopted is another barrier to wider familiarity. The economists base their constructions on game theory, a mathematical approach to thinking about interdependent choices that started out 60 years ago and has been growing steadily in sophistication ever since. In its attack on Keynesian economics, the Chicago school represented one of those approaches that moved economics onto a more mathematical track, and game theory was one of its bag of tricks. This book in collecting some of those ideas and presenting them in an accessible manner, attempts to articulate an alternative worldview to MarketThink--a worldview that reaffirms the role of collective action and the need for the disenfranchised in society to act together on their own behalf. It is not a book "for" or "against" individual choice. It argues that choice is useful only if it helps you to get what you want. And the thing is, it often doesn't.
Jack Shops at Wal-Mart
Scattered throughout the book is a collection of stories set in a fictional town that I call--because it has to be called something--Whimsley. It is a deliberately oversimplified and artificial place. The residents of Whimsley make choices in an unrealistic and stylized manner, and the choices put before them are simplistic. Yet despite all these simplifications we will see that the Whimsley tales give rise to surprising outcomes.
The exercise of watching the inhabitants of Whimsley go about their lives has the benefit of making their choices more transparent than are the choices in our own lives, and it provides a starting point for understanding the choices that we ourselves make on a daily basis.
Now, to see what Whimsley has to tell us, let's take our first visit.
* * *
Jack lives in Whimsley. Some time ago Jack used to do most of his shopping in the downtown area--of course, he no longer does--and he also used to walk through the downtown before crossing Whimsley Park on his way to work.
Jack shares an eccentric trait with the other inhabitants of Whimsley: he has an odd way of making choices. As he goes about his daily life, when faced with a decision he assigns numerical points to the benefits and costs of the available options, and he chooses the option that gives the most points.
Let's follow Jack's reasoning as he thinks about what life was like when he shopped in the downtown area.
Value. I did much of my shopping at the two downtown department stores. They provided reasonable selection and price. They were worth two satisfaction points per week.
Variety. I liked the variety of the two stores. Sometimes I went to one store, sometimes the other, depending on what I needed, how much time I had, what other errands I had, and so on. The variety of having two stores was worth an additional two points.
Atmosphere. I assigned myself another two points each week from my enjoyment of the thriving downtown as I walked through it on the way to work.
Jack was happy to the tune of six points per week: two for selection and price, two for the variety of shopping options he had available, and two for the atmosphere of the thriving downtown.
A few years ago Wal-Mart opened a new store on the outer edge of Whimsley. Wal-Mart has huge economies of scale and tremendous bargaining power with its suppliers, and thus is able to offer the lowest prices. Like any consumer, Jack likes low prices. So Jack started shopping mainly at Wal-Mart.
For a while things were pretty good. Jack was happier because of Wal-Mart's arrival in town. Here is his reasoning.
Value. By shopping mainly at Wal-Mart I not only continue to have a reasonable selection but I also get lower prices. So I give myself three points per week for price and selection, instead of the two I used to get by shopping at the downtown stores.
Variety. What's more, Wal-Mart has extended my range of options: I assign myself an additional satisfaction point for the extra variety that Wal-Mart introduces, because on the days I don't feel like trekking out to Wal-Mart I can still visit one of the other stores and get what I need.
Atmosphere. There is no change to the atmosphere of the city, so I still get my two points for atmosphere.
Soon after Wal-Mart arrived, then, Jack was getting eight points per week: three from Wal-Mart's selection and everyday low prices, three from the expanded variety he has available, and, as before, two from walking through the lively downtown to work. Jack was happier than before Wal-Mart built its store.
* * *
Of course, Jack was not the only person in Whimsley to be making choices, and that is where his problems started. Like him, many other people started to shop at Wal-Mart. The smaller department stores downtown started to have troubles, and gradually they went out of business.
Wal-Mart became the only department store in Whimsley. Jack had to shop at Wal-Mart all the time, like it or not. As a result, Jack's points for variety moved down to just a single point. Jack wanted more variety, but instead he got less. With the closing of the downtown department stores, Jack was down to six points per week again. He was as happy as before Wal-Mart came, but no happier. That's not too bad. At least Jack was no worse off than he was before.
But Jack's problems did not stop there. Once the downtown department stores closed, the slower customer traffic in the area meant that other stores closed too. Now downtown is not so interesting anymore: a number of shops are boarded up, others have been replaced by dollar stores, and the buildings are shoddy. Jack does not enjoy walking past the rundown area on the way to work. It gives him no pleasure. No points.
Now Jack has only four points per week. He is less happy than he was before Wal-Mart came.
In the beginning Jack made a choice that he believed would make him happier, but now he finds that he is less happy.
* * *
Jack is, of course, an archetypal consumer and citizen, and his tale embodies the frustrating predicaments that many of us face. We have the right to make individual choices, and we make them sensibly, like Jack did, and yet that is not enough to lead to a happy outcome. In fact, we shall see that a system of private enterprise and free markets is particularly likely to produce such poor results on a regular basis.
There is no catch to the tale of Jack and Wal-Mart. There is no hidden information or trick that can lead to a happy answer. Instead, Jack's predicament is just one example of what happens when the individual choices made by different people have a larger impact. Jack's particular choice influenced, in a small way, the outcome for other shoppers, and their choices in turn influenced Jack's happiness.
The moral of the story is simply that individual choice carries no guarantee of a happy ending. Choices are rarely made in isolation. They become quickly and intricately tangled, and their outcome is often not what we intended or hoped for. Stories like this one about Jack and Wal-Mart lie at the heart of many problems with our modern free-market corporate economy.
People who believe firmly in the virtues of individual choice will assert that Jack must be happier now than he used to be, because he has exercised his freedom of choice. If he didn't like Wal-Mart he would not have shopped there. If he valued the lively downtown so much, he would have shopped there to save it. They will assert that, as a consumer, Jack is sovereign and the market always gives him what he wants. Yet in this story there is no individual choice that Jack could have made that would have improved his outcome. Even if Jack had chosen to continue shopping downtown, his minuscule individual contribution to the revenue of the downtown stores would not have stopped their closing.
People who are more sceptical about the value of individual choice often have difficulty explaining stories such as Jack's. Some will argue that the appearance of choice is deceptive: in some way Jack did not make a free choice. Yet his decision was made for perfectly good reasons. A common alternative is to suggest that Jack was fooled or tricked in some way, perhaps by advertising. Yet Wal-Mart did not offer anything it could not deliver. Jack's story is not a tale of consumer ignorance: he made his choices in a perfectly sensible way, calculated to increase his happiness. Even so, his individual choices made him unhappy.
* * *
The source of the problem here is that Jack's choices are tangled. Jack's preferences are tangled: he wants many things, from a lively downtown to cheap prices for the things he buys, but the choices in front of him do not relate directly to these preferences. Jack's actions are tangled with the actions of other citizens of Whimsley: his own outcome is altered by the outcome for others, and their outcomes depend in turn on Jack's choices.
Tangles such as these may seem surprising, but they are not perverse curiosities or obscure dilemmas; they are the stuff of everyday life. Unfortunately, the knotty behaviour of individual choice is not just a technical problem, and recognizing the existence of bad outcomes is not enough to free us from the dilemmas we face. These tangles have much to say about the workings of power in modern societies. In a free-market system the special interests with the resources to do so can encourage tangles to form, to their own benefit. Individual choice becomes a tool that can be used to maintain and extend privilege under an egalitarian and populist guise.
Certainly, with individual choice being offered by so many as the solution for so many problems, we need to become more familiar with how it works. It is time for a guide to individual choice and its consequences.
Most public discussions about individual choice see one of two possibilities. Either we make good choices and are happy with the outcome, or we make bad choices and are unhappy with the outcome. But there is a third possibility, which is that we make good choices and yet are still unhappy with the outcome: that is, individual choice can lead us into traps.
Much of this book is devoted to cataloguing circumstances in which individual choice goes wrong, and to exposing the mechanisms that lead to disappointment. It provides a taxonomy of these circumstances: situations in which good choices lead to bad results for everyone; winner-take-all situations in which good choices lead to inequality with good results for only a few and bad outcome for most; situations in which "the devil you know" is better than the devil you don't, and predictability trumps quality.
As a subtext, this book is a call for the reinstatement of collective action into politics. The neo-conservative right has wielded the promise of individual choice very effectively to discredit organized collective action such as that carried out under the umbrella of trade unions or governments, presenting unions and governments as obsolete bodies whose sole purpose is to restrict choices. But if individual choice can lead us into traps, we will need collective action to make our escape.
A thread that runs through the whole book is that we can make sense of the world by making the respectful assumption that people generally make the best choices they can in the circumstances in which they find themselves. There is no need to resort to arguments that people are tricked, or are behaving against their best interests, or are somehow gullible. But contrary to what MarketThink would have us believe, the picture that emerges is not a pretty one: it is one of growing disparity in which wealth leads to influence and influence leads to wealth. Wealth does not "trickle down," and those at the top can plunder the wealth of nations under the guise of individual choice and free markets.
[i] Piketty and Saez, Income Inequality in the United States, 1913-1998. The relevant data are in Table A4, and are updated to 2002 in a supplement on Emmanuel Saez's website.
[ii] Piketty and Saez, Evolution of Top Incomes. All figures were adjusted for inflation.
[iii] Piketty and Saez, Income Inequality in the United State
[iv] Stein, Cult of Efficiency, p.199.
[v] "The Case for Brands," Editorial, The Economist, 360, 8238 (September 2001), p.3. For the corporate consultant's quote, see "Who's Wearing the Trousers?" The Economist, Sept. 6, 2001, online edition <http://www.economist.com/displaystory.cfm?story_id=770992>.
[vi] Clive Crook, "Globalisation and Its Critics," The Economist, 360, 8241 (Sept. 27, 2001), online edition <http://www.economist.com/surveys/PrinterFriendly.cfm?Story_ID=795995>.
[vii] See Friedman, The Lexus and the Olive Tree.
[viii] Tony Blair, campaign speech, London, June 23,2004 <http://www.labour.org.uk/news/tbpublicservices0604>.
[ix] See Stein, Cult of Efficiency, pp.199, 200, 202.
[x] "Transcript: Bush, Kerry debate domestic policies," CNN, <http://www.cnn.com/2004/ALLPOLITICS/10/13/debate.transcript2/index.html>.
[xi] The White House, "Specifics on the President's Plant to Strengthen Retirement Security," Feb. 28, 2002
Copyright © 2006 Tom Slee