Fair Trade? We Have Nothing Close

In a textbook market economy, buyers and sellers know all they need to know and never get burned. Today’s oligarchs and plutocrats have essentially burned the textbook.

For the 18th century philosopher Adam Smith, markets needed fairness to function efficiently and effectively. Photo Adam Lederer

By Sheila Suess Kennedy

Lest the title of this “fair trade” post confuse you, I’m not talking about the fair trade goods that stock the shelves of shops run by well-meaning nonprofits. That movement — to insure that craftspeople abroad get paid fairly for the goods they make — is well-intentioned and important, but it isn’t the subject at hand.

The operation of a market economy — capitalism — rests upon a definition of what constitutes a fair trade. Analysts usually frame this definition as the amount that a willing buyer and a willing seller, both of whom possess all relevant information, agree represents a fair price for the goods or services in question.

In some areas, rather obviously, markets don’t work. Health care — no matter what GOP congressmen insist — rates one of these, because health care buyers and sellers do not both possess all relevant information.

Economists call this situation an instance of “information asymmetry.” As a practical matter, when one party to a transaction has important information that the other party doesn’t have, the party with the information has an unfair advantage.

We have other situations where markets can be manipulated. One of the most common involves “externalities.” Economists use this term to refer to the costs of an economic activity that aren’t paid by either party to the primary exchange, but are instead “offloaded” to someone else — typically, taxpayers. [pullquote]In some areas, rather obviously, markets don’t work.[/pullquote]

One common example: pollution. A local factory produces a toxic chemical in the process of manufacturing its widgets, but rather than safely disposing of that chemical and including the cost of disposal in the price of the widget, the factory owner dumps the poison in a nearby river.

In the process, the seller makes a bigger profit, and the buyer gets a better deal on his widget. Meanwhile, we taxpayers pay to clean up the river.

Most of us have no problem identifying such “externalities” as unfair all around. Such practices distort the marketplace. They allow people who break the rules to profit at the expense of the taxpayer.

But externalities can often be hard to detect, especially in today’s economy where the lines between public and private increasingly blur, where private-sector companies routinely ask for — and receive — government subsidies and favorable regulations, where corporations that can afford well-connected lobbyists enjoy privileges unavailable to mom and pop stores on the corner.

This isn’t textbook capitalism. This is corporatism, a very different animal: the socio-political organization of a society by major interest — corporate — groups.

Even worse, we don’t seem to be stopping at corporatism. More and more these days, we hear the words “oligarchy” and “plutocracy” in our American political discourse.[pullquote]In transaction after transaction, we socialize the risks and costs and privatize the profits.[/pullquote]

Oligarchy — “government by the few” — derives from two Greek words: oligos meaning “few” and arch for “rule.” Plutocracy comes from the Greek ploutos meaning “wealth” and kratos for “govern.” Today’s plutocrats and oligarchs are the rich and superrich who effectively dictate economic policy.

And they make the toxic waste-dumping widget factory guy look like a piker.

When markets work as they should, where they should, they really do operate as Adam Smith described. The “hidden hand” improves life for all of us. When the system has been corrupted — when, in transaction after transaction, we socialize the risks and costs and privatize the profits — the only people who prosper are the “haves.” And the greedy.

And that’s not fair trade, by any definition.

Sheila Suess Kennedy teaches law and public policy in the School of Public and Environmental Affairs at Indiana University Purdue University at Indianapolis. Her scholarly publications include eight books and numerous law review and journal articles. Kennedy, a frequent lecturer, public speaker, and contributor to popular periodicals, also writes a column for the Indianapolis Business Journal. She blogs at www.sheilakennedy.net.