401(k) -- That's "K", as in strikeout

Recently I’ve been hit by people from both sides of a rather large argument. One side makes the case that any prosperity we enjoy beyond that of a subsistence level existence is attributable to free market economics. The other side argues that capitalism and free market economics are inherently exploitative and undermine our intrinsic cooperative and compassionate natures.

There are many points in between these two extremes, but at the very least, most people can agree that free markets have a few shortcomings.

• They are not self-sustaining. Government is required to defend free markets against those who would corrupt or destroy them in the interest of greed or ideology.


• Some problems require collective rather than market-driven solutions because individual incentives do not in and of themselves produce the necessary consensus and consequent investment and sacrifices.


• Our ability to make good economic choices is undermined by ignorance and flawed decision processes.


• Free markets can, from time to time, produce results that simply shock our consciences.

All of these shortcomings can and should be mitigated even though doing so results in something less than optimum economic efficiency. The question societies and governments have to grapple with is how they should be mitigated and to what degree?

This is a particularly difficult question with respect to the third problem – people are sometimes unable to make good economic choices due to ignorance and flawed decisions processes. Ideally this problem would be addressed through education, but that solution runs into the problem that some choices are so complex and technical that many people lack the time and resources to become educated or acquire expert assistance. Therefore, the only alternatives are ones that reduce personal freedom and choice – anathema to market purists.

An example of the problem seems to be the management of personal 401(k) investment accounts, which even before the recent economic meltdown have performed abysmally as compared to the defined benefit plans that 401(k)’s largely replaced. Defined benefit, or pension plans, are of course managed by professionals and, while they are more costly for employers to administer, they produce better returns and cost employees significantly less.

That is the argument made by New School professor Teresa Ghilarducci whose math I will trust to be accurate and whose prescribed solution, Guaranteed Retirement Accounts (as in guaranteed by the government) managed by the federal government, would, she argues, generate greater returns at lower cost. I’m not qualified to assess the validity of all this, but a necessary result of implementing Ms. Ghilarducci’s prescription is that personal freedom to control how retirement funds are invested would be largely overridden.

Is it a worthwhile tradeoff? And is the choice purely pragmatic or one of principle? I would say, both, while reminding myself that the free market is a tool that we wield (presumably to our benefit) and not a deity to be worshipped.