The upcoming Republican debate will feature moderators from the Fox Business Network. That means another lovefest, replete with softball questions and set ups that aid and abet. In preparation, I decided to look into what undoubtedly will be a go-to reference: the “Free Market.” It’s a concept that has crept into our national psyche. It has become a backdrop for our discussions rather than a topic of them. But I never really had thought about it.
Looking into it, now, I believe the fundamental idea comes from Adam Smith’s 1776 treatise and can be summarized as follows: a free market, due to the aggregate of decisions of producers and consumers made in accordance with their own self-interest (the so-called “invisible hand”), will settle into a pricing equilibrium that is optimal for both consumers and producers. The essay that generated this idea seems groundbreaking in both extent and approach. The idea itself seems straight forward, and it definitely has an appealing, pseudo-engineering veneer. Yet, I couldn’t get past one thing.
Consider what this construct asks us to believe. An economy – a complex, social arrangement, one interconnected globally with other complex, social arrangements, one subject to external forces and random events, one acutely susceptible to manipulation, and one driven internally by the vagaries of human behavior in manifold profusion – will order itself into a state that is stable and that best balances the interests of consumers and of producers.
That is not rational. What social structure works that way? Economies are not physical systems. They are not subject to physical laws. They are not subject to fanciful analogs of physical laws. Economies arise from and consist of human interactions. They do not occur in nature. Their properties do not arise from first principles. They are not deterministic: no outcome follows necessarily. For a social arrangement of the scale and complexity of our economy, optimal self-organization would be nothing short of miraculous.
The concept may have been somewhat less irrational in Adam Smith’s simpler world. However, if Smith was trying to do for economics what Isaac Newton had done for physics less than a century earlier, he should have listened to Newton. “I can calculate the motion of heavenly bodies,” he said, “but not the madness of people.” Newton’s observation was prompted by an investment gone bad. That pretty much says it all.
(I say more anyway after the break.)
A free market does have prerequisites; if they isolate the system and sufficiently constrain the actions of users, an approximation to some predicted outcome might yet be plausible. Unfortunately, the system cannot be isolated, and the constraints in the requirements are nonpracticable. Consider the following summary.
Wealth-preserving laws, such as property rights and contracts, must be enforced.
Consumers must make rational decisions.
Information on products and prices must flow freely and be accurate.
Entry into the market must not be restricted.
Competition must be plentiful and uncompromised.
We have a plutocracy, so property rights are safe. The second requirement, though, is contrary to human nature and to experience. Worse, the last three requirements provoke fear and loathing in corporate boardrooms (not to mention that any one of them would disqualify American capitalism). The proposed mechanism of the free market requires that decisions be made in a producer’s or consumer’s “own interest.” Unfortunately, decisions made in a corporation’s own interest conflict with the requirements for a free market. Given the choice between their own interest and a free market, guess which one corporations will chose. This may be why you never hear free-marketers discuss requirements when they are going on about benefits.
Evan Adam Smith recognized the certainty of abuse: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Unfortunately, Smith then threw up his hands, announced that there was nothing to be done about it, and recommended that we try not to facilitate it. This uninspiring passage may be the origin of the bizarre claim by free marketers that it is regulation rather than the lack of it that promotes fraud, collusion, and abuse. (More likely, the origin is more cynical, and they use Smith for a specious justification.)
Now, thus far, we have looked only at concepts and have found them wanting only by common sense. One could argue that being non-intuitive and contrary to common sense does not preclude materiality of the free market.
That is true. However, so dubious a claim produces a burden of proof on the claimant. Laplace said, "The weight of evidence for an extraordinary claim must be proportioned to its strangeness." Carl Sagan popularized this as “Extraordinary claims require extraordinary evidence.” Modern physics is non-intuitive and contrary to common sense. Its theories, though, have survived experiments of extreme rigor and measurements of exquisite accuracy. No theory in physics ever has enjoyed the unquestioning and stupefying ease of acceptance by which we have acquiesced to free-market theory.
If proponents claim that controlled experiments and measurements are not feasible for economies, then on what, exactly, do they base their claims? There have been models, models mind you, that supported free-market outcomes. However, they assume those unachievable preconditions into existence, and even then, the model results are not at all definitive. There is plenty of arm-waving, but there are no experiments, there are no measurements, and there is no math consistent with the invisible hand.
That leaves example-based arguments. Their best example, judging by how often we hear it, is Hong Kong. Singapore also is heard, as is Australia, but mainly it’s Hong Kong.
If Hong Kong were all that successful, it would be staying the course. It is not. It is changing, and that change is being driven by the “disparity between rich and poor.” Poverty is so wide spread that the government has had to provide housing assistance to 50% of the population. Singapore, the other fabled “success,” has 85% of its population in public housing. Hong Kong’s overall welfare spending continues to rise in response to poverty, and a minimum wage has had to be instituted. If this is an optimal equilibrium, conservatives need to come clean about their definition of optimal.
Further, what lesson do we take from the fact that Hong Kong does not toe the free-market line for entrance barriers and competition? What lesson do we take from its support for higher education and its universal healthcare system? (And what lesson do we take from the fact that the predictions, during the minimum-wage debate, of massive job losses and other economic disasters never materialized?)
What matters most, though, with example-based arguments is not any one example. What matters is that the totality of positive and negative examples be statistically meaningful. That raises questions about the population, about sampling rules and power and significance and uncertainty, about the survivor-bias fallacy, about criteria for success or failure, and about how one isolates free-market factors from other factors that may have affected success or failure. Failing this level of analysis, even a potentially legitimate example is nothing more than an anecdote. It has been said that the plural of “anecdote” is not “data”. Proving stuff can get hard.
The response will be, can only be, that there are too few appropriate economies for such an analysis. Exactly. In the end, it does not matter why they do not have the arguments but only that they do not. Proponents are left with nothing but arm-waving. That does not mean that their arm-waving is necessarily wrong. It does mean that they have failed to meet their burden of proof. There is no reason to accept their premise.
The last line of defense is misdirection: the claim that the “modern” free-market concept is completely different and refers merely to an absence of centralized planning. I’m not sure the distinction is real. “The Wealth of Nations” was, in large part, a reaction against British mercantilism. In addition, Republicans, in a show of their hand, declare any regulation to be centralized planning, including those for safety, for environmental protection, and for ensuring the competition necessary for a free market. And, since both Smith and invisible hands still are regularly invoked, it is hard to see a difference. This really is a straw-man argument: the only time this country even approached a centrally planned economy was the Gilded Age, when the government was actively abetting certain industries, and that was less central planning than greed and corruption.
The fundamental concept of the free market is irrational. The prerequisites for a free market are unrealizable. The mechanism of the free market is less invisible than imaginary. And examples of free market successes are incomplete, inexact, and too few to be meaningful. Worse, the best of the supposed examples of free-market success has been disastrous for working men and women. The free-market claim requires extraordinary evidence. It has not even good evidence.
Proponents can call for more study (as long as they understand the difference between arm-waving arguments and evidence). They can document trends and tendencies since there are legitimate lessons to be learned there (as long as they identify the governing probability laws, avoid confirmation bias, and do not claim causality without proof). They even can argue for turning our economy into an experiment (as long as they document beforehand decision points, decision criteria, responses, controls and their monitoring, and how different factors affecting the outcome will be identified and isolated: beware Brownbackistan). Whatever else they do, though, they need to stop talking as if the supremacy of the “free market” is self-evident. It is not.
How, then, did such arm-waving gain wide credibility? Perhaps it was PBS airing Milton Friedman’s “Free to Choose” in 1980 (and again, like a booster shot, ten years later). Maybe it was a way to express Americanness during the Cold War. The emotional factor in that, since it would have been reinforced by a compliant, Kool-Aid drinking media – including PBS, may be impossible to overstate. Maybe it was the revisionist histories of the Reagan administration. Or maybe it was another emotional factor: “free market” has the word “free” in it. People like that, and many can be manipulated with little more than that.
It doesn’t matter. The basic concept, when applied to a modern economy, is so patently silly as to suggest that few of its most ardent proponents actually believe it. They know it is a ruse and a useful one: convenient cover for funneling money and power to themselves or their benefactors. The free-market concept, as practiced today, is to make the market as free of rules as possible for oneself but far less so for others. This is the tell:
Republican policies would be the kiss of death for an actual free market, purposely shifting it away from equilibrium. Their policy agenda is a free hand not for market processes but for the rich and corporations.
Democrats need to take on this mythology and the reality that hides behind it. I have no idea how you do that. I do not know how to boil the above down to a bumper sticker or a television ad or even a short stump speech. That is something politicians or others will have to work out. But until someone does, the myth will persist because it is part and parcel of the struggle to make the world safe for plutocracy.