Why the Free Markets concept is useless

Law of Diminishing Marginal Utility
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It is something I stumble onto extremely regularly lately, people who claim that only a free market economy would be capable of efficiently allocating resources, or maximizing the utility of most people. That any other system will by definition lead to disutility.

This is a very bold claim, and one is well justified in asking what proof we have that such a system would indeed have this result. And this is where the problems start. The most common answer, especially from proponents of the Austrian school of economics or people accepting most of their arguments, is that this is not provable. Rather, this is based on logical deductions from axioms.

This capability of the markets is then contrasted with mathematical proof. That is, the fact that free markets would lead to efficient allocation etc is as solid as saying 2+2=4.

However, if this kind of argument is espoused, then a major flaw appears. Mainly that mathematics, and other axiomatic concepts, cannot tell us anything useful in isolation from reality and empirical evidence. To give you an example, to claim that markets are axiomatically defined as always leading to pareto efficiency does not tell us anything about which system humans should organize their societies around. It simply means that the concept of the markets is separated from what is commonly referred as the markets now.

Under this kind of proof, the market can easily be, say, a communist society. But if whatever will lead to Pareto efficiency will automatically be a “free market”, as humans we still face the problem of discovering which kind of system will lead to Pareto efficiency. To turn around and say that the free markets will, and by that imply a very particular system based on particular property rights and laws, is an equivocation fallacy.

The problem of course, is not that some concepts have been turned into axioms, as by itself this practice wouldn’t lead to any normative conclusions, much like pure mathematics can’t either. The problem comes because Free Market economists have attempted to sneak descriptive concepts as axioms, something which would allow them to make claims about reality. For example, the idea that a human always acts to fulfill his strongest desire first.

But the problem with such an act, is that these descriptive facts have been conceived out of pure air. Without empirical proof, any such “axioms” introduced run the problem of having minor errors, minor facts that the original thinker didn’t know about. And as most people know, the slightest error in a purely logical edifice, can lead to a wholly wrong result.

Which is why actual science requires empirical observation, repeatability and falsification as it attempts to iron out errors of human thought or modify the facts, ever so slightly, so as to make the rest of the logical deductions from the facts, as solid and correct as possible.

Proponents of the Free Markets do not do this however. They start from a few basic premises, a few of which should have been empirically tested before being accepted, and then build based on pure logic from there. They then claim that like mathematics, the result, as long as no errors in the calculation have been found, cannot be anything but correct.

And most importantly, real empirical data that refutes the results, is not used to find errors in the premises, but rather dismissed. It is claimed that if logical results do not match the reality, then there’s some factor in reality that skews them (what it is, is not important but it’s most likely the government). But this is the problem! What exactly is the factor might be critical, as the factor might be that one of the “axioms” is wrong!

Market Anarchists would have us believe that a free markets within a very particular society would work for the best result and thus, we as humans should aim for this particular society structure. But this is not proven. It is asserted. It starts from the premise that a Free Market works in a particular way and that is based on assumption of how reality and particularly human psychology works!

So why is the concept of the Free Markets useless? If “Free Markets” is defined as being a utilitarian result, then anything that achieves this result is a “Free Market”, and to find that “anything” we’ll again need to use empirical evidence. If Free Market is logically concluded from a few premises to lead to a utilitarian result in a particular society, then unless these few premises are empirically proven, we cannot and should not trust the results, nor aim for that particular society.

In the end, the Free Market concept is useless because it tries to prescribe reality independently of any empirical evidence. And like all other such independent concepts, like mathematics or language it can either tell us nothing, or lead us to the wrong path based on equivocations.

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38 thoughts on “Why the Free Markets concept is useless

  1. I consider myself in the same group as the people who are "market anarchists", but I actually agree with a lot of what you're saying. A market process is just one of the ways that we find solutions to people's problems. It is not the only one, and it shouldn't be. And to reduce everything voluntary to a variety of market phenomenon is no answer at all.

    What we need is a society that gives people space to collaborate without mediation on their own problems. We don't need to build on the existing status quo structures, but break those structures down until we get to something that serves people. How they do that could be as varied as the personalities involved. I imagine it would be a incoherent mix of market transactions, mutual aid, do-it-yourself, and probably arrangements that we couldn't conceive of.

    Society is more than just a series of transactions which can be explained economically. If it wasn't more than that, the current system wouldn't work! One of Carson's most profound arguments for a mutualist approach to libertarianism is the revitalization of respectable subsistence. You don't need to pay for everything you need; trading, bartering, sharing, and gifting are just as viable. Why pay taxes for police or subscription fees for professional security and arbitration services when you can just do it yourself with your neighbors?

    The certainty with which many varieties of anarchist approach the stateless project does astound me sometimes.

    1. The trick though is that when talking on normative concepts, like debating how society should be, why one type of distribution is better over another etc, these arguments should be based on something more concrete than logical deductions from axioms.

      The aggravating thing is when I talk to some market anarchists is that they cannot even conceive a future society without a free market. To promote something like that is, for them, akin to gross stupidity.

      When someone has a utilitarian perspective, then the type of society that will achieve the most utility for the largest amount of people should does not matter. If I can be shown with materialistic arguments that a free market anarchism would achieve equality (which I claim is necessary for a utilitarian society) then I would have no problems espousing it.

      1. "If I can be shown with materialistic arguments that a free market anarchism would achieve equality (which I claim is necessary for a utilitarian society) then I would have no problems espousing it."

        So I'm not a huge "free market" kind of guy, even though I see some balance between mutualist-style markets and syndicalist-style federations as the best recipe for a livable anarchy. That said, Kevin Carson's Exploitation and the Political Means went a long way in convincing me that institutionalized coercion has more to do with class stratification than markets alone do. Check it out: http://www.mutualist.org/id58.html

      2. How do you suggest having no market though? That is the problem – nobody ever suggests a non market solution without a state as well. They may think it is not a market, but everything is based on exchange and voluntary action.
        Even if you give your work away you are expecting something in return. It may not be immediate goods, it may not be in physical goods and it may not be set out in a contract, but you still expect something, usually that others will do the same as you and you will benefit.
        When giving to charity you get something in exchange, the feeling of having done something good (or social standing for some people).

        I don't see any anarchism without a free(d) market, and I see no free market in operation today.

        1. Again, as I said elsewhere, you're abstracting the concept of a free market to something totally different from the contemporary meaning. As such, you manage to retain the name but nothing else of substance.

          When I reject the Free Market, I specifically reject a system based on Private Property and monetary exchanges. Namely, as the free market is contemporary understood.

          This is actually precicely what I have been writing about in my article above.

          1. So You simply dont't think, that voluntary exchange can lead to private property and monetary exchange – both institutions are facilitations to exchange?

          2. I think, that voluntary exchange is facilitated by monetary exchange (i drop private property, because possesion is the same kind of facilitation as private property). So there is chance, if actors of voluntary exchange will be searching the way to make exchange easier (and i think that is higly probable), that they will reinvent money – univeresal medium of exange.

            Sorry if it's hard to understand me, but i'm not good english language user.

          3. It depends, I think that money without private property, and thus investments, interests, rent etc has no reason to exist.

            In a communist society for example, where the concept of usury is not popular, and people can receive what they want (perhaps having to wait a bit if it's not immediately available) people who want to exchange items will do so because they do not need them. As such, exchange should happen even without having to trade items of equal value, particularly because people trading something of higher value will not end up in a worse economical position than before.

          4. And why people can't give away in money in this same manner, as any other stuff? And don't You think, if they would, it will make exchange easier? If anybody can get money without usury and exchange money to whatever he/she want, isn't that facilitation?

          5. People won't give away money because money won't exist. And again, I don't think it will make exchange easier, because it's easier to just give without requiring to get something in return (and thus barter) rather than always need an exchange of items.

          6. Role of money can by played by anything. People were using as money cigarets, stones and salt. How You want to prevent people to treat something sa money?

            Why it isn't easier? If i want butter and can give You only cigarets, when You want strawberies for butter, how it is easier than buying butter by money? So, if someone thinking about joining the commune, isn't it better to him, if the commune allow to sharing money also? Because even if he wont get what he want from commune, it is possible he will be able to buy that by money from the commune. I think this is good deal. Don't You?

  2. You make some excellent points here. I think that a lot of my frustration with free market advocates comes from the assumptions that underlie what they argue. When you get to make up your own assumptions you have a whole part of your argument that is hidden and presumably can't be debated. The idea that human beings are perfectly rational actors is laughable, and yet it is the foundation of a good part of their structure of thought.

  3. The biggest problem with the concept of "free markets" is that relies on the idea of rational actors. As you said, people don't necessarily fulfill their strongest desires first, often because they don't even know what those are. Not only do they lack self-knowledge (are fickle, and short-term oriented), they also often are confused about what represents the best value, relying on "perceived value." For example, someone will buy a gas guzzling car looking at only the current price of the fuel, rather than doing an analysis on the likely higher future cost. They almost never examine externalities or the long-term, only weighing immediate out-of-pocket costs or worse, "can I afford the monthly payment?"

    If it were somehow possible to communicate true costs and force people to act on perfect information, then I think a case could be made for completely free markets. However this is an extremely unlikely scenario. So in the meantime, the solution is to use regulation to mitigate the most egregious bad decisions of irrational actors. I stop short of espousing full central planning, since information at the top of the chain is often as bad or worse as that at the consumer level. At some point, the "wisdom of crowds" overtakes individual stupidity. And that is the only salvation of economies. Central planning would have to have some similar check and balance, and then you're back to the kind of mixed market economy we have today, or some variant thereof.

  4. "what proof we have that such a system would indeed have this result"

    Um…. free market is not a system, it's rather a lack of a system so people are free to do as they wish.

    1. *Sigh*, ok then: "what proof we have that such a lack of a system would indeed have this result?"

      In any case I don't agree that the Free Markets are the lack of a system, mainly because they are a distinct historical development. They didn't exist for the majority of human existence

      1. We don't have free markets. So no, they haven't existed, but they would exist absent the state and coercive authority. That is their definition.

        1. but they would exist absent the state and coercive authority. That is their definition.

          So you're saying that whatever we would have, absent state and coercive authority, would by definition be a "free market"? In that case anarcho-communism would be a free market as well, even though it would use no money and have ownership rights based on possession

  5. Every complex system that works evolved from a simple system that worked. I do not see that markets indeed work. I consider free markets working quite illusionary on that point. Wishful thinking. Void bless randomness. Ahoy!

  6. What on earth do you mean by a 'free market'? I see no way for any anarchist to oppose actually free markets. To oppose them is to sanction coercion and the state.

    Free markets are the sum of peaceful human interactions. To oppose that is to seek to impose a system upon others through force.

    If you mean currently existing markets then fine, but I know of no market anarchist who supports the current distorted capitalist market. You're just seeking to argue at cross purposes based upon your priors…

    If you oppose free(d) markets then what do you suggest in their place? How can people live without trading? We do naturally. The only way to live without trading it to live in total isolation.

    1. You're doing exactly the kind of thing I condemn in my article above. You're simply redefining markets to be whatever there would be without a state and active coercion. With such a definition, any number of systems apply for a free market label, including Communism and Syndicalism.

      Instead of defending a particular system, you're turning the word meaningless.

      But in fact you do not simply mean "the sum of peaceful human interactions". You explicitly assume that this "sum of peaceful human interactions" would be within the framework of a Private property ownership system along with a (right-)libertarian code of law.

    2. Is there any possible situation in which it would be morally permissible or obligatory for any one group of people to initiate force upon another group? I think so, but I also think that answer depends on the nontriviality of the terms "force" and "initiate".

  7. For any scientific theory, it is not the premises but the conclusions that are typically subject to empirical verification. A theory predicts the results of observations and experiments: if the theory's predictions do not match the actual observations, then the theory fails to accurately describe reality.

    Which brings up, of course, a more important point (that you correctly note): All scientific theories are descriptive, not normative. It is impossible to establish a normative proposition by the scientific method, since any non-trivial normative proposition is in principle unfalsifiable by experiment in any theoretical context.

    There are substantial problems with free market economics from a purely theoretical level.

    First, free market economics do indeed entail Pareto efficiency, but this result begs the question as to whether we actually want a Pareto-efficient economy and more importantly which Pareto efficient solution we want to achieve: many different patterns of distribution are Pareto-efficient.

    More importantly, free market economics entails that all individuals seek the local Nash equilibrium for individual economic decisions. This entails that any "Prisoner's Dilemma" economic situations are always resolved by mutual defection. Therefore, free market economics (as well as purely anarchist economics) structurally fails to achieve available mutual benefits. (Note that all outcomes of PD games are Pareto efficient, when different decision-sets are considered as alternative benefit distributions.)

    Third, there is the observation that free market economics has absolutely nothing to do with actually existing political economies. Free market economics specifically requires (on close examination) that property rights be limited (with only trivial exceptions) to ownership by physical possession. Ownership of capital is necessarily abstract, abstract ownership is by definition an externality, and free market economics assumes no externalities. To attempt to describe a capitalist political economy in terms of free market economics is as pointless and stupid as trying to describe aerodynamics in terms of gravitation in a vacuum.

    1. To attempt to describe a capitalist political economy in terms of free market economics is as pointless and stupid as trying to describe aerodynamics in terms of gravitation in a vacuum.

      As a side-note, it's funny that you used this particular example 😀

  8. While your criticism of why a purely free market theory fails, your solution is not compelling. You miss the fact that regulation does not work. This is for 3 reasons.

    1) Regulation happens by the state, and the state is a tool of the capitalist class. As such, it will protect only their interests. This is obviously the case as all regulation that has happened, has been either the result of inter-capitalist struggles (ie industrial capital VS financial capital) and as such it ends up being applied or withdrawn in relation to which capitalist camp has the upper hand. In the early to mid-20th century, the industrialists had the upper hand, so a lot of financial regulation was there.

    2) Which leads us to the second part, that regulation that happens against the capitalist class as a whole is always the result of working class stuggle. It is done to placate the workers and avoid a revolt. (eg the new deal). However, once the threat of revolution has passed and capitalism once again goes into a boom, all regulation will be rolled back. As is what happened in the last 30 years. This is because you regulate the capitalist class but leave them the money, and thus the power to affect the government. So what are they going to push for? Deregulation.

    3) A lot of regulation is not even there to control the Capitalist class, but rather to prevent competition and retain the advantage of the monolithic corporations who are too inefficient to compete with small and nible corporations. As such, most of the regulation end up putting costly "checks" and "tests" that prevent anyone who does not have a larhe amount of capital to even start. Such was the case with the regulation of the home-made toy industry for example, under the banner or "health". This only achieved that small scale toy creation is unfeasible. On the other hand, you see the troubles Microsoft is having from small competition (free software) since they can't put forth regulation fast enough (patents)

  9. I'm not going to prevent people from using anything as money, I'm going to push for a social system where the use of anything as money is not required and I'm going to push for a mindframe that people won't be always looking to make an exchage.

    You mention stuff like butter and so but you fail to ask why would it have to be an exchange. When you go to your neighbour to ask him for some sugar because you're out, does he ask you for money? When you ask a stranger for a cigarette, does he ask you for money?

    So no, I don't think money is a good deal, for various reasons that are quite off topic.

    1. Not everybody can be suplied in everything they need or want by their neghbours. If it was not true, than no communes would be needed by anyone.

      1. Firstly, the purpose of a commune is not simply to facilitate distribution.

        Secondly, I made the neighbour example to show you what kind of relationships do not require money.

        1. And if commune commune isn't for easier distrubution sake (and more egalitarian – to make everybody equally rich), then – what it is for?

          I understood why You wrote about neighbour. But You seem to dont' understand, that this kinf of relationship (being a neigbhour, not necessarily realtionship that don't require using money) are rare. Too rare to plan something on the basis of it.

          1. Egalitarianism does not mean "richer" because that's a comparative word. It doesn't apply. In an egalitarianism society, you may be "richer" than a wage-slage (in both material wealth and positive freedom) but you'll probably be poorer than a multi-millionaire today.

            A commune is a organizational form, it's a way for people to organize around the geographic area of their residence. As such, it would define all aspects of economical, social and political life.

          2. But You seem to dont' understand, that this kinf of relationship (being a neigbhour, not necessarily realtionship that don't require using money) are rare. Too rare to plan something on the basis of it.

            Of course it is rare in today's society. But I'm talking normative, I'm talking about how it ought to be and why, when that is so, the concept of money or markets does not apply and will not spontaneously pop-up as you stated.

  10. As long as the state regulates, the possibility of private profits will lure with those with power and resources into that game and it’s a game they will inevitably win. And the losers will be those without the power and resources. Free markets don’t give us utopia, but I really do believe they do better by the poor than do regulated markets.

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