Monthly Archives: November 2010

Everything you know (about the free market) is wrong.

One of the problems in American politics today is that a lot of people are advocates for what they think is the free market. They’ve been taught that creating one will build an economy that requires no management, and simply works on its own, instantly producing (through the action of something called the Invisible Hand) the best solutions to every possible problem. Don’t laugh. This is serious economic theory and it’s something a large number of fairly serious academics (to say nothing of lunatic radicals) actually believe. And it’s actually true. The problem is that most people advocating for free markets are speaking a language they don’t understand. They know what the effects of a Free Market are, but they don’t know what a Free Market is.

Free Beer

The fundamental thing that’s confusing is the word “free.” This has several meanings, the most important of which are what the free software community refer to as “free as in freedom” and “free as in free beer.” The first is the human right of reasonably unencumbered agency or action, liberty in other words. The other is exactly what it says on the tin: Getting things without paying for them. Americans are very fond of both usages, but the first is more popular in American politics. Unfortunately, as it happens, the “Free” in “Free Market” is a kind of Free Beer.

A Free Market is one in which three conditions exist:

-There is no cost to enter the market.

-There is no cost to exit the market.

-There is no cost to continue in the market.

This creates a condition that economists fancifully term “perfect competition.” It’s called this because there is no longer any tactical aspect to the market. No means now exist to drive a competitor from the market. The only things that matter to profitability are the popularity (not to say quality) of a product and the efficiency with which it can be produced.

All the World’s a Stage

Of course, as it would happen, we need one more thing to summon the Invisible Hand and imbue it with its mystical agency. That thing is called a “microeconomic actor” and it’s a truly bizarre critter. It’s a very simplified economic model of a human being, and as soon as I describe it for you, you should immediately spot the problems with it.

A microeconomic actor is a being who:

-Always acts with enlightened self-interest

-Has resources

Now the problem, for the 30% of the class that missed it, is that humans are neither enlightened nor self-interested enough to fit the bill. As a matter of fact, humans are stupid, gullible, and altruistic. Only the last is seen as a virtue, and the first two are an absolute disaster when set loose in the Free Market. As it happens, not all humans have resources either, but that’s mostly their problem, except for the altruism thing.

There is No Such Thing as a Free Lunch

Of course, laying aside the inadequacies of humans for a moment, we still have to deal with the problem of where Free Beer comes from. You may have heard that nothing in life is free. It’s true, and the Laws of Thermodynamics demand that it be so. This is obviously going to be a problem of implementation for our Free Market. Fortunately we have something that is an outside actor as far as our economic system is concerned. We call that thing a “Government.”

Governments can cause economies to reach a reasonable approximation of perfect competition (let’s call it “good competition”) by simply thwacking any entity that gets large enough. It turns out governments are good at this, since their only tool (which they exist to create and protect a monopoly on) is coercion. Because no entities are large, none have the leverage necessary to dominate a market and drive away competitors. Of course, that still leaves significant problems with entry and exit costs*. Governments can limit these to varying degrees by providing entities looking to enter or exit the market with grants, loans, and subsidies to limit their costs. The funds for these of course must be provided through various acts of thuggery and extortion, which governments happen to be good at. These of course need to be as market-neutral as possible. This gives us what I’ll call “better competition,” but do note that it’s still not perfect.

If governments do none of these things, far from “unshackling” the Invisible Hand, they have all but cut it off.

Chasing Unicorns

So now we have Better Competition, but we still don’t have any source of microeconomic actors. Fortunately, through the magic of government intervention, we can create a better approximation of one than your garden-variety human. If microeconomic actors are unicorns, these are more like horses, so through the powers of analogy and bad punnery, I hereby pronounce them (since I am unaware of a term for them) microequinomic actors. Humans are stupid, but they can learn. To serve this end, governments must provide for the education of people it wants to be active in markets (read: everybody.) You could call this practice “compulsory universal education” if you like. Punishing stupidity and dishonesty (while rewarding intelligence and honesty) further help to curb the effects of these human failings. Altruism’s effects can be curbed by providing those without it with additional resources to account for it.

To the extent that governments fail to protect humans from their fundamental failings, the Invisible Hand is shackled to the very limited abilities of those who are active in markets.

It should go without saying that the funding for these actions must necessarily be provided through acts of market-neutral thuggery and extortion.

Free Markets vs. Freedom

By now we’ve got a lot of thuggery and extortion going on, and you might rightly feel somewhat disquiet about it if you come from the nation whose unofficial motto was and is “Don’t tread on me.” Unfortunately, perfect freedom is as unachievable in fact as free beer. You may already be aware that individual rights can conflict, but there is a further problem that no one is truly free if there are things he must do or that he cannot do.

Shackles are affixed to our agency through the very bodies we inhabit. We must eat to live, at the very least, and our bodies can break down and become diseased, leaving us in a pitiful state which is a mockery of freedom. We have further shackles in our minds, a common morality that tells us we must sacrifice for others, if only our spouses, our spawn, or our friends.

Wealth grants us power to overcome the weaknesses of flesh and discharge the duties we impose upon ourselves, but the only ways of creating wealth require shackles and the best ways of creating wealth need government interference.

So in the end, we find that freedom isn’t free (and not in the way you thought, either,) and that the people who want to create a free market are in reality doing their level best to destroy the best approximation of one our deeply flawed system of government (created and enacted by stupid, gullible, altruistic humans) has been able to create.



*If you were wondering, starvation is an exit cost.