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.


20 thoughts on “Everything you know (about the free market) is wrong.

  1. complicatedlight

    this world seems (relatively) suddenly flooded in a tsunami of absolutism. and absolutism is basically an excuse to no think (cf, remain unenlightened). i’ve spent a good deal of energy arguing for the points you make with eloquence and clarity above [microequinomic ftw], in my own way, with the tea-party crowd; but try as i might, it just doesn’t work on them. at least not up front. maybe after they get a chance to fully taste the fruits of a truly unfettered, government-completely-off-our-backs market…maybe then they’ll come around.

    i practice altruism, by the way (though not stupidly); the models had better come to terms with that.

    a fine article.

  2. The_ATM

    The free market is based on the idea of voluntaryism. That is, ‘Unfortunately, as it happens, the “Free” in “Free Market” is a kind of Free Beer.’ is not correct. In fact, it is the exact opposite of accurate.

  3. TheSaltMine

    Humans are altruistic?
    Yeah, maybe when they’re being watched closely. But I don’t believe for even a fraction of a second that most people have anything but their own welfare at the front of their mind – whether they will admit to it (or are even aware of it) or not.

  4. BobRichter

    @The_ATM – Oh, I know the definition I used isn’t the most popular one, but it is both the *best* and the *oldest*, since it is Adam Smith’s. If you define a free market as one without coercion or fraud, you’re still chasing unicorns, and there’s no reason to expect the Invisible Hand to emerge. Rather, markets of this sort tend to concentrate wealth, as a notionally temporary advantage in wealth creates leverage a competent player will use to deal unequally with other players. Money is power, power is force, and poverty makes a mockery of freedom.

    @moritheil – I am not, strictly speaking, opposed to thuggery, especially since it’s necessary to secure my person and property against various mischief.

    @TheSaltMine – Humans aren’t perfectly altruistic, any more than they’re perfectly gullible or perfectly stupid. The fact is that they will from time to time abandon their own interests for the sake of others. Unless they’re psychologically abnormal they will in fact sacrifice a great deal for those they are closest to. Interestingly, they’ll also abandon their own interests simply to injure others.

    If humans possessed no altruism, human society could never have formed or would cease to function.

  5. TheSaltMine

    @BobRichter – 

    If humans possessed no altruism, human society could never have formed or would cease to function.”

    Oh, surely they possess it to some measure, I’m merely arguing that it is a small degree in most cases and that the intervals for which it is made apparent are few and far between.
    I would also like to point out that society is really not doing so well and never has. It barrels along on momentum alone.

  6. The_ATM

    @Airborne_Muse – 

    “Oh, I know the definition I used isn’t the most popular one”

    Did I say it wasn’t popular. I said it was not accurate. You have provided in this post no attack on the idea of a free market, except to define it incorrectly.

    Moreover, it is dishonest to start off your post by incorrectly defining something and then attack that inaccurate definition. This post is basically the fallacy of a straw man. Wikipedia says, “A free market is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property.” Clearly, this is free in the sense of liberty, not in the sense of ‘free beer’. While it is true there should be no entrance barriers, it is not called a free market because there should be no entrance barriers.

    America has a long history of government interfering in the marketplace, so if you are complaining about the current situation, it would be a very inaccurate complaint.

    Now I would agree the idea of the invisible hand is a little.. inappropriate for academic discussion, the idea behind it, that everyone acts in their own self interest, makes a great deal of sense. Think of the marketplace as a genetic algorithm or as the process of natural selection–these are both things which attempt to find optimal solutions.

  7. Psychopompousgb

    @The_ATM – 

    The idea behind this post, as far as I can tell, is not at all to attack the Free Market. If you paid attention, you would notice that the reason he defined the Free Market as he did was because that was how Adam Smith defined the Free Market in formulating his economic theories (Classical Economics), it is thus a technical definition that differs from common usage. If you don’t accept Adam Smith’s definition you won’t find the same results in the market’s behavior as he predicts.

    And the original post isn’t saying that Adam Smith was wrong in the predictions he made, exactly. It was clarifying that those predictions don’t precisely apply to the real world the way you might think. The natural state of any Free Market, using the wikipedia defintion you provided (and not Adam Smith’s definition), is the vertically integrated monopoly or trust. Because a large business can earn more profits if smaller businesses are not competing with them and because it is possible for them to impose additional barriers to entering the market than would naturally exist, they happily do so. Government intervention in the market is necessary to create a rough approximation of the Free Market Adam Smith required for his economic theories to be valid.

  8. The_ATM

    “further problem that no one is truly free if there are things [he must do or that] he cannot do.”

    Really? I am not free because I cannot jump 20 feet in the air with only the aid of my legs? This is a pretty tortured definition of freedom if you hope government to some how help me shoot lasers out my eyes or dunk like Micheal Jordan. I am pretty sure the free market is free in the sense people are able to make choices without the government getting in the way or punishing them for their choices.

    @Psychopompousgb – 

    Well, “Free Markets vs. Freedom” sounds pretty opposed to the free market to me, unless we take for granted both you and I think freedom is a bad thing. Take another read and be a little more critical of the things he is writing. Some of them are just nonsensical.

    “If you paid attention”

    I did.

    “The natural state of any Free Market, using the wikipedia defintion you provided (and not Adam Smith’s definition), is the vertically integrated monopoly or trust.”

    This is BS everyone was taught in grade school, including myself. There are entire schools of economic thought that disagree. In other words, just because you were taught this at 14 by a government employee does not mean it is unilaterally true or would be the opinion of all professionals. Even if we were to have monopolies, they would be required to keep their prices low to stave off competition. They also would be required to keep their wages competitive with those of other industries as to avoid employees moving elsewhere for some compensating differential. Yes, there are other factors to discuss here, but rather than you and I discussing them, if you would like to read about economists that disagree, you can do the research.

    Either way, I would argue what we need is a freer market where the government is not guaranteeing loans so that people can buy houses they cannot afford. I would argue the government should not be setting interest rates directly causing speculative booms like the housing and NASDAQ bubble.

  9. Psychopompousgb

    @The_ATM – 

    Although I do have an opinion on the matter, I made no judgement about the value of freedom in my previous comment and it is not necessary for anything I said.

    I was never told that the natural state of a “free market” (as you’ve define it, not as JediBear did) will be monopolies or trusts in grade school. I figured that out on my own as part of an advanced study of economics in college. I’m familiar with many schools of economic thought, and if you’d like I can explain in depth why many of them are very, very wrong. But that’s beside the point, what’s being discussed here are the concepts underlying Adam Smith’s classical theory – which virtually every other school of economic thought borrows from to some degree.

  10. BobRichter

    @The_ATM – In saying a definition is inaccurate, you do a violence to language. Definitions are either popular (an accepted usage) or unpopular (an obscure usage) they are never correct or incorrect.

    I used the definition I did because it’s the best definition for the purpose I was undertaking. If you want a free market that actually selects for the best solutions it needs the properties I laid out. To the extent that a free market does not have these properties, it selects suboptimal solutions because it is unable to discover genuine value, since various types of economic force can be leveraged against individual actors to distort values.

    I am actually growing to be an advocate of the Free Market in its original sense. Please don’t mistake my mentions of the model’s technical impossibility for an attack upon it. Most theoretical models don’t and can’t exist in reality. I simply think that people need to be reminded from time to time that there are in fact no such things as particles, perfect freedom, or free markets.

    That and I’m sick to death of people who’ve never read or don’t understand Adam Smith trying to lecture me on his philosophy. The Wealth of Nations is freely available on the Internet. Do keep in mind when you read it that it is the beginning of economic wisdom and not the end.

  11. The_ATM

    @BobRichter – 

    I see. I believe I misunderstood you. I apologize. Font must have been too small for me to read it properly… or something. Rereading, I think I missed this line, “And it’s actually true”. I guess should probably go on youtube and troll now.


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