We often forget what “free market economics” really means.

by w3woody

A Lawyer and a Physicists Walk Into a Bar

Economists routinely use the framework to form their views on everything from taxation to global trade — portraying it as a value-free, scientific approach, when in fact it carries a hidden ideology that casts completely free markets as the ideal. Thus, when markets break down, the solution inevitably entails removing barriers to their proper functioning: privatize healthcare, education or social security, keep working to free up trade, or make labor markets more “flexible.”

The trouble with all of this is that none of it is true. If political party affiliation is any indication, the fact that academic economists are overwhelmingly Democrat indicates that pro-market utopianism isn’t widespread.

Let’s back up a minute from the debate here.

Let’s define what a “free market” looks like, in economic parliance.

One definition, given by Wikipedia, states: One view is that a free market is a system in which the prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Okay, but let’s unpack that. What does that mean?

Well, we have “consumers.”

That’s you and me, when we go out and buy something, like a tube of toothpaste, or a carton of rocky road ice cream.

And consumers buy stuff from “producers,” implicit in the definition above. That… well, again, that’s you and me, when we make something, from little jewelry trinkets we sell at a Renaissance Fair to helping others produce flight control software that controls a 747. That’s those of us who work on a farm keeping track of the cows to those of us who work in a manufacturing plant maintaining the machines which put the toothpaste into the tube, to those of us who help clean the machines that make the rocky road.

And we have the “open market”–which, in practice, is us wandering the grocery store looking for what we want to buy, or posting a job request on LinkedIn looking for a developer to write an iOS application, or asking a friend if he knows someone who can help maintain the machines which mix the rocky road ice cream in the batch mixers. That’s the strip of small shops in a downtown mall where mom and pop sell tools at the local hardware store, next store to the ice cream parlor. That’s the on-line store someone opens up on Etsy to sell their typewriter key-based jewelry.

And finally we have the phrase “free from any intervention by a government, price-setting monopoly, or other authority.”

What does that mean?

Well, exactly what it says. But most of us living in the United States really don’t understand what this means, so it is worth taking an example. From Venezuela:

World View: Venezuela’s Socialist Government Arrests Bakers Because of Bread Shortage

Because flour is in short supply in the Socialist economy, Maduro has ordered bakeries to produce only French bread, white loaves, or pan canilla. Furthermore, all of these items are price-controlled, which means that they must be sold at the government-dictated price.

Meaning bakers in Venezuela are not free to bake so-called “luxury” items, such as croissants or brownies, which are not subject to Venezuelan price controls.

Tell your child that a brownie is a “luxury” item.

Or here’s a blast from the past, another example from 1991 before the collapse of the Soviet Union: On the brink: bread lines in Moscow Soviet Union reported nearing bankruptcy

The long lines in Russia came from price controls: bread producers where limited in how much bread they could make, what they could charge for the bread, where they could obtain the wheat for the bread, and were not permitted to make a profit from their bread baking activities. Similar government impositions occurred all the way up the line–which is why some of the most productive wheat fields in the world (located throughout central Russia) could never produce enough for their own population.

In Venezuela and Russia, as in many other countries in the world, people are not free to set their own prices for the goods they produce and the services they provide. In such non-free areas of the world, shortages–even in areas which should experience plenty–take place.

It’s not the political system, by the way. The Great Irish Potato Famine which led to a massive diaspora of the Irish, happened because of a network of property ownership laws and mandated production levels (set by the Government and which effectively limited the freedom of the Irish to eat their own food) ran head-long against a potato blight, creating a massive shortage of food.

The irony of the Famine was that while the Irish were starving, the English (who ate Irish food) ate very well, receiving the historically mandated levels of food that was previously promised.

Or to take an example closer to home: does anyone remember the gas lines from the 1970’s? Those were caused by government-imposed gas prices and a gas shortage which limited the amount of gas consumers could buy at that price.

So what does “Free Markets” mean?

It means consumer and producer freedom from government intervention.

It means you are free to buy an old typewriter, pull off the keys, make cute jewelry, and sell it on Etsy.

It means you are free to buy cookies instead of bread.

It means you are free to bake brownies.

It means you are free.

It doesn’t mean, by the way, that you are free of government intervention. Free market economics is not anarchy, as many on the left ironically accuse. Governments are still necessary to insure transactions go off without a hitch. Governments are necessary to make sure products sold are what they claim to be, that they are safe and effective, that producers don’t take money without delivering products, that consumers pay their debts.

Governments are necessary to arbitrate disputes–while private arbitrators do a bang-up job, at the bottom of the stack enforcement of rulings must eventually land on the back of a guy with a gun able to arrest and jail someone who fails to live up to their requirements.

Governments are necessary, in other words, to serve as referees: to provide trust to both sides of the transaction that the complete stranger they are dealing with will engage in the exchange in an honorable way.

But referees are not participants in the game.

Governments, like consumers and producers, are also people–and the awesome power of government they wield can often be abused. Which is why everyone must keep an eye out on government enforcers–and abuse of government power should be dealt with in the harshest terms.

Quis custodiet ipsos custodes?

We all do.

Now of course the study of free market economics includes a nuanced study of those areas of the economy where free market economics create perverse incentives which clearly run contrary to reasonable social outcomes.

For example, health care insurers have every incentive to drop customers who have become sick and who run up massive health care bills.

It’s why the government must intervene in the health care market–though there are a number of ways which this can be done, some of which provide greater consumer and producer freedom, some of which provide less consumer and producer freedom.

(We must be careful, by the way, in following the model set by other parts of the world, since in most of the world, personal freedom is a secondary concern. Even in Europe, freedom of speech and freedom of conscience are secondary concerns to maintaining government-imposed order.)

We must remember, however, that these perverse incentives are often very rare.

We must also remember that producer success is not a market failure.

We must remember that consumer wealth is not a market failure.

We must remember that producer failure is not a market failure.

We must remember that a lack of consumer wealth is not a market failure.

We must remember that freedom means as much the freedom to fail as it does the freedom to succeed.

And it means that if we see someone who is hurt, downtrodden, or in need of a hand–that personal freedom means we have the personal responsibility to help where we can.

Robbing from Peter to give to Paul leaves both Peter and Paul the poorer for it.

It’s also important to remember that any rearrangement of the market will inevitably result in those whose lot is improved as well as those who find themselves on the short-end of the stick.

So when someone touts the success of a massive government rearrangement of the economy, such as the successes of Obamacare or the upcoming successes of whatever rearrangement is imposed by the Republican party, remember that they are simply cherry picking from one side of the equation while ignoring the other side and while ignoring the overall statistical average.

Now it is entirely possible that a government-imposed arrangement may be the “optimal” arrangement for some definition of “optional”.

But what you must remember is this: if the government is imposing itself on the price structure of goods, on the supply of goods, or by goosing the demand for goods (other than through government acting as consumer), the government is taking away your freedom as a consumer and/or as a producer.

And in the light of a loss of freedom, we know (from experience throughout the world) several things happen:

People are not free to come up with better products or better ways to produce those products.

People are not free to purchase the products they really want, and must confine themselves to the products that are available.

People lose incentive to produce a better product.

People lose incentive to stay in business.

And in the most extreme cases, helping those around them by producing the products they want become a revolutionary act subject to punishment by the government. Just see what’s happening now to bakers in Venezuela.

The deepest irony to me is how the Left, supposedly those who embrace the freedom of mankind, would roundly reject the ultimate expression of personal freedom: how we may choose to work, make money, and buy the goods and services we want. Of course some on the Left are on the cutting edge of economic freedom in very narrow and specific ways: at the forefront of legalization of certain drugs or the forefront of the legalization of prostitution.

But in the greater area of personal economic freedom most on the Left don’t even realize their efforts run contrary to personal economic freedom.

And that’s because many on the Left–as well as many on the Right–believe wealth is a zero-sum game, and thus success is a market failure.

And thus, they want to take away your freedom–in the name of freedom.

The Free Market economy may not be the best economic arrangement possible.

But it is the arrangement which respects personal freedom.

And, as many economists have shown, personal freedom works.

It may not help Kings and Emperors stay in power to build gigantic wasteful monuments to the ages. But it does help the shopkeeper supply enough bread so that his customers can eat.

I believe, quite fervently, that you should be free to spend your money as you wish. You worked hard for your money, so you should be able to spend it on whatever you want: a 24 ounce diet soda, or a pizza with cheese in the crust, or a cute little dress which flatters your figure.

You should be free to travel where you will, to write what you will, to work as you will, to live as you will.

And it is a shame to me that academics must bury the Truth in layers and layers of terminology in order to hide the cold reality, which is this:

Most academics, most politicians, even most economists, don’t give two fucks if you are free.