Is the free market free?


On 2 September when the Senate passed the repeal of the mining tax, the legislation included a considerable slowing of the process to increase superannuation for workers. Senator Lazarus for PUP, and Finance Minister Mathias Cormann, both emphasised that this gave individuals more money in their own pocket. Cormann went so far as to suggest people could now decide what to do with their extra money:

"This is not an adverse, unexpected change as it will leave Australian workers with more of their own money pre-retirement which they can spend on paying down their mortgage, spend on other matters or save for their retirement through superannuation as they see fit," Finance Minister Mathias Cormann told the Senate.

That is a classic liberal, or now neo-liberal, approach to economics: that people should be entirely ‘free’ to decide how they use their money with no government interference. Carried to its logical extreme, there would be no government involvement in health or education services, leaving that to private providers in the market and allowing people to decide how much of their own money they wish to spend on health and education. If you want higher quality health and education services, then you have to choose to pay more for them, or pay less and probably get a lesser service.

A recent issue shows how the market can directly impact health issues. In relation to a female chronic condition called endometriosis, a drug is available specifically to control the condition but it is not yet sold in Australia, although readily available overseas. The manufacturer, Bayer, does not yet believe it would make a profit from selling it in Australia (although it is ‘assessing the feasibility of introducing this product to the Australian market’). Even the AMA said its introduction to Australia was a commercial matter. When the operation of a free market can affect people’s health in this way, one has basis to question the ethics or morality of the whole economic system.

But that is the freedom of a free market, as neo-liberal economists see it.

Economics has drawn on the two basic approaches to freedom discussed in my earlier piece ‘Whose freedom?’: the freedom of the rational person to make their own decisions and choices; and the freedom that comes from there being no interference or coercion in making those decisions and choices.

Classical economics is pinned to ‘rational choice theory’ that assumes individuals always make prudent and logical decisions that provide them with the greatest satisfaction and are in their best self-interest. The pillars of this approach are self-interest, omniscience (‘perfect information’) and conscious deliberation. Adam Smith also created the ‘invisible hand’ whereby this rational self-interest actually creates benefits for others and for society at large, which is the basis of the ‘trickle down’ approach in economics.

The very concept of ‘the market’ is based on the idea that people freely interact, and freely exchange goods and services. In this concept, I exchange my labour for other goods and services and money has become the medium of exchange: it allows my exchange of labour with one person to be used, through the use of money, for exchanges with other people. [Although most economists state that money is not a ‘good’, there is a market for money so it must also have the characteristics of a ‘good’, not just a medium of exchange; in which case, it is the ‘good’ I receive for my labour and then exchange.] But the emphasis is that people freely and rationally make the decision to exchange because each party expects to gain from the exchange, a gain that provides ‘utility’ — or ‘satisfaction’, ‘pleasure’, ‘personal welfare’ (each words that have been used at different times to explain the economic meaning of ‘utility’).

The first glaring fallacy is that in classical economics this is based on a person having ‘perfect knowledge’ of the market, of all goods and prices, and being able to rationally assess that knowledge and make the best decision that meets their needs. ‘Perfect knowledge’ is, however, an impossibility: theoretically, if knowledge was perfect there could only be one rational decision that it would lead to, and that is clearly not the case.

There has been much work in the latter half of the twentieth century, and in the current century, that questions the classical approach, with many works showing that knowledge in the market is imperfect and even that people do not always make rational decisions — decisions can be influenced by emotions, by peers, by previous decisions and experiences, and so on.

Some have argued that it is this less than perfect information that actually leads to distortions in the market and market failures. Hayek and the ‘Austrian school’ recognised imperfect information in the 1940s and argued that each person has only a little information but maintained that it is a free market that efficiently allows each person to use what information they have. On the other hand, firms can raise prices or lower wages because they recognise the greater cost to the consumer or the worker of obtaining the necessary information that may lead them elsewhere: for example, a worker accepts a lower paid local job rather than undertake the effort (‘cost’) to search far and wide and relocate to a higher paid position.

There was also the classical view of ‘perfect competition’ which would produce the best possible outcome for consumers and society. Under perfect competition there would be only one price for equivalent goods because the market demand would be equal to the market supply (an equilibrium). When a good is first produced it may reap super profits for the initial providers but the high price attracts other players into the market, increasing supply, driving down the price, then driving some suppliers from the market, until it moves to equilibrium. This is one reason some economists think that ‘bubbles’ are not a market failure but are self-correcting. (It would also appear to be the underlying economic reasoning for the constant creation of new products, as firms try to obtain that initial advantage, and super profits, in the market.)

In this perfect world of rational buyers and sellers, of ‘perfect information’ and ‘perfect competition’, there is no need for advertising or branded goods. The model doesn’t exist in the real world (although it is argued by some that the money markets, and trading in items like tea and coffee come close) but it is still used as a model against which economic judgments are made. It is at the heart of the argument that unemployment comes about because the labour market is not ‘free’ (being subject to interference by government regulation, like minimum wages, and unions) and that, if it was completely free, wages would settle at a level where there was no unemployment.

All the ‘perfect’ models that make economics work lead to the fact that it is not operating in the real world. Many economic theories use ceteris paribus (‘all things being equal’), meaning they work unless other matters intrude — such as the real world. No doubt that gives rise to the joke that, for economic theory, the real world is an exception. It also means that it takes no account of the real-world social issues that impact freedom and therefore an individual’s capacity to participate or ‘compete’ in the so-called free market.

The neo-liberal economists lay claim to the John Stuart Mill approach to freedom:

The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to attain it.

They certainly place a lot of emphasis on the first part of Mill’s statement as an integral part of a free market. They partially cover the second part with their view that their ‘perfect’ free market allows people to enter and leave as they choose without cost (despite the reality that there is usually a ‘cost’). But, to my mind, they pay very little attention to the third part, regarding not impeding the efforts of others to attain freedom. In other words, they basically cherry-pick the concept of freedom and use only those parts that support their ‘free market’.

This is reflected in the approach to private property which is considered essential to a well-functioning free market: a means of managing resources (all forms of resources, whether natural, produced or intellectual). It is, however, actually a constraint and creates a basic anomaly in economic theory. One person’s ownership of a resource obviously limits the extent to which others can access it, but the economists argue that without private ownership there would be constant conflict over resources: in essence, private property provides a peaceful means to make resources available. The extent to which that resource is ‘desired’, or is valued by others, will be reflected in its price.

Private property is also essential to the concept of the market itself. To exchange something in the market, I must own it in the first place and the other party must also own what they are exchanging. The logic of this seems apparent when one considers what a thief may offer for exchange: we undoubtedly consider that not to be a fair exchange because the thief does not actually own the item of exchange — or does he? The thief clearly has ‘possession’, so there must be a logical difference between ‘ownership’ and ‘possession’ in the economic system. When one considers the history of conquest around the globe, it is easy to argue that what in many countries is called ‘ownership’ is in fact only ‘possession’. Take Australia for example: non-indigenous Australians possess the continent but do they own it? That question is, of course, central to the land rights debate.

It goes back to history and C B Macpherson’s argument that political freedom came before economic ‘freedom’ and was first obtained by the property-owning elites who then used it in their own self-interest. And it also goes back to history in the sense that much modern ownership is based on past dispossession of previous owners, and yet the economic system is based on the modern possession not the historic ownership.

So there is an illogicality in the underpinnings of the economic system and it is prefaced not on freedom but an historical loss of freedom imposed on others. It is essentially a system imposed by the ‘winners’.

That loss of freedom continues in the modern economy.

Some economists like to consider that their discipline is a science and, like the natural sciences, ‘value free’, but that ignores they are dealing with social issues which inherently have cultural values driving them; and also ignores that the entire field of economics is culturally derived and culturally driven. And they ignore that their whole economic system relies on the basic social value of trust. The thief is able to exchange the item he has only because we normally trust people to undertake a genuine exchange. The shopkeeper trusts us to pay for an item when it is handed over and/or we trust the shopkeeper to hand the item over when we have paid — otherwise we would either be there all day negotiating who should first begin the exchange, or we would need to have enforcers in every store to oversee the exchange. Without trust the ‘cost’ of exchange would become prohibitive. The economists tend to say that such social issues fall outside their field of study, yet their whole system depends on them.

By ignoring the social implications of the market, they ignore Mill’s dictum that freedom includes not impeding the freedom of others. This actually distorts their view of the ideal that there should be no government interference in the market. Putting those two together they can come up with this:

Consider the case of a black woman who wants to rent an apartment from a white landlord. She is better able to do so when the landlord has the right to set the rent at whatever level he wants. Even if the landlord would prefer a white tenant, the black woman can offset her disadvantage by offering a higher rent. A landlord who takes the white tenant at a lower rent anyway pays for discrimination.

According to this line of thinking, rent controls (in the USA) reduce competition based on monetary exchanges and increase competition based on personal characteristics: because the landlord is restricted in what rent can be charged, he then pays more attention to personal characteristics in selecting a tenant. How can we have any faith in people arguing that it is the lack of a free market that leads to discrimination?

The obvious flaw is that the black woman may not have sufficient money to offer a higher rent. And, if she has to pay a higher rent than a white person might to obtain the same apartment, isn’t that also discrimination? — but that doesn’t seem to exist in the thinking of the neo-liberal economists. They take the view, as explained in the ‘Whose freedom?’ article, that ‘lack of means’ is not a lack of freedom and they completely overlook that it may well be historical circumstances, an historical lack of freedom, that has created the current lack of means. There is no room in economic theory to overcome the economic injustices of the past. If economics can’t address economic injustices, then surely governments should, but not so according to the neo-liberal economists for that would be interference in the market.

‘Lack of means’ overlaps with the whole concept of competition. The economists argue that competition allows the real value of items, to individuals, and through them to society, to be determined (despite the fact that their ‘perfect competition’ actually leads to no competition). Thus, the auction of a house produces a price that reflects the personal value given to that piece of real estate by the individuals at the auction. If, however, I am outbid because another individual has greater means, I have surely had my own freedom to satisfy my self-interested ‘utility’ curtailed. I obviously look elsewhere in the market, so for the economists I still have freedom, but that original competition has impeded my freedom by imposing greater costs (information search) to continue looking for a house and, if those greater costs start exceeding my means, I may give up looking altogether (which is something the government needs to consider in its approach to younger jobseekers). Giving up is still a rational decision because the individual has decided that the cost of gaining more ‘information’ has reached the point of outweighing the benefits. (Note that ‘cost’ here, and in much of economics, is not just monetary but may include physical effort, time and other resources.)

Neo-liberal economists deride the old mercantilist view that any increase in means can only come at the expense of others but there is still an element of that in their ‘competition’. Competition is not necessarily fair when the resources and means are unequally distributed by private property and the historical accidents that led to it. There is, therefore, no real freedom in competition. But what the neo-liberal economists won’t admit is that it is competition, not freedom, that is fundamental to the economy they have created. Although my costs may increase or I lack means, that does not mean I am not free to make other choices, just that I have lost the competition. So it is not really a system about freedom but about protecting the competition’s winners.

In a short piece like this, I obviously cannot do justice to the full range of economic thinking. I have focused on a few key aspects of classical economics partly because that is what the neo-liberal economists returned to when they rejected Keynesian economics.

All is not lost because there are many new economic approaches, including Modern Monetary Theory (see 2353’s post here) and ‘middle out’ economics (see Kay Rollison’s piece here). There seems to be growing exposure of these ideas and they offer some hope for a new approach to economics but, unless they accept Mill’s dictum on freedom in full, not just in part, and allow a role for government in ameliorating economic injustices, the free market will still not be free.

What do you think?



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TPS Team

5/10/2014Ken Wolff returns today with a thoughtful piece on matters economic. As usual, he puts what is a complex subject into words that can easily be understood by non-economists. Let us know your thoughts on various economic theories and which we should and shouldn't be taking notice of in comments below.

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5/10/2014Ken Once again you have given us a brilliantly erudite piece on economics. How fortunate is [i]TPS[/i] to have such gifted writers as you! You describe how the so-called ‘free market’ is not free at all, as neoliberals would like to believe it is. What astonishes me is that in order to fit reality into the particular model of economics they favour, they ignore evidence, overlook the fact that no one operating in the market place has complete knowledge – indeed it is usually quite fragmentary – are blind to the illogicality of many market decisions and the role of emotion in a great many of them, and discount the extreme complexity of markets and the vastness of the factors that operate within them. How can rational beings, instead of building their preferred economic theory on solid rock, be content to build it on the quicksand of global markets with all their volatility, their proneness to change radically in the face of global and local news, and the fickleness of operators within the markets, many of whom make irrational decisions while the big players deliberately manipulate the markets for their own purpose? How can they propose that such a ‘perfect’ model could, and indeed does operate in the midst of all the chaos and turmoil we see every day in global geopolitics, global markets and national economies? If ever there was an example of forcing economic theory into a Procrustean bed, this is it. Beset by the obvious limits to our knowledge, the unseen, the unknown and the unknowable, neoliberal theorists attempt to squeeze the world of economics, the reality of markets and the people who operate within them, into distinct commoditized ideas, particular vocabularies and conveniently constructed narratives. And just as Procrustes found as he chopped off arms and legs to force his tall victims into a tiny bed, economic theorists chop off inconvenient truths, unpalatable evidence, human vagaries, the extraordinary complexity of markets and the inadequacies of those who seek to interpret and use them. It is mindboggling that rational discourse among intelligent economists is so contaminated with fictional scenarios, denial, and make believe. And to complicate matters, so many of those who hold to their favoured theory of economics do so with the fervour of the zealot, with the passion of the religious extremist. What hope is there for the world when doctrinaire attitudes so easily replace evidence and reason? Despair is an emotion hard to avoid. Thank you for alerting us yet again to the incongruities of economics and the mental distortions of latter day Procrustes who try to force reality into unaccommodating theory.

Ken

5/10/2014Ad Ironically, the difference between economic theory and economic reality is similar to the difference between Soviet socialism and Marx's ideal communism. In both cases, the ideal looks okay but in an imperfect world, neither works well. The final outcome of the 'perfect' economy is, actually, not that different from the perfect form of communism. The 'perfect' economy has no competition because all supply and demand is in equilibirium; it has no advertising or branded goods; and in theory workers would be adequately provided for by equilibrium in wages and the price and supply of goods. The problem for the neo-liberal economists is that they recognise that the market is imperfect but argue from the perspective of the perfect market - just as the committed communists had to argue that Soviet socialism was a 'stepping stone' to the perfect world. I make these points deliberately because the neo-liberals are implaccably opposed to socialism or communism but are operating in the same way.

2353

6/10/2014Well written Ken. I have a suspicion that in 50 to 100 years (if the neo-cons haven't bombed the world back to the stone age by then), those that are around will look back on theories such as 'trickle down' economics and wonder what were they thinking? The rational intellectual process used to justify the imperfect distribution of goods and services in a 'perfect market' is similar to that used by some to justify that 'God' is on their side in an armed conflict such as the current warlike actions in the middle east, parts of Africa and recent historical events such as 'the troubles' in Northern Ireland.

Ken

7/10/20142353 I think you are right and that there will be changes in mainstream economic thinking over the coming decades. Just as the current approach arose from the 'apparent failure' of Keynesian economics in the 1970s, we are now getting mounting evidence of the failure of the neo-liberal economic approach. Eventually, that will lead to the adoption of a different approach but I'm not a fortune teller and can't say exactly when.

Ken

7/10/2014I see the government is devoting more of its energy to the 2016 election, extending the date of the inquiry into unions until December 2015 to ensure its outcome is still in the public mind during the election campaign. Although I have seen a number of similar approaches, I think this is the most cynical political use of a Royal Commission that I have seen in my time.

2353`

9/10/2014The extension of the Royal Commission is a two edged sword Ken. If nothing is 'discovered' (and so far that seems to be the trend), there could be a argument made about the waste of money spent on a witchhunt (but the ALP will probably just roll over like it has on the method used by Abbott in declaring war in the middle east).

TalkTurkey

9/10/2014Greetings Comrades, This being Mental As Week, I must say I have been [i]a la mode[/i] for a while. The 'flu I had 6 weeks back seems to have affected my mood, my facility with words, my energy levels, to a degree I find disconcerting - and of course, that's cyclic in itself. Not reading much, not writing, but fuming a lot. That's down to the overwhelming horror of what is happening to this country, which 15 months ago led the world in its progressive policies. This must surely be the furthest-Right Government in the OECD, destroying beyond even what I feared - and I feared much. What is really bringing me down most, though, is nothing the rotten Government can do, nor its reasons for doing such horrid stuff, but the fact that the will to fight, or even the consciousness that fight is an option, seems to have gone completely missing from the leadership of the Federal Labor Party. We go to WAR, not a murmur. Hundreds of thousands of people march repeatedly against a great raft of Government deforms, where's the Party? Why did they choose Shorten? He seems like Captain FeatherSword! I always tried to gee up Labor's front bench while they were in power. They were so [i]polite![/i] (I use the word with the same sort of intent as Sir Humphrey Applebee's *courageous*!) But even they were more prepared to be aggressive than today's Shadow Cabinet - where "shadow" is all too ruefully accurate. And when they did, the outcome paid dividends for us. The outstanding example being *J*U*L*I*A*s 'misogyny'speech. And it got MILLIONS of hits. So come on Bill & Co, FFS [i]ARC UP![/i]

Ken

9/10/2014TT Agree, it's difficult to know what game Shorten and co, are playing. I can understand the not making much noise about the war ('don't mention the war') because mostly so-called national security issues are a no-win for an opposition -- at least at the start of the war. It takes along and unsuccessful war, such as Vietnam, to create a popular backlash that an opposition can ride. But there is, I agree, plenty of scope to be much more aggressive regarding the budget and their destruction of a progressive Australia. And there is scope for them to be laying the foundations for a different approach to economics, as I have suggested in a number of posts this year. Even my current article: Shorten should be saying it is not just an 'unfair' budget but it is unfair because it is based on a whole 'unfair' economic model and ideology. He should be laying the seeds now -- or does he just continue to accept the economic model of the neo-liberals. He should be aiming high, not just the detail of the budget, but the whole underlying approach. That is what Abbott did in opposition by attacking Labor's whole approach. TT, I agree entirely that the current ALP approach is timid.

Ken Fabian

10/10/2014Thank you for the interesting and thoughtful posts - I've only recently added this site to my list. One aspect of market competition supposedly delivering the best outcomes that occurred to me is that the economy wide costs of competition include those of the poor performers, failures and bankruptcies as well as the profitable and cost effective successes. This seems to be something I have not seen examined - although I admit to not being all that academically/economically literate. The costs of developing more efficient methods can be internal to an enterprise - R&D, forethought, investment in new methods - or it can be external - different enterprises using different methods, one of which gains the bigger market share and those that fail to hold or gain sufficient share losing market share. Yet any conclusion that the market winner's costs are the only ones that count seems false to me. This seems to reflect my own concerns about the too little challenged idea that our nation should be run more like a successful business, by successful businessmen (usually men); the human and economic costs to the outcompeted 'failures' are not the concern of the successful businesses, yet they must always be the 'business' of a nation, which surely include the entirity businesses and the damaged remnants of ex-businesses. My own view is that a nation cannot and should not be viewed as a business; it more resembles a healthy family. A family may engage in business-like activities but it also seeks to prepare and help it's members stand on their own feet economically as well as achieve more subjective goals like attaining a degree of contentment and happiness. It also reserves a willingness to assist them when they cannot.

Ken

10/10/2014Ken Fabian Welcome to [i]TPS[/i] and thank you for your thoughtful comment. I think the piece I posted here reflects your view that there is more to economics than the models and 'business' approach. Unless economics adopts a wider view of society, it is not really representing the way we should be using and dividing our resources. Please come back because in the coming weeks there will be a couple more pieces from me exploring other aspects of the economic model being promoted by the neo-liberals.

2353

10/10/2014Ken Fabian, Welcome and you are correct - a nation is not a business. The sad thing is that both of the major political parties seem to be keen to promote the concept as a fundamental truth. I wrote an article here some time ago that looked at the morals and ethics of the political parties now versus Menzies ideals for the Lineral Party and Chifley's 'Light on the Hill" speech. Lets just say there is little in common. As I'm writing this, the ABC's 'Mental Health' telethon is on the TV. I believe there is hope as there was a fake ad for the 'platinum race card' - highlighting the current treatment of those that 'look different'. Hopefully the message will get across.

Eight Ellaitch

11/10/2014Haven't been here for a while. Boy, the stench of decay is very strong indeed. A post made five days ago has attracted twelve comments. All of which are sycophants vigorously nodding at what every other sycophant says. The measure of a successful site is the existence of robust discussion between people of differing views. On this site, anyone holding a different view to the usual suspects who spend large licks of their life typing, tapping and furiously agreeing with the other regulars, is soon driven away. So, in the end, all you can hear are same heads nodding in agreement. Bloody boring. 12 responses after a huge post that was filed 5 days ago? You're all doomed to spend the rest of your lives with yourselves. That's a sentence much harsher than any court would impose.

Ad astra

11/10/2014Ken Fabian Thank you for your thoughtful comment and welcome to [i]The Political Sword[/i]. Do come again.

Bacchus

11/10/2014What a shallow, boorish comment "Eight Ellaitch" - an indication of the "intellect" that made it? If you don't actually have anything to contribute, why comment at all? Just to inform your obviously ignorant little mind - some topics generate a lot of discussion, others not so much, especially where the topic is a bit more difficult or technical. You'll find that this article is attracting just as much interest amongst readers as others, but fewer choose to comment. Many popular blogs have a views to comment ratio of between 10:1 and 40:1; other sites can have a ratio of 100s:1, so comments alone tell you very little about how a topic is being received. "[quote]The measure of a successful site is the existence of robust discussion between people of differing views[/quote]." Says who? Various blogs serve different purposes - some are nothing but useless argument amongst long-standing protagonists (so lots of comments amongst a narrow group & lower views to comments ratio); others provide information, knowledge and opinion. "[quote]On this site, anyone holding a different view to the usual suspects who spend large licks of their life typing, tapping and furiously agreeing with the other regulars, is soon driven away[/quote]." Anyone is welcome to put their view on this site, as long as it is relevant and not abusive. Put a well argued case supported by facts and you'll be listened to. Come here with a mindless rant (like your comment) and you won't be welcomed. "[quote]Bloody boring[/quote]." Don't let the door hit you on the way out, and don't hurry back! If there is a next time like this one, your comment will just be deleted.

TalkTurkey

11/10/2014 Eight Ellaitch stench of decay is indeed quite overwhelming at the moment. The miasma of toxic gases from the rotting Right, and your own unique stink of course. You got nothing we want, you got nothing we need. You got nothing at all. This is the last time I will address you. Hereinafter you are to me, not a third person, but a third thing. http://www.youtube.com/watch?v=curWh7AXx9U ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
How many oranges do I have if I have 3 oranges and take ONE away?