free market theory

/ / , , /

Addendum on Coase [Again- Apologies in Advance!]

A friend here in New York wrote to me to say he “didn’t get” the import of my comment yesterday about Coase. This is my fault. Let me take a quick – I promise – stab at clarification because his befuddlement strikes right at the heart of why regular people find economics so baffling.

Recall that I use Coase’s 1937 article as my starting point. For the record, Coase won a Nobel prize for his later work and not for his comments about the existence of firms.

In that 1937 article Coase posed the question: “why do firms exist?”.

Now, to my friend, and no doubt to most of you, this is just a silly question. It is obvious after all why firms exist: they are places where we cooperate to produce stuff. And the complexity of production requires big organizations with capital and expertise to get the job done.

Right?

Well no. Not if you are an orthodox economist. And this is where orthodox economics and reality part ways. Coase was trying to inject reality by asking his question and was soundly ignored for his effort.

The problem is this: having spent the better part of a hundred years constructing a wonderland in which markets perform miracles and are indisputably the best possible way of organizing economic activity – including production – there is no way to fit the real world thing we call a firm anywhere into free market economics. No way. However real they may be. However obvious it is to you. However many people they may employ. However important they may appear. In orthodox economics, especially as it existed back in 1937, firms do not exist.

More to the point they cannot exist.

This is because markets are held to be so efficient and superior that the emergence of a cooperative form of activity, e.g a firm, would be crushed before it took root. It is a question of theory in defiance of reality.

This may seem arcane and irrelevant to you, but I beg to differ. We are assaulted daily about the effectiveness of markets as economic organizing machines. They, we are told, are wizards. Nothing can compare with “the market”. Especially not the evil alternative known as “central planning” which we usually conflate with government. No. We are lectured by dozens of Nobel prize winning economists that the market should be set free to decide resource allocations, income distributions, what gets produced, who wins and who loses. After all the market cannot be surpassed in effectiveness in such matters. So relentless is this repetition that the superiority of markets has entered the central narrative of American life. Pick up some of our most popular economics textbooks and you will be told that America is wealthy because it adheres to a free market form of economic policy. Business is retrofitted into this narrative for sure. But not into the underlying theory.

In other words there is a massive disconnect between the story we are told, and the theory on which that narrative rests. We are misled.

It was in the context of that deeper theory that Coase asked: then why do firms, manifestly a form of central planning, exist?

If orthodox theory is correct there should be no firms, at least as we know them. Their very existence is an indictment in the real world of a hundred and fifty years of theorizing.

Which is why to this day the subject called the “theory of the firm” hardly ever gets onto the curriculum in school.

In response to Coase economists basically carried on as if he never asked the question, and it is only much more recently that people have taken up the challenge. And even then, in my opinion, they attempt to elide the real challenge.

This entire discussion goes to show the huge gulf between orthodox economic theory and the real world. I hope it highlights why we should all be extremely skeptical of the notion of the hidden hand. That markets do certain things is obvious. That firms exist is equally obvious. But to orthodox economists intent on defending the extreme vision they have of free markets – and I mean extreme – firms are a huge, and very unwanted, elephant in the room.

So to sum up: Coase’s simple little question plunges a dagger right into the heart of orthodoxy’s most revered conclusion. Free markets are not always efficient. They do not always have good outcomes. This is obvious to us all, but is a plague on orthodox theory. It undermines the claim that deregulation will lead to a healthier economy. It suggests we need a more balanced approach to policy. It tells us that a mixed economy, where some things are centrally organized and others left to the market is probably a better solution than leaving everything to the market. It implies we should all rid ourselves of the notion that unfettered capitalism is always preferable to any alternative. And so on.

By asking his question Coase was pulling on a string that if pulled a little more would have unravelled a century’s worth of work. He chose not to pull again.

Had he, economics would have been improved immeasurably and people like my friend would not be befuddled by the derisory way in which orthodox economics treats business.

So, no, my friend didn’t miss anything. On the contrary it is economics that misses something. That something being reality.

Does that make it more clear?

And I apologize for repeating myself. Economists, even rotten ones like myself, can be truly obscure sometimes.

/ / , , , , , , , , /

Smith’s Curse

I am not easily swayed by talk of curses. They make for good gossip and a laugh, but have no explanatory legitimacy. All except Smith’s Curse. Adam Smith that is. Here’s why:

Ever since Adam Smith wrote, just once, about the mysteries of the “hidden hand”, economics has had its brains addled by the allure of those magical powers Smith postulated as the reason he saw order rather than chaos around him. His was possibly the first insight into what is now called the self-organizing properties of a complex system.

The problem with this is the absurd lengths to which economists have gone in order to give credence to Smith’s insight. Instead of embracing the muckiness, and infuriatingly indirect nature of complex systems, they have gone the other way entirely. They have been driven to simplify at inordinate and quite ridiculous length in order that they come up with the answer Smith first thought of. Their tools and methods are wrong. Their desire runs deep. That combination makes for some pretty ugly reasoning. This doesn’t mean that complex systems are not comprised of very simple components. It’s just that they are not deterministically thus constructed. Therein lies the big error of orthodox economics. It is still rooted in a mechanical vision where the economy is a vast machine playing out in an orderly fashion from a set of basic assumptions.

When we observe apparent order, such as we see in the confines of a well behaving market, we must be careful not to interpret that observation as implying that the underlying system is, itself, well ordered. Disorderly systems are far more common. In fact they are the norm. Yet sometimes they give rise to patterns that belie their true nature.

This was Smith’s error. And by making such an error he bequeathed economists a long lasting curse.

They imagined that markets are orderly structures. They are not. They have people in them, which means they are can be whimsical, subject to fashion, or tightly ordered and efficient all at the same time. They are human, not magical.

We could simply end at this point by saying that the rest is history. Economics, or at least its orthodox versions, has labored long and hard to detect and theorize about the mystical forces necessary to ensure, not just orderly outcomes, but orderly workings. In a deterministic system the outcome is orderly because the systems itself is precise. It plays out along known and predictable lines. Hence the theories of people like Walras who conceived of the economy as giant machine capable of arriving at a single best solution to the problem of allocating resources. Only his machine needed help. He wasn’t able to solve his equations without the assistance of an external “auctioneer” who directed the traffic to make sure everything resolved itself neatly. Some of us think of this as cheating, but to the orthodox it was simply a challenge to try harder.

As Walrasian thinking became to pervade orthodoxy all sorts of bells an whistles were added to try to get around the fictional auctioneer. The humans within the system were invested with superhuman powers of calculation and information. Gathering information was made costless. What people wanted or needed was crushed into something called utility so it could be fitted within a mathematical structure. Time was reduced to a single point by using the trick of futures markets. And so on. Smith’s curse drove a great many intelligent people to extraordinary and, frankly, almost psychotic, lengths to discover and articulate the magic he imagined lying beneath the surface.

In the end orthodox economics was reduced to getting rid of humans in order to make things work well at all. And even then the prime movers of the final edifice, Arrow and Debreu, were not sure of the relevance or use of the monster they created.

This is because there isn’t any use. It was always a wild goose chase. The order Smith saw was a chimera. A mirage beckoning economists and no one else.

Now here’s the really big problem with Smith’s Curse:

It can make clever people do bad things.

Ever since the 1930’s classical economics has taken on a morally superior tone. It has been preached rather than taught. Free markets are, according to the orthodox, superior because they produce “the right answer” without any intervention by governments. Thus they are untainted by the wants, requirements, and biases of mere mortals. Markets march, so they say, to the beat of immutable forces that are impervious to human intervention. So they are ideals we should strive to achieve. As if Smith was channeling Plato when he devised his curse.

If this sounds vaguely religious, you are not the first to notice the resemblance.

In the hands of folks like Hayek and Friedman classical economics was used as an ideal bulwark against the intrusion of the dark side of human calculation. Hayek meant it when he talked about “The Road To Serfdom”. Friedman meant it when he wrote about being “Free To Choose”. Both imagined that a free society whose economic relations were determined by the forces that drive unfettered markets cannot end up in a bad spot. It just works out that way. It just is. Perhaps a mystery. But it just is. Worse: whenever silly and limited humans get involved things will alwatys go awry. Those of us who a tad more skeptical are told to keep our tawdry questions to ourselves and not to sully the beauty of the free market vision. We should allow the faithful to go on believing. Their faith unquestioned because it is unquestionable.

Such was their fervor, and such was the hold Smith’s Curse held over them, that no amount of foolishness was allowed to sway their thinking. Thus Friedman could write, presumably in earnest, that no matter now ridiculous, absurd, or other worldly the assumptions needed to make a free market systems superior in theory – let alone practice – those assumptions were justified if they drove the theory to the “correct answer”. By which he meant the answer he, like Smith, first thought of. Where there is science in this is questionable. But you have to admire the zealotry.

Now comes the damage I mentioned.

So smitten by Smith’s Curse are orthodox economists that they engage in social engineering. By their own logic people like Hayek and Friedman should aver all attempts at imposing a system upon society. After all that way lies the road to serfdom. And surely we – the rest of us – are free to choose. Yet Friedman in particular, and his army of righteous followers, think nothing of advocating all sorts of changes to society in order to get things ordered the way most conforming to their theoretical views. This is why Friedman was a major, if not the major, force behind establishing a free wheeling derivatives market. You know like the one that just blew up the world economy. This explains the ardor with which orthodox economists advocate deregulation, the dismantling of social safety nets, and other community oriented devices. Their faith drives them to preach and alter anything they deem inappropriate. Like society, or any construct with word word “social” in it.

So in the end Smith’s curse has produced a prodigious paradox: the theorists most stricken by his vision are both the most ardent advocates of freedom, and the most determined social interventionists at the same time. They think nothing of forcing the rest of us to conform to their utopian visions. More to the point: the past few decades have been a prolonged social experiment in free market economics. In any number of places orthodox economists have influenced society in an effort to make reality reflect their theories. Society, as it had evolved by the 1970’s, needed to be saved. It needed to be shunted back into its rightful place. If that meant imposing order and restricting the choices of others, so be it. Nothing should get in the way of the neoclassical crusade.

This is, of course, back to front. In respectable science theory reflects or explains reality.

But then it might not come up with the right answer. And Smith’s Curse would lose its grip.

And it’s such a warm and fuzzy feeling when slip into the dreamworld described by that curse.

It can’t just be a myth can it?

I don’t know. Maybe we should ask the unemployed.

/ / , , , , /

The FCIC and Political Economy

In the old days, before orthodox economists decided to try to look scientific, economics was more commonly called “political economy” or some such thing. Evidently the discipline’s founders had no problem with advertising the obvious connection between the study of matters economic and matters politic. The two seem a natural pairing. Especially when it comes to giving advice on policy. Thus the great political debates about the Corn Laws in the UK provided the context within which people like Ricardo began the development of what we now call simply “economics”.

But it really is political economy. It doesn’t seem that scientific to me at all. Not when it disappears into the methodological individualist rationalist rabbit hole. In order to create the pretense of being scientific economists had to decide what they meant by science. On reflection it appears they had a very narrow view. Lots of math. Lots and lots of math. Did I say lots of math? If not I meant to. Economics is now a branch of applied mathematics with an emphasis on constrained optimization. On the periphery economists talk about other stuff, but at the core, oddities such as dynamic stochastic general equilibrium – phew! – is what counts. Of course in order to strip away non-mathematical material, and to focus on doing the math, economists had to throw overboard all sorts of interesting topics, many of which would strike you and me as being the very essence of an economy. Or at least interesting from a general social perspective.

This all came to a head during the 1930’s when ardent free market economists were being forced to defend capitalism from the then healthy challenge represented by both fascism and communism. Note that the idea was to defend capitalism, not to study economies. This would be like defending alchemy against the intrusions of chemistry rather than studying actual chemical things. So convinced were these free market types that they convinced themselves that no matter how twisted their logic or how absurd their assumptions they were truly scientific as long as the answer was “correct”. One might wonder what the correct answer was.

Well guess.

It was what they wanted it to be. Free markets, unencumbered by the evils of government intervention are always – always – a better coordinating device for an economy than any heavy handed centrally planned way of doing things. So they say.

Set aside the fact that every single one of our large corporations is a centrally planned economy. That’s different apparently. In the wonderland of free market economics it is cheating to mention real world phenomena.

And also set aside that the only way the free market emerges as the clear winner is to assume everyone knows everything. Yes that’s stupid, but it’s necessary to get the “correct” answer. It also raises the knotty problem that if everyone knows everything then, presumably, an omniscient central planner would arrive at the same coordination solution as the omniscient market does. Whoops. How do we tell the difference?

Ideology.

In other words we are discussing political economy.

I raise all this because of today’s news.

Rumbling along for some months has been something called the Financial Crisis Inquiry Commission. This august and worthy group was charged with determining the causes of the fiscal meltdown, and to advocate some measures that would help us avoid a repetition. The news is that the group is hopelessly divided along political lines.

This is no surprise. In contemporary America everything is divided along political lines. Even the air we breath is either left or right wing depending on whether it makes you cough. So to read that the Republican members of the commission plan to release their own findings is no shock at all.

Nor is it shocking to read their definition of the culprit.

It was the government.

Who would have guessed that?

Yes. The US government was entirely to blame for the collapse of the mortgage market, the real estate bubble, toxic asset accumulations, rotten risk models, unsafe leverage ratios, and all sorts of other sins. Had the silly government stayed well away none of this would have happened. And at the very heart of the problem? You guessed it. Fannie Mae and Freddie Mac. The twin evil towers of the government’s attempt to socialize real estate and force unsuspecting banks to make loans that they would never have made otherwise. The very worst example of government coercion of the poor innocent bankers is that neo-socialist Community Reinvestment Act designed to channel hard earned money into poverty stricken areas populated by irresponsible poor people who should never be allowed to borrow. All those CRA loans were the thing that brought the entire edifice crashing down. Why do we know those people were irresponsible? Because they’re poor, and they live in neighborhoods no self respecting banker would ever lend unless forced to.

None of this is true. None of it. But it is a rollicking yarn and conforms to right wing ideological interpretation of history.

It is political economy writ large.

That there are plenty of right wing mainstream economists who agree with it confirms what I wrote at the beginning. Getting at a neutral, “positive”, or truly scientific economics is devilishly difficult, if not impossible.

A goodly part of the problem stems from the orthodox view that there are no structures in an economy, and that the only subject worthy for study is the rational individual. Those of you in the UK will remember Margaret Thatcher’s insane comment that society doesn’t exist. She meant it didn’t exist in her ideological view. This is like saying that the only object for study in physics is the atom. Stuff like galaxies, planets, stars, molecules, and so on, are not worthy of consideration except in so far as they represent agglomerations of atoms. And forget anything smaller than atoms. That’s not possible in Thatcherite physics.

In economics, without structure as part of the subject, we can no longer study “group” effects or “group” activities. We cannot study the pull of fashion or the tug of class. Gender melts to nothing. Religion, and culture are rendered meaningless. And corporations are flattened into absurd caricatures. All this in order to ensure that any analysis produces the “correct” answer: free markets rule. Above all else the hideous specter of the government, that group of all groups, no matter how democratic, has to be expunged from our thoughts. That a market is a social group is conveniently overlooked. That “correct” answer must be arrived at.

This is old ground, and not usually exposed so visibly to the public gaze.

Yet today’s news is a stark reminder of the deep and permanent divide that has sundered economics. As political economy this is understandable. In such a setting the economic argument is openly about supporting an ideological position. Is it the capitalists? Or is it the workers? Who do we want to appear the driving force and thus the group to be nurtured or rewarded?

But in a positive economics, one based upon a dispassionate assessment of real world economies, this won’t do. Interpreting the fiscal meltdown would be a forensic exercise. We would be able to agree on the major points. Countrywide Bank and other unregulated rogue lenders would exist. So too would the long term effects of banking deregulation. That mortgages were bundled haphazardly and recklessly would also be in the report. That bankers relied on faulty economic theories about efficient markets would be there too. So would the rating agency habit of getting paid to raise their ratings to a satisfactory level. That a mortgage was called subprime precisely because it failed to live up to government standards for lending might also get a mention. Even if it mucks up the anti-government story line.

In the end this all makes me wonder whether we have any hope, any time soon, of executing a sensible economic policy. You know, one that actually helps us all, rather than one aimed at specific interest groups. So fractured is our polity, and so divided is the world of economics, that it is hard to see sense prevailing.

At the end of his great “Decline and Fall of the Roman Empire” Gibbon lists as one of the primary causes of that decline as being the intractable nature of the political divide that prevented Romans from acting in their collective welfare. So riven through with ill will and self referential focus had the various factions become that the failure of the state was more acceptable than any of the necessary policies needed to save it. The decline was inevitable.

I am ashamed that economics could be one of those self referential causes of our decline. Perhaps going back to our roots is one way to revive ourselves. Political economy sounds good enough to me. It sounds almost sensible.

Then again who can define “sensible” in our current context?

Addendum:

With all due respect to the Republican members of the FCIC, their analysis of the causes of the bubble falls apart at the very first step. How do they account for the crisis in Ireland, Spain, the UK and all the other non-American places where the exact same thing occurred? Is the evil US government so influential that it brought down Ireland as well? Did the Irish fall into the clutches of the CRA?

I think not.

Political economy indeed.

/ / , , , , , , , , , , , , , /

Its Official! The Recession’s Over … Yawn.

Hang out the flags. Set off the fireworks. The recession is officially over. Whoopee. The National Bureau of Economic Research says so. In fact, by their count, the recession ended in June 2009.

There, don’t you all feel better?

Not really.

The “Great Recession” was officially 18 months long, making it a full 2 months longer than the slumps of 1973/1975 and 1981/1982. Those two recessions were doozies and unemployment surged in both. Banks shuddered. Businesses lost money. Shops were closed. But neither felt like this last one. The reason being that both were followed by decent recoveries. Obviously I have a personal gripe about the 1973/1975 slide since its aftermath was sufficiently meandering to set the stage for the Reagan takeover and all the deterioration in our economy that his slippery illusion has implied.

Still, here we are, on the other side of what history will record as the worst slump since World War II. We are edging slowly away from the abyss. So slowly that many of us cannot tell the difference between being in recession and being in recovery. But let’s not be churlish: we should acknowledge that we are afloat and not sinking. At least those of us still gainfully employed. As for those other folks …

If you are someone who believes in market magic, let’s say you were schooled in textbook economics, then the slump has failed to clear out the dead wood sufficiently for the recovery to be robust. In particular you are really annoyed that wages have not dropped low enough to make it attractive for businesses to hire workers in droves. For you magic lovers the lunacy of government intervention has prevented the market from solving our ills. This slow growth is a direct result of that persistent and foolhardy intervention. If only, you mutter to yourselves, unemployment had reached 20%. Whatever it takes. Maybe 25%, like back in the good old days of depression era economics. Back when workers took their medicine like the undeserving ingrates that they are. Silly things like the minimum wage have stopped the market from “clearing”. Demand for workers is too low only because – you suggest – wages have failed to drop to a market clearing level. Then there’s all those payroll taxes imposed by the silly politicians who seem to think we should set aside cash for workers retirement. Phooey! If workers cannot save for their own retirement they should starve. That’s what the market says. And you believe the market magic myth.

It helps if you are a tenured professor when you articulate this myth. That way the slump never actually gets too close to the comfortable surroundings within which you pursue academic freedom.

But that’s another story.

No one ever said that hypocrisy and academia were not entwined.

Meanwhile those of us who base our economics on reality, and not magic, see it very differently.

We see the entire problem as one of insufficient demand. There are no jobs because businesses are being very sensible. They aren’t hiring until they can expect to make a profit from the labor of those new workers. Until business expectations turn more optimistic unemployment will persist. So the central aim of government is to stoke the economy in order to boost expectations. Once we get the engine rolling it will take off on its own and we can withdraw our support. Since the taxpayers are the ones who benefit from the growth in the economy, they get new jobs, pay raises, and all sorts of other neat stuff, it is not unreasonable for them to chip in up front and pay for the necessary boost to get the engine going. They chip in by taking on the responsibility to pay back the debt the government issues as it primes the pump.

Its a perfect example of “we the people” taking responsibility for our own welfare. Its also reality. It also is an affirmative rejection of the notion that “we the people” have to get hammered before we react to the mess that the bankers made.

We are grown ups. We will fix our own mess thank you. We do not have to wait for the market fairy to awake and wave her magic wand.

I am always astonished at how many good people grow up to reject the idea of Santa Claus or the Tooth Fairy, yet still cling to the Market Magic Myth.

It was always a made up story designed to keep the workers supine. The suffering inflicted by the depressions of the 1800’s and that of the 1930’s was turned into a punishment for the ills of the laboring class. It was converted into a parable about the “natural workings” of an economy. The story telling reached its apogee in the arcane and obscure pages of academic economics. Generations of workers were told that the decentralized mechanisms of the free market produced wealth for all. They would get a share of that wealth if only they obeyed the workings of the mechanism. Sometimes that meant hunkering down and starving as the market sought to work its magic and locate a new wage level. That new level seemed always to be lower than the old. But hey, there were new jobs in new places if only you all were willing to take that new wage.

This was the essence of the myth that became modern economic theory. In the hands of people like Schumpeter – he of the “gales of creative destruction” – and then the postwar wave of right wing theorists like Friedman and Lucas, economics became an apologia for naked capitalism. It gave up the pretense of being a science. Instead it contented itself with a justification of a particular form of economic activity.

Nowhere, and I mean nowhere, is there a scientific argument that free markets work to the benefit of society. Nowhere is there a body of scientific proof that central planning is worse than decentralized planning. On the contrary. You may be shocked to hear that during the 1930’s a great debate raged within economics between those who argued central planning was at least as efficient as capitalistic decentralized planning. The argument became known as the “Socialist Debates”, and engaged some of the most famous thinkers of that time. Oscar Lange defended socialism, while Hayek and von Mises defended capitalism. You might be even more surprised to hear that it was generally agreed that the socialists won the debate. There is no proof to support the contention that markets are better at anything. There never was. There was simply assertion and assumption. The victory was hollow. Poor Lange lost on points because of the horror of authoritarianism in Nazi Germany and then in the Soviet Union. That horror so tainted the discussion that postwar economics in the West became single mindedly pro-market, even in the absence of proof.

Back in the 1930’s it was Keynes who acted as the bulwark. He provided the realist view that saved capitalism from its own doings. He saw that the magic was a myth, and argued for a realist intervention in order to prevent the carnage that an imploding market can inflict on the workforce. By mitigating those effects he realized that he could stabilize democracy and allow the middle class to flourish.

This is, of course, nothing new to you. I bring it up because the Great Depression acted as an inflection point. The great debates back then were left incomplete and the proofs were never provided. Keynesian economics prevailed for three decades. It was only when the 1973/1975 recession seemed to disprove Keynes that market magic theorists like Friedman were able to get back into the discussion. With voters disillusioned by the oil shock and the falling away from the heady postwar growth rates of the 1950’s and 1960’s, it was easy to turn their heads back to the capitalist side of the 1930’s debate. Only this time, the Cold War ensured that there was no socialist or centralized side in the discussion. The debate was entirely one sided.

I think, perhaps, that our Great Recession is another inflection point. It is time to redress the one sided nature of the debate and ask simple questions of the magic believers. Questions like: where’s your proof?

I think of the last thirty years as a great experiment. The economy has been managed, by Republicans and Democrats alike, along free market lines. Regulations have been limited and reduced. Taxes have been cut. Welfare has been gutted. The minimum wage has been held down. Laws protecting trade unions have been eliminated or neutered. The list goes on. It may shock you to learn that it took a personal call from Milton Friedman to the SEC in order to persuade that body to allow the establishment of options trading. Up until his call the SEC saw options trading as a form of gambling. Friedman’s reputation was sufficient for them to open up trading. The derivatives melt down of 2007/2008 was thus a direct heir to his theorizing. It was his set of ideas that underpinned the financial collapse. To Friedman and magic believers derivatives are a way markets mitigate risks. Realists see them as gambling.

The experiment failed.

We now have the proof.

Then again, we always did. Ask any CEO whether they believe in free markets and they will respond with a resounding “yes”. Just as long as we retain patent laws; copyrights; restrictions on unions; import quotas where “necessary”; subsidies for agriculture; price supports etc. And just so long as they can establish centralized strategic plans to guide their businesses.

In other words not one CEO truly believes in market magic. Not one. They all run their businesses along centralized planning lines. General Motors is not a free market. Nor is General Electric. Apple. Microsoft. None. They are centrally planned mini economies.

In fact more economic activity in America goes on within the safe harbor of corporately constructed centrally planned economies than takes place in supposedly free markets. Even the OECD, hardly a socialist haven, supports that observation.

Now I am not going to support socialist economics. I find it fails too. But we must be more realistic about the economy in which we operate. We need to recognize that the free market experiment failed. It was always going to fail. It was based on ideas that were incomplete or highly tailored to the 1930’s. In the hands of ideologues masquerading as economists it became twisted. Economics was conflated with politics. It became the American state religion to argue that unfettered capitalism was the only economic system to believed. And like all state religions it turned from being believed, to being revered, to being enforced without thought.

We forgot why the debates of the 1930’s took place. And we forgot that neither of the two sides was correct. Keynes was. And he was in the middle.

I hope we can forget the extremism of the free market magic myth, and return to practical realistic economics. There are jobs depending upon it. Indeed, our respective futures do.

/ / , , , , /

Unicorns and Free Markets

One of the more depressing features of the discourse on the parlous state of our economy is the constant refrain from some about the need to allow ‘free markets’ to do their magic and fix our ills.

That’s nice.

Or it would be were free markets not like unicorns.

Both are beautiful and captivating. Their features send us into paroxysms of joy and wonder. Their exploits and virtues are the stuff of great poetry or writing. They beguile us with the extent of their magical powers. They haunt us with endless dreams of what might have been.

Were they real.

Which neither are.

It is one thing for poets to wax lyrical about imaginary animals like unicorns in order to inflame our minds at the mythical. It is another for supposedly hard headed analysts to invoke free markets as an elixir of endless youth and vigor for our economy. Free markets are artifacts of our imaginations. They were invented in order that we could study the many differences between their imagined perfection and the grubby mess that is the real world. They allow us to identify all sorts of anomalies and quirks that clutter up real life and prevent it from ever being as pristine as the dream like wonderland we call a free market.

But there never has been, nor will there ever be, a truly free market. Like the unicorn they cannot nor do they exist. They remain a vivid and unfortunate reminder that human imagination and human reality inhabit two very different spheres. Call it a Platonic curse. I cannot abide Plato and his authoritarian views, nor can I stomach his obsession with the unreal. The notion that ‘pure’ forms exist, and that we are fatally compromised and thus shall never experience such purity is utter nonsense. It never existed in the first place, so it is hardly a failure not to experience such nirvana. Nonetheless Plato and his errors have infected our lives for more than two thousand years. Most notably in Christianity which is almost exactly built upon his faulty foundation – not that most Christians seem to notice or care. This is not an idle comparison: the exertions urged upon sinners bear a remarkable likeness to the exertions urged upon the unemployed. Both are deemed failures who should repent and improve themselves in order to be saved. Both are urged to hew more closely to a dogma remote from the front lines of modern living. No wonder Weber got lost in the Puritan work ethic.

And free markets?

They are a version of a Platonic ideal. They are unrealizable in the world of humanity. They turn to vapor and vanish the moment any contact with temporal considerations are introduced. They are a mist that distorts our dialog.

The reason is, of course, that markets in our real world and compromised daily by all sorts of stuff the free market dreamers call flaws. But they are not flaws at all: they are essential constructs and components of non-mythical markets.

The dream like free market is something that is suspended in mid air. It has no contact with geography, with man made institutions, nor with our incomplete cognitive ability – neither our instrumental nor our cognitive constraints limit its computational powers – and its denizens are unrecognizable as human. They are what Miroswski calls cyborgs in his book “Machine Dreams”. Only when real people and all their many imperfections are totally expunged from a free market can it become free. Only when it is released from the constraints of the law, custom, culture, religion, class, gender, and family can it rise above the mess of humanity and become free. And only when it is universal and not locked into a specific earthly location can it be free.

In other words it cannot be.

The analytical mythology that is the free market came into being because economists wanted to set up a laboratory model against which to compare the real world. I am being generous here. In my more cynical moments I would argue that they wanted to justify a certain way of life – they wanted to ‘prove’ that the interference of government was deleterious to the creation of wealth. So the cynic within me would say that the entire edifice of classical economics has been an effort to prove the superiority of decentralized markets over centralized or planned economies. This is not science it is politics. And the upshot has been the creation of an artifact we know as the free market, which, when stripped of all humanity, is indisputably superior in exactly the long sought for manner.

That economists still advocate this artifact as an exemplar of reality is shameful. They know full well that it is an imagined object.

Having opened Pandora’s box they have armed an ideologically motivated group to march off with the concept and impose, or try to impose it, on society. These ideological storm troopers engage in all sorts of social engineering in order to force reality more closely to align itself with the dreamscape. And by so doing they both undermine humanity and they introduce conflicts and distortions into the everyday workings of a real economy.

One outcome of this social engineering is the enormous change in the distribution of wealth we see today. As long as we acknowledge the conflict between democracy, which is a device for ensuring a more equable distribution of power and wealth, and capitalism, which necessarily results in exploitation and concentrations of power and wealth, we can maintain a balance. The conflict between the two enforces compromise. And all compromise leaves purists dissatisfied. The great era of the US economy – the 1950’s and 1960’s – was built upon this messy compromise. Once we allowed ourselves to be beguiled by the free market myth we sacrificed that balance. We unwittingly undermined democracy and favored capitalism.

We started to believe that unicorns were real.

And so, having arrived at the nearest we can to executing the dream here in the real world, after having deregulated and tossed aside as much constraint as we can, we are faced with the ugly moment of truth. Our pursuit of unicorns has been in vain. We are awake from the delusion. Reality requires limits to the market. Because only within limits do real markets exist.

That is the great lesson to be learned from the decades of Reagan illusion: once we strip away humanity in order to explore the magic of the free market, we should not then fall into the trap of thinking we are looking at something real. A market without the trappings of humanity is not a market. It is a unicorn like myth. It simply cannot be. However beautiful. However mysterious. However perfect.

So it saddens me to hear advocates of free markets get any air time in our current discourse on the economy. They are selling ideology not economic advice.

Snake oil has no place in our debate when the livelihoods of over nine million of our fellow citizens are at risk.

The unemployed deserve more than stories about unicorns. They deserve policies to restore growth. Policies based upon real world economics.

1 2