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Market Reflex

from Peter Radford

There are a few thoughts or words in a normal economics discourse that trigger what I call my ‘market reflex’.  Asad Zaman just triggered it. Of course he didn’t mean to, and the sentence in question is in an article I agree with. Further, the sentence, on the surface, looks and sounds so innocuous. Here it is:

“Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects”

See what I mean? Innocuous. Asad is totally correct, they do think that. Worse: they mean it. And even more worse: they teach it.

Which gets me truly bothered.

The entire enterprise of contemporary economics, aside from its fringes, is built on this shady and unsubstantiated premiss.  It’s shady because it is laden with ideological bias, and it’s unsubstantiated because, well, its unsubstantiated.

Which gets me even more annoyed. 

The supremacy of markets sitting at the heart of contemporary economics is a faith based notion not an empirically based fact. It is the result of economists of a certain ilk having vivid imaginations and strong biases. When you push a little on the idea you find that it relies on a set of thought experiments rather than on research of the real world. It requires superhuman and distinctly otherworldly computational skills, flows of information, and ironclad willpower, not to mention a total lack of real choice on the part of the denizens of this imaginary market, for it to work smoothly and to find its way to the happy land called a utility maximizing equilibrium. Only within such ridiculous constraints is the so-called superiority ever exhibited.

The rest of the time stuff happens and who knows what’s best?

It is the obsession with sanitizing the economy and thus rendering it unreal that has led economics astray over the years. And this article of faith about free markets working best when left alone, is sheer tosh.

Just to press my point further: for the dream land of economists to display such a characteristic it would have to be inhabited by two sets of parallel and never interesting people. One would be the superb calculating machines of the erstwhile free market. The other would be the foolish idiots of the political system.

You see, and this bugs me most of all, the ‘agents’ of the economy that economists model and who, in those models, produce such startling efficiency – so startling that it cannot be improved upon – are the same ‘voters’ who support government intervention to soften the edges of the economic machine. Apparently economists are oblivious to this rather salient fact. I suspect they are oblivious on purpose. For to acknowledge the reality of democracy and voter involvement in government treads heavily on the pristine ground economists have carved out for themselves. By separating the economy, or, rather, the ‘market system’ from society as a whole they can pretend that it is a self-enclosed entity bereft of outside influences that might muddy their simple models. And it means that they can indulge in anti-democratic theorizing without actually being anti-democratic: democracy is a dirty government thing, it isn’t part of the market system.

I remember reading Hayek’s famous paper on knowledge in the economy in which he lays out the argument about central planning being a hopeless adventure and asking myself how, if the world is that complex, anyone can know whether any system is better than any other. You can’t. If the information is so difficult to gather and compete for a centrally planned system, on what basis do we have to conclude that a decent rally planned system cannot be improved upon?

Well, it turns out, we can make that determination if we rig the model and the calculations upon which we rest our argument.

Which is what Friedman and the other followers of Hayek have done.

They have no ‘proof’ other than an artificial test tube model that they created especially to produce their proof. Garbage in, garbage out.

Or, as Friedman so famously argued, it really doesn’t matter how insane your assumptions are as long as they produce the ‘right’ results. Friedman, of course, knew what result he wanted:

Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.

So there.

Scientists at work.

Not

  1. originalsandwichman
    April 28, 2016 at 10:56 pm

    “…it would have to be inhabited by two sets of parallel and never interesting people. One would be the superb calculating machines of the erstwhile free market. The other would be the foolish idiots of the political system.”

    NOT EVEN! Those “superb calculating machines” would NOT be able to achieve a social optimum by acting rationally to maximize their utilities. And I am not talking about the real world. EVEN in the abstract model, there is a tacit, unacknowledged assumption that agents are acting AS IF guided by an egalitarian ethic because it is only such a tacit assumption that will grind out the social optimum. Pareto improvement is crypto-egalitarianism. The entire equity/efficiency trade-off fable is based on an a priori assumption of equality.

    Is the Road to Hell Paved with Pareto improvements?

    http://econospeak.blogspot.com/2016/04/is-road-to-hell-paved-with-pareto.html

  2. April 29, 2016 at 1:53 am

    There is a utopian quality to idealising the ’free market’, a kind of resignation that if we just stopped trying to fix things then ’everything would be as it should be’, overlooking the fact that ’free market’ still consists of competing power groups always seeking to tilt the market to their own advantage. Perhaps free market means only that all markets can be freely rigged by some dominant power, and it seems we are not far from that state anyway.

    There are few aspects of modern life that require as much central governance as monetary economics, primarily because money is something intrinsically macroeconomical: it affects all people within an economy according to how money is created and distributed (assuming that existence without money is today nearly impossible in the first world, short of being destitute). This dependency would persist even in a ’free money’ environment, where the medium of exchange is composed of many private but competing currencies, and some power group would inevitably end up dominating the media of exchange.

    Even libertarians, or their more consistent cousins: anarchists, may need to concede that as long as money and power exist there must be some kind of centralised control to maximise fair distribution of resources. The only question in my mind is what degree of control is conducive to maximising economic fairness and what degree of control becomes self-defeating, increasingly susceptible to become just another means of exploration. Ultimately it is probably the quality rather than the quantity of control that matters.

  3. jlegge
    April 29, 2016 at 4:17 am

    It is hard to avoid a neo-Marxist interpretation: the neoliberal movement paved the way for the transition from entrepreneurial capitalism to financial capitalism.

    Entrepreneurs don’t believe in market perfection; their success depends on creating imperfections. They aren’t necessarily hostile to the welfare state: its origins are in Bismarck’s Germany where it was clearly intended to reduce entrepreneur’s training costs and relieve them of health and pension obligations. The nasty anti-Semite Henry Ford forced up US wage levels: his $5 per day was intended to create a market for his cars.

    Preaching market perfection all but criminalized entrepreneurial activity. The new masters of the universe had no interest in general welfare or wage levels or entrepreneurial competence in anything but the activities of Kirzner’s arbitraging trader. It makes sense for believers in self interest to “get with the strength” and polish the egos of their new masters.

    Watching the Australian Labor Party endorse neoliberalism in the 1980s showed that part of its appeal was precisely the attack on entrepreneurs and productive businesses. Exposing them to more competition (“Holding a blowtorch to their bellies” as one ALP politician elegantly described it) was supposed to reduce their economic rents and increase ordinary consumer welfare. In the event, it transferred economic rents from productive to zero value added activities and reduced ordinary consumer welfare, dramatically in the case of former manufacturing workers.

    Bernie Sanders and Jeremey Corbyn represent a pushback against neoliberalism; but both are under continuous attack for the “unreality” of their proposals. As Peter Radford points out, it is the attackers who live in a different intellectual universe, one with the most tenuous connection to the real one.

    • April 30, 2016 at 3:21 am

      Great points. Agree. I just have one question. Some entrepreneurs just love Ayn Rand and the type of predatory capitalism she favored. The spread of this destructive form of entrepreneurial activity is a danger, not just to productive markets but to society at large.

      • jlegge
        April 30, 2016 at 9:40 am

        Rand seems to have tapped a theme in US culture: the individual against the odds. When Obama said “you didn’t do it on your own” it struck me as transparently obvious; but the Romney campaign thought that they could use it against him. For an alternative (Australian) myth read http://www.poetrylibrary.edu.au/poets/lawson-henry/the-fire-at-ross-s-farm-0002036 Australia’s rural fire brigades are almost all volunteer; we learn in primary school that you can’t do it on your own; and you aren’t on your own either.

  4. April 29, 2016 at 4:42 am

    If the word “free” is removed from the phrase economists hold onto like a talisman then we are left with just markets. And we have five thousand years of history for markets. This history shows markets are not uniform in anything except that exchanges happen. No one knows exactly how to build a market or even more important how to build a successful market. Markets are trial and error constructions. Sometimes they involve money. Sometimes they do not. They are sometimes complex and difficult to track. Other times they are simply and easily viewed. Most are messy and their results are unpredictable and often even harmful to the very exchange intended. Most play other role besides exchange. They foster political overtures or engagements, settle wars or other disputes, pay ransoms, stop or start rebellions, etc. And this above all else, these markets fail often in each and every one of these tasks. They fail most often because frequently the participants cheat. They cheat to win the biggest reward, to control the market or its participants, or just for fun of cheating. And lest we pretend otherwise all markets use and need governments, and are in turn needed and used by governments. Funny thing I don’t read any of this in Friedman, Lucas, or the other luminaries of neo-classical theology. In the words of New Zealand economist John McMillan, “markets are neither magical nor immoral. Rather they are powerful if imperfect tools, the best we’ve found for improving our living standards.” I’d add, also one of the more dangerous tools we’ve found to work on improving our living standards. On this basis markets are worthy of our full attention, but not our worship.

  5. April 30, 2016 at 12:06 pm

    Society, you have a problem
    Comment on Peter Radford on ‘Market Reflex’

    (i) The claim ‘Free market work best when left alone’ is either a political or a scientific statement. If it is politic it needs only repetition, if it is scientific it needs proof.

    (ii) NO scientific proof of the claim exists. General Equilibrium Theory as the most ambitious attempt is known to be a failure, e.g. (Ackerman et al., 2004).

    (iii) The question about the functionality of the market system as a WHOLE cannot be decided in the political sphere with claims and counter-claims. BOTH, pro-market and anti-market ideology is sitcom stuff.

    (iv) Economics claims to be a science and science is about proof and proof is about formal AND material consistency. “The chief demerit is inconsistency, …” (Popper, 1994, p. 160)

    (v) The econ101 student is taught supply-demand-equilibrium and he accepts this for the rest of his life as a satisfactory explanation — imperfections, stickiness, and distributional bias granted as properties of real life — of how the market system works. This has nothing to do with ideology but with flunking an intelligence test.

    (vi) The crucial point is that the price mechanism does NOT work as standard economics hallucinates. Economists are PROVABLY wrong with regard to the two most important features of the economy: (1) the profit mechanism, and (2), the price mechanism. This holds for Orthodoxy but also for Heterodoxy.

    (vii) The primary fault of economics is not that it is an ideology but that it is a failed science. The Palgrave Dictionary sums up: “A satisfactory theory of profits is still elusive.” (Desai). This means: more than 200 years after Adam Smith neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian school can tell the difference between income and profit. Hence, they fail to capture the essence of the market economy. Clearly, when you do not understand profit you cannot understand how the market system works.

    (viii) Standard profit theory is PROVABLY false. Therefore, the familiar story of the price mechanism is PROVABLY false. Therefore, the assertion ‘Free market work best when left alone’ is PROVABLY false (2015).

    (ix) Economic policy proposals of ALL schools lack sound scientific foundations.

    Society, you have a problem: some feeble-minded poultry entrails readers are telling you how to run the economy.

    Egmont Kakarot-Handtke

    References
    Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working
    Paper Series, 2624350: 1–40. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350.
    Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.

    • May 2, 2016 at 2:50 am

      Science is about observing and concluding. And scientists do it over and over and over with the hope of building an accurate representation of what is shown by the observations. Economists do lots of concluding (they call it theorizing) but damn little observing. This not only makes them tenuous scientists, at best, but also ignorant human beings. I would not trust the welfare of my dog, let alone any economics concerns to such poorly educated and unaware persons. At bottom today’s economists are self proclaimed scientists who don’t give a damn about science, and certainly not about what economics is about — managing our resources to keep body and soul together. They theorize instead an “economic machine” that operates in an automatic fashion, following inexorable and amoral laws. That being the case economists might be looked at as mechanics, if we could find the machine they want to work on. Which up to this point is till missing!

  6. Norman L. Roth
    May 1, 2016 at 1:22 am

    April 30, 2016
    M. Handtke,

    If you have ever participated in the running of a business, or had to sell your services & skills in the market place, there’s three things you would understand without needless theoretical mystery:
    {1}} The not so mysterious difference between income and profit
    {2) The things that happen when you’re NOT making a profit
    {3} The connection between income and profit when you’re an employee.
    I suggest that if you want to even get a head start on how to understand markets and commercial exchange, & their pristine origins from the beginning of civilization, you should read the following:
    {1} The Concept of the Corporation, Peter Drucker, 20th century
    {2} The Salamanca School of Economics, 16th Century
    {3} The evolution of Money, interest and Banking systems… They go back a lot further than you might think.
    {4} The connection between our modern {Brahmannic, not “Arabic”} number system and the evolution of modern commerce, trade and accounting practice.

    Norman L. Roth, Toronto, Canada

    • May 2, 2016 at 4:07 am

      As I’ve already pointed out economists today are not well educated. They are to use a term from 19th century UK and US, “dunces.” So most of your suggestions will slide off of them like water off a duck’s back. These same economists also have little practical experience with doing business in any sort of market, operating a business, or meeting/receiving payroll. Double dunce. Your suggestions would help with both these problems. But I would expand your list a bit. The invention of science in the 16th-19th centuries in Europe also played a large role in pushing the social sciences (including economics) to create a mirror image of what they saw happening there. And the invention of science was based on a number of precursors, mostly philosophical and political. These include the invention of a kind of fact that can be studied scientifically, the elevation of numbering (counting) to the top level of proof of facts, and inventing a new social class, the scientist. Studying and communicating with this history would certainly help in understanding markets and commercial exchange,

  7. May 1, 2016 at 5:48 pm

    The problem with “Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.” is that it is absurdly self-contradictory, to the point of being close to uninterpretable word salad.

    Free markets cannot exist and never have existed without governments. Markets presuppose and always involve money and credit, and money is a creature of the state. Money is not a thing which is or can be exchanged, but a social/moral relationship of a creditor to a debtor/ issuer of money. Markets are side effects of, parasitic upon, the government intervention that Friedman denounces, and cannot logically exist without it.

    So Friedman’s statement is tantamount to:

    Insane asylum economists believe that markets work best when left alone, and any type of intervention by buyers or sellers to help the economy can only have harmful effects.

    What could this possibly mean? is the proper response to both dictates.

    • May 2, 2016 at 3:19 am

      The proper response is that markets were around long before the profession of economics. They seemed to work quite well without the “wise” words of economists. There are two things we see in markets from Babylonian Empire, to Ancient Rome, to Ghent in early modern Europe, to commodity markets today. One, buyers and sellers will make the rules for markets that work best for them and these rules change as the interactions between buyers and sellers change. The vernacular is “haggling.” Second, markets are never the most important aspect of society. That belongs to the church the monarchy, family, conquest, democracy, etc. depending on the time period. Markets are important but never have the final say in anything. In terms of these historical facts today’s markets are quite unique. They are supposedly the result of autonomous, inexorable, and amoral laws — something that has never been seen in any historical market ever. And today’s markets are supposedly the savior of society and the only hope for individual freedom. Again something never seen in history. But economists think such markets should and do exist. How dumb it that?

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