The “Free markets” con

Because they have the word free in them,   the terms “Free markets” and “free  trade”   have seduced  those  of all political colours to  treat them uncritically as ideas.  They are  considered good or bad but their intellectual coherence is rarely questioned. 

Neo-liberals   believe in a childlike quasi-religious fashion   in  the workings of  Adam  Smith’s   “invisible  hand”,  which,    moved   by enlightened self-interest,  supposedly creates the best of all possible material worlds through the operation of the market.    Socialists  see “free markets”  and “free trade” as economic “state of natures”   which must  be  ameliorated by the state before a civilised society  can   be realised.   Conservatives in the traditional sense no longer exist as a recognisable  political  force in the West,   but when they  did  exist they opposed “free markets” and “free trade”  primarily  on the grounds of  national security and the general disruption to  society that  they caused.  Nationalists of the fascistic kind have traditionally opposed the ideas because they see the nation  as a single organism  which  can only  be  strong  if it is master of its own destiny,  something  which an  only be achieved (they believe)  through state direction   of  both the internal market and of external trade.

There  are  varying  quantities  of  truth  in  all  these  ideological responses,    but their  utility is seriously tainted   by the lack  of any objective  or  even properly defined  and  permanent  prescriptive truth in the concepts of “free  markets” or “free trade”.  The reality of  these   ideas is  that they  are   arbitrary  chosen  bundles  of behaviours  which  are excluded  or included  at  the  will  of  their proponents. Moreover, the bundles of behaviours are not static.

The widespread  negligence in examining the coherence of these ideas is all the more remarkable because  their incoherence as theories and  the arbitrary and dishonest  nature of their practical realisation   is not only readily apparent but fundamentally undermining of the claims  made for them by their champions.

There  is a splendid  irony in the objection of the self-defined  “free marketeers'”  and “free traders”  to state intervention for the natural end of a  truly free market is  monopoly – or at least greatly  reduced competition resulting  in  oligopoly and the  rule  of  cartels.   All so-called   “free market”   societies  recognise  this   by   passing anti-monopoly laws. The “free market” is in fact a market controlled by the state in the most fundamental  way, that is, to prevent its natural workings.   It is one of the great propaganda triumphs of  history that “free  markets”  have been successfully  sold as  being  what  happens naturally  without  state intervention.   Call a  spade  a  spade  and substitute  the truthful “state regulated non-monopolistic market”  for “free  market”   and  the psychological shape  of  the  idea  changes dramatically.  (Some casuistical “free marketeers”might argue  that the “free” in free market  applies to the workings of the market rather than the market as a natural phenomenon.  That explanation falls because “free marketeers” invariably   make the blanket claim that markets only work  efficiently without  government  interference.  Their honest position would  be  to state  that they want state regulated markets to prevent monopoly. They will  not  do that because it would be an  acknowledgement  that  state regulation  of  the market is legitimate and hence remove  any  general argument  against  regulation.   That in turn  would mean any  form  of state regulation would be potentially reasonable and consequently  each form  of regulation  would have to be argued down individually  on  the merits of the case,  rather than simply empty-headedly dismissed on the grounds of no regulation = good; regulation = bad.

The  state regulated “Free Market”  is not even  a  natural  phenomenon made somewhat artificial by rules to exaggerate the natural  phenomenon in the same way that we breed animals to exaggerate nature.  Rather  it is just about as  far from being a natural phenomenon as anything  can be for  it goes against all Man’s inclinations,  both  individual  and social. 

Economic history is overwhelmingly a catalogue  of market   regulation, local  and   national,   from   guilds to governments.    It  would  be surprising  if  it  were not because   human  beings,  like  all  other organisms,  naturally behave to secure their own advantage or  that  of their  group.  Extended to the nation state,   this natural   behaviour has commonly  resulted in  domestic markets  being  protected  against foreign competition.   Whether this is a good or a bad thing is another matter  – a question I shall deal with later – all I am concerned to do at  this point  is  to nail down  that  the  fact  that  protectionist behaviour is  what is natural.

Historically,  whether  you were anything from  a rich merchant  to   a poor day  labourer it was obviously not in your personal  interest  to allow others free access to your markets to offer the goods or servicesat a lower price or to work for lower wages.     The merchant  might bedriven  to   bankruptcy  by competition, the  labourer  from  his  job. History also tells us that   whatever their  previous economic station, such people  will probably  not be able to find  equivalent or  better paid employment and often may not be able to find  any  employment  at all where structural unemployment arises.   What was historically  true not only   remains  true  today,  but its  effect  is  much  magnified because the  opportunities for competition are  greatly  increased  by modern communications and the ease of travel and cargo transportation.

Of  course,  any individual or sectional advantage causes strains in  a society  and if the material privilege of any person or  group  becomes excessive,  sooner or later there will be a successful revolt  and  the wealth in a society will either be shared more fairly through a  change in  the  way the  society is  structured,  for  example,  through  the abolition of tolls, the  ending of state monopolies  or even through a removal  of the rich as a class without any increase in the  wealth  of the majority.

But wherever wealth distribution through social change has occurred  it has normally  been done with the express  intention  of  benefiting  a particular group or even an individual in the case of monarchs. The odd thing about “free marketeers”  is that what they ostensibly advocate is not to privilege any particular individual or group but  to  benefit society as a whole. Whether free markets do so  is another matter,  but that is their claim.

The  “free marketeer”  says to a population, do what I say and in  time society will become richer.  He does not say this person or that  group will become richer or even all will become richer,  but merely that the society as a whole will become richer.  This is an extraordinary  thing to ask people to trust in.  It is also the most wonderful  blank cheque ever  written to a politician because not only does it absolve  him  or her of any  need to take the responsibility for regulating the economy, it  also  means  that he or she can never be  held   to  account  for dishonesty   by any individual if that individual is  personally  worse off.  All a  “free marketeer” politician has ever claimed is that  his economic  way  will make society richer.  Provided society  overall  is richer, he has met his met his promise.

It is also telling for their intellectual credibility and honesty  that “free marketeers”  will oppose government interference in such  matters as subsidies,  quotas,  embargoes,  wage rates and working  hours  and grumble  about tax rates and public expenditure,   but   are  generally quite happy to see other gross distortions of the market  deriving from government   action.  They  not only tolerate  patents,  copyright  and trademarks,  but  often defend them as  property in themselves  and  asdevices  which   actually  improve economic  performance  because  they encourage invention, investment and expansion.  In addition,  those who constantly  bleat about Adam Smith’s “invisible hand”  sorting out  the business  wheat  from  the  chaff  insist  that  limited  liability  is necessary.  This  of  course is also a violent  interference  with  the market because it means that the individual shareholder  never  takes full responsibility for their investment.  (It is worth noting that the British industrial  revolution  –  the  one  and  only   bootstrapped industrial revolution  – took place before  limited  liability  became legally possible (Limited Companies Act 1862) and at a time when patent rights  were insecure and in practice limited to the  domestic  British market.)

It  is  true that none of these things are actually part  of  what  the concept of  a “free market”  is and that they are inimical to  such  a market,  but the fact that almost all modern  “free  marketeers”  have  tacitly incorporated them into their vision of what a “free market”  is demonstrates their   intellectual  confusion  (or  dishonesty  if  you prefer).

 The “free market” as its proponents conceive it

Let us put aside for the moment the fact that “free markets”  are state regulated markets and ask the question  what  is a “free market”  as it is conceived by “free marketeers”?    A jolly good question.  Even  if market distortions which appear acceptable to “free marketeers”  such as patents and limited liability did not exist,   that would leave many other   things which prevent unfettered domestic competition.   In  an advanced modern economy these include:

Taxes

Non tax fiscal measures, eg control of interest rates

The state of the currency

Exchange controls

Overall Government expenditure

State Subsidies

Industry and trading standards,  official and otherwise

Public sector employment

Transport costs

Public ownership

Defence

Direct and indirect Government intervention

Copyright, trademarks and patents

The moral  and social climate, eg, a tradition of Welfare The feeling of the people, eg, the national feeling of Japanese Practical cultural barriers such as the difficulty of a language

Dumping

Transport costs

Working hours

Trading laws

Labour laws

Wage rates

Bureaucratic differences

Company laws – particularly the attitude towards foreign ownership

Banking laws

Banking system

Social policy – welfare, health etc

Physical infrastructure

Honesty of public servants

Foreign policy

National strategic considerations

Education – The amount spent, school leaving age, curriculum,

Limited Liability

Environmental laws

Some  of these things such as subsidies,  patents,  quotas and  limited liability  could be obviously and  legitimately  ruled out of order  by a “free marketeer” because they are deliberate state interferences with competition,  but what of items such as the provision by the  state  of education  or  the  physical  infrastructure of  a  country?  They  are undeniably distortions of competition at some level,  but they are  not deliberate attempts by the state to distort competition. A purist “free marketeer”  could  just about  say such things were no business of  the state  and still be intellectually coherent because it is  possible  to conceive  of  a  society without such state  provision.   But   however purist they might be,  sooner or later the “free marketeer”  will  run into features which undeniably restrict competition  but  which  must exist  simply because they are an inescapable part of society. The most obvious is tax.

Any modern state needs a large tax revenue to sustain itself,  the only questions  to determine being how large should be the revenue and  what it should be spent on?   Some things such as defence and  policing  are inescapable  expenditures  for any state,  although   even  there   the amounts to be  spent are debatable and elastic. Items such as education and  welfare are  more subject to variable  expenditure.   Nonetheless, substantial amounts are as a matter of contingent fact invariably spent on such items by all advanced states.  Such countries also engage to a lesser or greater degree in all the forms of regulation listed above.

In  theory,  and even more in practice,  the notion of a “free  market” seems to rest on little more than anti-monopoly laws,  wages and prices set  by  the market (although in practice this does not  happen  purely through the market because of welfare provision, tax regimes etc) and a lack  (or at least a minimum)  of  state interference in such areas  as health and safety, employment law and  company law. 

The  inclusion of these narrow criteria are merely a subjective  choice made  from a much larger menu of man-made distortions of   the  market. Consequently,  there  is no objective coherence to the concept  of  the “free market”  as it is conceived by the “free marketeers”.   It is  an arbitrary  ideology based on subjective choice.

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