Some distinct arguments in favour of free markets

What follows is a list of arguments in favour of free markets. I have made no attempt to critically analyse each argument, as my intention is merely to present and label various arguments so that I can refer to them at a later date.

It should be noted that many arguments in favour of free markets present markets in opposition to some alternative, usually something called ‘central planning’.  This opposition strikes me as a false dichotomy, as it is entirely possible to imagine a system that incorporates some elements of central planning with some elements of markets. In fact, we don’t have to imagine such a system because we actually live in one; the real world of economic activity is characterised by an intermingling of central planning (e.g. within firms and governments) and market systems (e.g. between firms, households, and sole traders).

Anyway, without further rambling, I present the arguments…

Markets as disciplined pluralism

In The Truth About Markets John Kay argues that what makes markets really useful is that they allow for what he calls ‘disciplined pluralism.’ Markets are pluralistic because they allow people to ‘propose’ different projects, usually in the form of business ventures. Markets are disciplined because if these business ventures provide goods or services that are not in demand then the business will fail, and the resources used by that business will be allocated elsewhere.

Kay distinguishes the disciplined pluralism of the markets with the lack of discipline and pluralism one often finds in government-controlled enterprises. Because governments wield a monopoly on the legitimate use of violence, government-supported projects can survive long after they have been shown to be inadequate or wasteful. Kay illustrates this point with examples like Concorde and the British AGR nuclear power stations. Both of these ‘white elephant’ projects cost billions of pounds and survived long after a private company would have gone bankrupt.

Furthermore, Kay argues, governments tend not to be pluralistic; they encourage industries to speak in ‘one voice’, or simply ignore alternative viewpoints altogether, with the result that potentially good ideas are not given a fair hearing.

Disciplined pluralism means markets act as filters, allowing good ideas to pass through and spread, whilst suppressing bad ones. This pro-market argument explains how markets provide for dynamic efficiency in the form of innovation, invention, and technological progress. Good innovations are rewarded with increasing market share, and bad innovations are allowed to fail.

Markets as aggregators of tacit knowledge

‘Tacit knowledge’ or ‘tacit knowing’ is a theory introduced by the polymath Michael Polanyi. It denotes the idea that a great deal of our day-to-day knowledge is deeply personal, intuitive, and cannot be reduced to a set of written or spoken propositions. Friedrich Hayek applied this concept to economics, and argued that much economic activity relied on this kind of in-expressible knowledge; and for so no central planner could ever hope to co-ordinate economic activity, because the central planner could not express the commands necessary to instruct people to do what they needed to do.

Markets provide a solution to this problem. Individuals no longer have to communicate explicit instructions for everything every other individual has to do. Instead, individuals use the price mechanism of the markets to transmit information between themselves.

Markets as systems of co-operation

In The Market System Charles Lindblom characterises the market system as a tool that enables co-operation. This notion has something in common with the idea that markets aggregate tacit knowledge. I discussed Lindblom and his book in more detail in this post.

I suspect that this argument in favour of the market system can be collapsed into one of the other arguments, possibly the tact-knowledge aggregation argument or the decentralised optimisation argument.

In fact, this isn’t so much an argument in favour of markets as a description of what markets are for, without necessarily demonstrating that markets are superior to alternative means of co-operation. Lindblom is very clear that markets have both positive and negative characteristics.

Markets as decentralised optimisation systems

It is possible to show that, under certain highly restrictive conditions, market systems can achieve something called ‘static efficiency’, whereby scarce resources are, in some sense, allocated in an optimal fashion. The most complete expression of this view is to be found in Gerard Debreu’s Theory of Value.

I have yet to read Theory of Value, but I am reliably informed that it contains some elegant and beautiful mathematics; however it is not clear that the theories that Debreu presents has and relevance to the actually-existing economic world. Indeed, it seems that Debreu himself was at pains to point out that his theory had no real-world implications. In fact, it could be said that Theory of Value constitutes a negative result, essentially demonstrating that the conditions required for markets to achieve optimal results are so restrictive that they will never be met in practice.

Markets as revelation of democratic preference

I am vaguely aware that certain people argue that markets are tools for revealing the collective ‘will’ of diverse groups of people. Without wishing to burden this notion with more credence than it can support, I shall include this in the list, if only to ease future referral.

 

Markets vs. central planning: some distinctions

I left the following comment on Unlearning Economics’ post at Peria:

As I see it, there are three intermingled debates going on here. They are: 1) An argument about the relative information-theoretic and allocative abilities of centralised hierarchical systems on the one hand and decentralised market systems on the other; 2) an argument about the intrinsic ethical and moral status of various types of political economy; and 3) an empirical argument about which nation states have killed the most people, and been responsible for the most suffering.

On the subject of argument 1): Free markets are not the same thing as capitalism. Central planning is not the same thing as communism. There has been a tendency for capitalist countries to exhibit far greater decentralisation of decision making and a greater reliance on some form of market system; but this historical fact doesn’t mean that ‘private ownership of the means of production’ necessarily requires a market system, nor does it mean that the historical tendency for communist countries to adopt central planning means that *all* future communist or socialist economies must be built around central planning.

I would also note that the most economically successful countries have historically used *both* central planning (in the form of large, centralised private firms; large, centralised government departments; and government-directed industrial policy) and decentralised market systems. Markets and hierarchies are tools, and different jobs require different tools.

I recommend ‘The Market System’ by Charles Lindblom on this subject. ‘The Origin of Wealth’ by Eric Beinhocker is also very good.

 

Form and function in writing

Wittgenstein once wrote that “my difficulty is only an – enormous – difficulty of expression.” I took that quote from his Wikiquote page, and I can’t really look at it without wanting to re-write it as “my only difficulty is an – enormous – difficulty of expression”; that I find it so difficult to avoid such an edit* is one of the many problems I encounter when attempting to write, of which more below. My own problem, however, could be more accurately expressed as “an enormous difficulty of knowledge, understanding, focus, and expression”; after all, I am no Wittgenstein.

What I find most challenging about writing is that it isn’t any one singular cognitive process. It consists of several intertwining processes. You’ve got to know the idea you want to express; you have to understand the idea you want to express; you have to appreciate which elements of the idea are useful and relevant, and which are not; and finally you’ve got to be able to express the idea clearly and elegantly.

Each of these is a distinct type of cognitive activity. Knowing which specific point one wishes to get across is often surprisingly difficult. When writing I often encounter a sort of factorial explosion of ideas – like the polar opposite of writer’s block – in which one thought leads to another thought which leads to another two or three thoughts.

I have only so much RAM in my head. Shortly after beginning writing I often find myself overwhelmed with possibility. I would like to hold a single idea in my head at a time; I picture it floating with crystalline distinction within my Cartesian theatre, without any connections or linkages with anything else; but it seems almost impossible to do this. The crystal grows and mutates and draws in other ideas and concepts and I am left with a head encrusted with nonsense.

Understanding presents another – separate – problem. Oftentimes the reason I am compelled to write in the first place is that I do not yet fully understand an idea, concept, or theory; and so I write long, rambling essays in which I come to no solid conclusions and which express nothing but my own ignorance.

Focus. There isn’t really much to say about this that isn’t already demonstrated by the present document. I find it difficult to focus. This is as true in writing as it is in my wider life; in fact, I find it almost impossible to focus on any one task for more than ten minutes or so. I don’t know if this is an intrinsic element of my personality or simply a consequence of living in a distracted age, but there it is.

The final aspect of writing that I find problematic is that of performance. As Richard Lanham argues in Analyzing Prose, all writing is necessarily performative; you can’t help but strike a pose, even if it is one of “objectivity” or “transparency.” There is a gap – a fascinating gap – between ideas and language and the particular symbolic systems we use to express ideas. Words are distinct from ideas, and arranging words in a pleasing order is a different task to developing pleasing ideas. In my first paragraph I couldn’t help but re-write the original Wittgenstein quotation into what I consider a more pleasing form, whilst retaining the same meaning as the original. But does it really have the same meaning? By placing “difficulty” before “only” in the original Wikiquoted form the emphasis is placed on the difficulty itself, whereas in my altered version placing the “only” before the first “difficulty” deflates the first half of the sentence and places the emphasis on the “difficulty of expression”. This makes it more quotable. Or perhaps not.

*Apparently the quotation was taken from his journal entry, which may well have been in German, in which case reforming the particular arrangement of the sentence might be entirely legitimate as a direct translation of the original text – I don’t know)

Iain M. Banks and Quentin Tarantino

There are many similarities between the late Iain M. Banks and Quentin Tarantino. Here are some of them:

  • Both excel at the low-level technicalities of their respective art forms. Banks writes excellent and inventive prose, and Tarantino creates excellent and inventive scenes.
  • Both write clever, naturalistic dialogue.
  • Both have a taste for macabre and disturbing violence.
  • Both juxtapose this violence with a strong sense of ‘normality.’ Note the ‘party’ scenes in various Culture novels, and the conversation between Vincent and Jules.
  • Both often choose to tell stories in a series of out-of-sequence vignettes.
  • Both enjoy over-the-top action and gore.

I have no wider point to make, I was just struck by the parallels.

 

God, I miss Iain Banks.

Some thoughts on Charles E. Lindblom’s “The Market System”

The Market System: What It Is, How It Works, and What to Make of It is a very good book. Go read it, and enjoy. Lindblom is the epitome of scholarly good faith and rhetorical balance. He presents a fair and intellectually rigorous analysis of just what it is we speak of when we speak of ‘the market’ or, as he calls it, ‘the market system.’ Care is taken to distinguish capitalism from the market system, and to discuss allocative efficiency as something distinct from dynamic efficiency. Lindblom recognises that the market system is a fragile instrument, which cannot work in isolation from a set of other institutions and norms of ethical practice.

This is not intended as a complete review or, God forbid, a precis of the book. It is my understanding that The Market System is by way of being a precis of Lindblom’s life work, and as such the book is as informationally dense as one would expect. It is fairly abstract and theoretical, which I appreciate*, but utterly readable and compelling. There are a few points which I feel need to be highlighted, as they are many important insights I would like to be able to refer back to at a later date. I am going to list some of these insights here, with a short comment:

Markets are about co-ordination.

Society is based on co-ordination. People behave in ways that enable them to achieve common and personal ends. Lindblom distinguishes between two types of co-ordination. One is co-ordination to curb violence inflicted by one person against another. The other, more ambitious form of co-ordination involves people helping each other to accomplish goals.

Co-ordination can be achieved in a number of different ways. One way is tyrannical, that is, it consist of one person telling other people what to do. Another way of achieving co-ordination is democratic, whereby people collectively decide what to do, and which among them shall do it.

Lindblom argues that the market system is ‘a method of social co-ordination by mutual adjustment among participants rather than by a central co-ordinator.’ The market is just one form of social co-ordination, and is not the only form of social co-ordination that takes place without a central co-ordinator. One example Lindblom gives of non-market, co-ordinator-less social co-ordination** is that of people walking down the street without bumping into each other. We observe where other people are heading, we make eye-contact, and adjust our own heading to those of other people, who in turn adjust their heading… und so weiter.

The nature of efficiency

Lindblom defines efficiency as “the ratio of valued output to valued input’. He then presents the argument for ‘efficiency prices’, which was the part of the book I was least happy with. ‘Efficiency prices’ are ratios between different commodities and services determined by good old-fashioned supply and demand, with all the limitations and abstractions of such arguments. I’m not going to discuss it much further here, but I will note that Lindblom is alive to the problems of the ‘efficiency prices’ argument as he presented it. Some of these problems include:

  1. Real market systems contain monopolies that limit the extent to which real market systems can approximate efficiency prices.
  2. Some goods and services are, by their very nature, not amenable to being traded in market systems.
  3. Spillovers, also known as externalities.

Allocative efficiency versus dynamic efficiency.

One way in which markets are about competition lies in their role in dynamic efficiency. This is in contrast with allocative efficiency, which entails that a given set of resources are distributed in a fashion that leads to an outcome superior to the initial condition. Allocative efficiency is about co-ordination.

But Dynamic efficiency, whereby agents change what they supply to the market in response to changes in market demand, is, arguably, about competition. Because it is through competition that those agents that attempt to provide one service at too high a cost are ‘forced out’ and therefore required to provide some other service. The distinction here between co-operation and competition becomes blurred, and might ultimately come down to a matter of nuance and personal values. For example, is it ‘efficient’ if a worker is replaced by a machine that does the worker’s job for less money? Maybe, maybe not, it all depends.

Think social, not economic.

The market system is not something that exists independently of society. The market is one element of the vast and interlocking set of systems that human beings have developed to solve problems of social co-ordination and co-operation. Although we are used to thinking of ‘the economy’ as a separate entity from (say) ‘the Church’ or ‘the state’, all of these institutions impinge on each other in countless different ways. Moreover the way they impinge on each other has changed over time, and this has changed how the market system itself is thought of and (as a consequence) how the market system works.

Islands of hierarchy in a sea of markets.

Lindblom distinguishes between market systems and command systems. He also notes that a great deal of economic activity actually takes place in hierarchical command systems, rather than purely through markets. Corporations exist, and their internal operation is guided through a more-or-less centralised command and control system. Command systems and market systems are two different solutions to problems of co-ordination, and each has their own pros and cons.

Market outcomes are not fair

Because prior determinations (e.g. inherited property, IQ, talent) are randomly allocated, there is no inherent justice in the market system. Market outcomes are as just as the prior determinations that go into them. Because the prior determinations are random at best, or the result of a long history of coercion and violence at worst, then market outcomes are not just.

Elites and mass

Lindblom distinguishes between ‘elites’ and ‘mass’ in both the governmental and market domains. He highlights how the elites – the ruling classes – of both the public and private sector, have successfully obfuscated and manipulated the public, who are rendered ignorant by a constant barrage of advertising and propaganda.

 

This latter point is crucially important. I don’t know if there ever was a golden age of enlightened public discourse, but it is clear to me that the ‘mass’ of the developed world has become more inert and ignorant*** even as it has lost the ability to act as a countermanding power to the interests of elites, whether they be market or governmental. I don’t know what to do about this.

 

 

* I dislike the habit some writers have of peppering their books with Illustrative Anecdotes (Malcolm Gladwell, I’m looking at you Ketchup Boy). Examples are fine, but I’d rather have them presented within a framework of rigorous theoretical argument. Lindblom strikes exactly the right pedagogical pose, at least as far as I’m concerned, but I realise that this fairly abstract approach might not be to everyone’s taste.

** Jesus Christ that’s an ugly sentence. Writing is really difficult.

*** So this is a point that’s been on my mind for some time now. I really, really don’t want to be one of those guys that sits at his computer bewailing how ignorant and stupid everyone else is and how all the bad things in the world are because everyone else is so ignorant and stupid, not least because I recognise that I’m pretty ignorant and stupid myself. Yet here we are.