[peterhartmann10]

Hi guys,

So recently I have been having a very long debate with some friends about the free market and thanks to liberty Classroom, pretty much holding my own. However, my cousin jumped in on the discussion and alas my knowledge just isn’t good enough to refute what he says. It was a very long debate on FB, but here is what he had to say:

“The idea of a genuinely free market is an entirely fictitious proposition dreamed up by some classical economic thinkers (well, political economists in reality, who were aware in the late 18th and 19th century that such a notion cannot exist in reality) and then taken as given by the likes of Von Hayek (Austrian School) and Friedman (Chicago School), with the latter heavily involved in the economic planning of the draconian military dictatorial regimes in Chile and Argentine through the 1970s and 1980s (the time frames of the two cases differ slightly). Apparently free markets and freedom are not two sides of the same coin in reality, as they are supposed to be in theory. Markets can only function, to any extent, in an environment that is facilitated by a government. Indeed, markets have often only emerged in the wake of government involvement. For example, without the initial investment in infrastructure from government; with trains, power grids, hospitals, roads, schools, etc. (the wealth for which in Europe was funded on the back of slavery and colonialism – coupled with state-supported innovation) there would not be a private alternative today. The huge investment required for such endeavours would not be made in the private sector, given that a profit motive can only exist in a situation where it is possible to make profit in a realistic timeframe.

Most of these infrastructural developments are unprofitable given that a lot of citizens could not afford them and the services offered without government subsidies, and did not see them as significant when compared to feeding their families (some similar discussions still go on in many parts of the world). To argue that an efficiently working free market (again, something that only exists in the realms of theory) would improve ‘efficiency’ and bring a lower equilibrium price for ALL goods and services is naïve at best, and extremely dangerous at worst. There is no way that the ‘free market’ would ever provide things like lampposts, a common example of what even the most hard line neoclassical economists would describe as the ‘free rider effect’; a necessary public good is provided which no one pays for directly. There is no way that such services would be provided and maintained other than through a local government or council.

As for market failure, to suggest that markets have only failed because of the meddling hand of government intervention is an incredible rewriting of economic history (not to mention social and political dynamics which further complicate resource distribution). Economics has only existed as an academic field for one hundred years or so, prior to which the discipline referred to was political economy. The differences between the two are fundamental with the former (economics) simply about the distribution of resources and the latter (political economy) concerned with the political imperatives behind resource distribution. Economists think that everything can be modelled, almost as though there are immutable rules to social sciences that are applied from a natural sciences mindset. Complexity theory offers something in this light but it is also important to realise that political economists are not only interested in politics with a capital “P” (political parties, governments, and states) but all forms of politics and the power discrepancies that exist because of gender, ethnicity, educational background, family wealth, and position within the social hierarchy which is often determined by level of influence wielded and the job that you do. Karl Marx had so much to offer on this, as did Adam Smith, whose notion of the ‘invisible hand of the market’ is entirely misappropriated today – he believed in a private, entrepreneurial sector that was supported by the visible hand of government.

To take the recent financial crisis as an example of market failure, it is quite clear that the continual nation-state level deregulation of an already volatile global industry simply encouraged risk takers to take further risks. Repealing long-standing legislation meant that those already working beyond were happy to continue to do so since the rules were moving toward them, rather than the other way around, and the short-term profit motive was seen to outweigh the risk of the entire system collapsing. Of course, when that did happen, the banks should have been allowed to fail according to the thinking of the Austrian School, Von Hayek and his acolytes like Friedman, but that was too much of a political risk given that the entire global financial architecture would have come crashing down. Perhaps that would have been preferable but it could be argued that the last financial crisis of this magnitude was one of the principal factors in the biggest war in human history which finally started a mere decade later. Hindsight is a wonderful thing, but foresight is preferable.”

I just don’t know how to answer that, He makes some pretty interesting points. And I currently don’t know enough about the people he cites to dispute what he says about them.

Any feedback/help would be much appreciated from you fine people 🙂

[tang20]

The first paragraph is a glorified “but who will build the roads?” argument, which can be disproved by many examples of private infrastructure projects. Secondly, it is not the market which emerges from government, but it is government that emerges from markets and economic prosperity. There was simply no government before there was civilization, which is brought about by division of labor and private property.

Second paragraph: again a big “who will build the lampposts?” argument. He’s just spouting the religious dogma of statism. The statement “there is no way such [public services] would be provided” is contradicted by cities such as Wenzhou in China.

http://reason.com/archives/2011/11/15/chinas-black-market-city

Third paragraph is a non sequitur. What does the history of the economics profession have to do with actual economic history? That said, markets are NOT perfect. They can “fail”, depending on how you define failure. Any numerical measurements based on mathematical models that may try to expose this “failure” are flawed because of the subjective theory of value. We can’t measure subjective value, but we KNOW that voluntary trades are the ONLY trades where both parties gain in value.

Fourth paragraph, Tom Woods has debunked the idea that deregulation caused the financial crisis. The rest of the paragraph is incomprehensible. The last sentence is a doozy. First, Rothbard has shown that the financial crisis leading up to the Great Depression was caused by credit expansion and gool ole’ ABCT.

Next, what does that have to do with WW2? The “principal factor” of WW2 was the fact that the Treaty of Versailles included -massive- reparations. The reparations were needed because Britain and France still had large amounts of -war debt- owed to JP Morgan. This drove Germany into hyperinflation which caused the economic problems that allowed Hitler to be voted in. I’m sure the historians here know much for of this than I.

The very notion that free market forces are to blame for World War II is utterly farcical (he didn’t say it, but I bet he thinks Black Tuesday was caused by the “free market” as well). At the head of every war or mass murdering dictatorship there is a government, and probably a banker.

[rt]

I don’t think that colonialism and slavery would have been necessary for Europe to prospe. The norwegian countries (e.g. Sweden) have never had any colonies to my knowledge. However, they’re far more prosperous than former colonialist countries such as Portugal and Spain. You could also mention the example of Hong Kong, which was a british colony until 1994 but prospered anyway. Thus, I don’t think that there has to be a connection between colonialism and prosperity.

Hospitals, schools, roads, trains etc. have been provided by the private sector.
Tom Dilorenzo on trains:
http://mises.org/daily/2317#1
Walter Block on roads:
http://mises.org/document/4084
Andrew Coulson on schools:
http://www.amazon.com/Market-Education-Unknown-History-Philosophy/dp/1560004088
Terence Kealey on science funding:
http://www.amazon.com/Economic-Laws-Scientific-Research/dp/0312173067/ref=la_B000AQ3Y2A_1_1?ie=UTF8&qid=1350804865&sr=1-1

As long there is demand for a product or service, companies can make a profit by providing them. It does not really matter whether profits will be earned in the short of long run.

In a free society, roads would be privately owned. People want to see in the dark when walking or driving on the street, hence companies will provide them with light. If they did not, another company would see the opportunity to make a profit and provide lampposts. Competition would ensure lampposts etc. Shop owners along a street might also install lampposts to attract customers etc.

Think about Felix Baumgartner and RedBull! The whole mission was privately funded:
http://www.uncmirror.com/opinions/column-red-bull-continues-to-give-private-sector-wings-and-profits-1.2931972#
Think about all the cool stuff the private sector provides: computers, smartphones, airplanes, trains, cars, etc. But your friend wants you to beleive that it’s incapable of installing some lampposts?! If we get government out of the creativity of millions of profit seeking individuals will accomplish awesome things!

Of course competition increases quality and reduces prices over time. Why else are our computers, smartphones, cars etc. a lot better and cheaper than a couple of years ago?

The financial crisis was not a market failure but the cause of government interventionism (Federal Reserve Monetary policy and to a lesser degree housing policies). I recommend Tom Woods’s book Meltdown which deals with the recent financial crisis:
http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879
The raw footage videos of ‘The Bubble’ film are great as well:
http://thebubblefilm.com/video-clips/

I also recommend Tom Woods’s book “Rollback”:
http://www.amazon.com/Rollback-Repealing-Government-Before-Collapse/dp/B005CDT7WM

[jmherbener]

Society is complex. There are a host of causal factors at work bringing about any historical result. That’s why we need theory to understand the world. When real economies are a combination of market forces and government forces, we must have sound theory to disentangle the causal factors. The theory of the free or unhampered market economy is essential to doing so. It doesn’t matter whether or not such an economy exists in the real world. We have no other way to disentangle the different causal effects.

The unhampered market economy is an economy in which legal sanction is given to all voluntary exchanges and private property and any involuntary exchange and any aggression against private property are illegal.

Take a look at the lecture on the unhampered market economy for more details.

Your friend is entirely mistaken to claim that any particular set of goods are prerequisites of the market economy. At best, he could merely claim that infrastructure provided by the State is a requisite to some particular goods produced by our interventionist market economy. Of course, in any economy the production of some things depends on the production of other things. But, by his own admission we don’t have a free market economy. So how could he know, except by theorizing, whether or not such an economy requires state-produced goods that our economy has.

The theory of the market economy demonstrates that production decisions made by entrepreneurs economize the use of resources for society at large. Efficient production depends on earning profit and avoiding loss. The state’s production decisions cannot satisfy the profit and loss test of social efficiency and therefore, they are, by nature, inefficient. Contrary to the claim of your friend, entrepreneurs on the market take account of the inter-temporal dimension of profit efficiently through the rate of interest. State officials simply ignore this dimension of profit as they do all its other dimensions.

Take a look at the lectures on economic calculation, profit, and equity.

No conclusions about the operation of the market economy can be drawn merely from claims made by Smith, Hayek, or Friedman. One has to exam their arguments and see. There have been many criticisms of all three of them, pointing out the inconsistencies in their defense of an interventionist system. (They all favored a market economy, but not one of them favored the free market economy.)

The function of a market economy is to satisfy the most valuable preferences of society at large. All economists agree that the market, generally, does so because production decisions are subject to profit and loss. One must demonstrate, not merely assert as your friend does, how the market systematically fails to do so and how the state can intervene to systematically correct the market’s failure.

It’s not a market failure that our society lacks certain conditions that the market is not designed to provide. The market is a production system and so, it succeeds or fails on the basis of whether or not it produces the goods that society at large prefers. Claiming that the market fails because some people are unhappy or obese or have less income than other people is like claiming that a car engine isn’t working right if the driver crashes the car because the breaks fail.

On Public Goods and Market Failure, take a look at Murray Rothbard’s, Power and Market:

http://library.mises.org/books/Murray%20N%20Rothbard/Power%20and%20Market%20Government%20and%20the%20Economy.pdf

Without theorizing, how could your friend discern whether or not the argument that the Fed’s monetary inflation and credit expansion might have had more to do with the financial collapse than the re-regulation of financial markets? In fact, without theorizing, how would he know what the effects of re-regulation were?

[woods]

These are really excellent answers. On the “deregulation” claim I recommend the relevant section of my book Rollback, and/or the relevant section of this video: http://www.youtube.com/watch?v=JcAX0oX9ANU

Laurence Kotlikoff of Boston University counts 115 state and federal agencies charged with overseeing financial markets. We are supposed to believe the current crisis could have been avoided if only we had had 116? Of what help are “regulators” when 99.9% of them could see nothing wrong with the housing-bubble economy? Hiring 10,000 more equally clueless people is supposed to help? How about not blowing up a housing bubble in the first place, so we wouldn’t have to be at the mercy of bureaucratic drones and their vaunted “regulatory oversight” in the first place?

Incidentally, spending on financial regulation has increased threefold, adjusting for inflation, since 1980.

[peterhartmann10]

Thanks for the great responses guys! Lots of information to take in. Currently reading Meltdown and I will check out the other books mentioned 🙂

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