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The Myth of the Free Market, Part 2

February 8, 2010

When Sarah Palin attacks policies like cap-and-trade or the carbon tax, she wonders why politicians have abandoned common sense and good old free market principles. Never mind that the volume of carbon emitted by the United States is already not a product of the free market. Never mind that cap-and-trade and the carbon tax are explicitly market-based solutions to climate change. Instead, I want to explore how championing a somewhat abstract economic tenet has become such an integral part of the right-wing populist shtick.

Emotional Legitimacy: The Specter of Communism – In my last post, I argued that the free market has never, and will never, exist. By the same token, no pure command economy ever has, nor ever will exist. But throughout the 20th century, a good portion of the planet was ruled by economies considerably less free than our own.

These economies were inefficient. As a possibly apocryphal story goes, after the Soviet Union fell, someone stumbled upon a state warehouse filled with nothing but left shoes. These economies were also terribly cruel. Stalin’s economic policies in the 1930s led to the Holodomor, a famine in the Ukraine during which 2.5 – 10 million Soviet citizens perished. Thirty years later, Mao’s experiments with collective agriculture during the Great Leap Forward resulted in famine and up to 30 million deaths. These were entirely man-made calamities.

Command economies were scary. Command economies were unequivocally bad. The horrific history of command economies has left citizens of the West with a natural love for market economies. But the Soviet Union collapsed 20 years ago and China has long been on the path to liberalization. I think many of us must have forgotten just how much American society differs from the nightmare of the Stalinist state. How else could a considerable portion of the country think that a 35% upper tax bracket and health care legislation that doesn’t even get us halfway to Sweden constitutes a complete betrayal of American economic principles?

Intellectual Legitimacy: Economics – Okay, the free market does actually exist somewhere. Economics textbooks are filled with them. A perfectly free market – one that exists outside of institutions, transaction costs, collective action problems, externalities, asymmetric information, product differentiation, monopolies, cartels, life, etc. – has desirably tractable mathematical properties. As such, economists will use near-perfect markets (e.g. wheat markets) in order to derive proofs that a the price mechanism in a free market will distribute goods throughout society so as to maximize societal utility.

There’s an old joke about an economist stranded on a desert island with a can of food. How can we open it, his companions ask. “Simple,” says the economist. “Assume a can opener.” Basically, economists assume perfectly free markets in order to write elegant proofs. And there is nothing wrong with this: these proofs constitute an impressive and essential body of knowledge.

But as I showed in my last post, we are not starting from a position of “free market,” wherein any regulation moves us closer to “command economy.” In the real world, policy implications do not flow from these proofs as effortlessly as they do in textbooks. There is no reason to think that a carbon tax – conditional on subsidies for fossil fuels, years of acculturation to car culture, billions sunk into interstates and suburban infrastructure, and the negative externalities of fossil fuels – would move us away from the “efficient” level of carbon consumption that would exist in a free market that had accounted for all of these confounding factors.

Nonetheless, Economics is the preeminent social science, and a politician’s peremptory nod toward the panacea of the free market will trump whatever arguments I can muster here. A politician opposed to cap-and-trade – or the public option, or unemployment insurance, or bank regulation, or raising taxes – can gesture with one hand toward Econ 101, and with the other hand toward the All-Americanness of free market principles. This politician then has the intellectual and emotional means by which to rally opposition to the entire progressive agenda.

The Third Motive: Loving the Status Quo – When a patriotic American proclaims love for the free market, they are expressing their love for the American – as opposed to the Communist – way of life. When an economist proclaims the marvels of the free market, they are expressing their love for a Platonic ideal – and who doesn’t love platonic ideals? But when a politician argues that a given policy would violate the free market, they are simply arguing for the continuation of the status quo.

Remember, we can very roughly divide the economy into “the market” and “the given.” Things in the latter category include portions of the economy that are regulated, subsidized, relatively permanent (e.g. residential neighborhoods), or are immutable in the short run (e.g.  the distribution of income and education at time zero). “The market” includes everything else. Market forces will efficiently allocate the goods in “the market”  conditional on “the given.”

Now, think of social policy as simply moving some portions of the economy from the “market” the “given” category, or vice versa. The new policy will clearly cause the market to re-equilibrate, so as to settle on a new allocation of goods. If the new policy is well-crafted, it will move factors from the market to the given (or vice versa) in such a way as to increase societal well-being.

And just who would be opposed to that? Not patriotic Americans, and not even economists. But those who currently benefit most from the current state of things are precisely those who do not want to see new policies alter the status quo. And because “I Love the Status Quo!” will never be inspiring politics, those who love the status quo have instead run with the slogan, “I Love the Free Market!” By defining the free market broadly enough, and by wrapping themselves in the sources of emotional and intellectual legitimacy described above, lovers of the status quo can brand any attempt to pass social policy as tantamount to undermining the free market. And these two words – however meaningless, however much they mask speakers’ true motives – have enough cachet in American society that once free marketeers have sounded their alarms, progressive politicians fear to dissent.

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UPDATE: This very length Paul Krugman article, The Fall and Rise of Developmental Economics, discusses the tendency of the economics profession to disregard any theory that cannot be expressed mathematically, and how the the math is aided by unrealistic assumptions. Like everything, these assumptions are fine until they aren’t:

In fact, we are all builders and purveyors of unrealistic simplifications. Some of us are self-aware: we use our models as metaphors. Others, including people who are indisputably brilliant and seemingly sophisticated, are sleepwalkers: they unconsciously use metaphors as models.

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