Chapter 13

 

DIFFERENCES WITHIN FREE-MARKET THINKING

 

 

The overview just given of the individualist "philosophy of a free society" may provide an appreciation for the true liberality and coherence of the classical liberal outlook.  Its coherence doesn't mean, though, that classical liberals haven't had a number of differences among themselves.  This chapter will touch briefly on those issues, but will focus mainly on a difference about methodology.  This is important because the tendency of many free-market advocates to embrace a "closed axiomatic system," if they persist with it, will greatly inhibit their ability to give classical liberalism a form that will suit the world's emerging realities. 

         

One difference has to do with monopolies, restraints on trade, and anti-trust.  The most common view among market theorists today is that there is no meaningful problem of monopoly or restraint on trade in a competitive market economy unless there is government intervention favoring one or more competitors.  It is seen not as a problem of the market but of government meddling.  The great classical liberal economist Lord Robbins, however, provided the opposing view when he said "I still believe, as against Schumpeter and others, that there is a real monopoly problem in free societies, and that it is unwise to resign ourselves to doing nothing about it."[1]  

          The world economic crisis of 2007-9 demonstrated how vital it is that financial institutions (with their massive capital flows) and the units of global business be brought down to a size that is amenable to central bank monetary controls, securities oversight, and other national regulatory norms. This is more than just a problem of a given organization’s having become too large.  When there are financial flows of “hundreds of trillions of dollars” that are subject to the vagaries of herd-psychology, there is a systemic need for down-scaling.

          A lesser but still important problem does have to do with the size of particular organizations.  Some corporations have become “too big to be allowed to fail,” because their failure can mean disaster for the economy as a whole.  Such a situation is intolerable to those supporters of a free market who realize how absolutely necessary it is to remove everything that can bring the market economy down.

          The argument that unfathomable capital flows and transnational corporate webs are essential to continued innovation and successful competition within “the global market” ignores two things: the on-the-brink prospect of disaster they bring with them and the fact that innovation can proceed apace without such scale.  All of this makes the argument for Lord Robbins’ outlook particularly strong.

  

A second difference relates to monetary policy.  Many laissez-faire proponents favor the gold standard.  Milton Friedman, whose economic thinking towered over classical liberalism for several decades, long supported a fixed legal rule for a gradual increase in the quantity of money by the Federal Reserve Board.  Mises and Hayek favored "free banking," which would have banks themselves decide about lending and money-creation under what they presumed would be the watchful discipline of the market.  Yet another approach, favored by Lord Robbins, is to require banks to have a 100% reserve for deposits, which would totally remove banking's money-creation aspect.

          Again, the 2007-9 crisis was an eye-opener.  The “bubbles” created by the U.S. Federal Reserve first in the stock market and then in housing were the result of a rapid expansion of the money supply.  This expansion was obscured because the price level was simultaneously held down by two things: the huge quantities of low-cost imports from China and elsewhere, and the rapid increase in productivity caused by technology. For several years recently, the “Fed” eschewed any concern about monetary aggregates, focusing on short-term interest rates, and got completely away from any idea of legally-imposed limits on monetary expansion.  This has put the United States at an unacknowledged cross-roads about monetary theory and policy.  It is precisely those most concerned about a market economy who should be most anxious to see this conundrum resolved.

 

In recent years, those who most single-mindedly support laissez-faire have been enthusiastic for free trade, the global market, and open immigration into the United States and Europe.  Others such as Patrick Buchanan have considered low-cost foreign labor a threat to American workers,[2] and unlimited immigration a danger to the national survival of the United States.[3]    If things continue as they have, these issues will grow far beyond what they are today.  The crisis for classical liberals and supporters of a market economy generally is that free trade, the global market and open immigration will come to be almost universally detested unless prevailing thinking adapts to the onrushing situation.  Because of the growing economic displacement, a failure to adapt will almost certainly cause “free-market theory”’s extinction as a political and ideological force. 

 

I want to focus our main attention, however, on methodological differences.  Far from being esoteric, the discussion of method will be central to the next chapter’s review of a good many conceptual issues that stand in the way of free market devotees' adapting to the world that is now taking shape. 

          If we talk at length with many libertarians, or with others who also pride themselves as steadfast free-market advocates, or with committed pacifists, what will strike us most about the conversation?  More than likely, the extent to which they strive for consistency.  They have a set of principles and compete among themselves to be the most purist in applying them.  They consider it a mark of dishonor to deviate from those principles, to which they are fully loyal.  They have the satisfaction of knowing that they grasp the central kernel of truth that most people overlook.  This provides them extraordinary confidence in their moral position. 

          I remember a conversation I had with anarcho-capitalist-pacifist Robert LeFevre at the Freedom School some fifty years ago when it was located north of Colorado Springs.  His view was that force was unjustified under any circumstances.  If a rapist tried to attack his wife, he said, all he could do would be to interpose his body between hers and the rapist's.  When I raised the usual rebuttal that the consequence might well be that his wife would be raped, he responded that the proper way to judge the rightness or wrongness of something is not by considering its consequences, but by asking whether the correct principle – in this case, non-violence – was adhered to.  That way, he said, you are at least not yourself a part of the problem.  (We might well have asked his wife, if he was married.)

          A similar approach is made by uncompromising libertarians.  Many start with a set of moral axioms such as "each person owns himself" and "the sanctity of private property" and seek to be strictly deductive from them.  No argument seems fully to the point that concerns itself with whether an economic or social model results that most people would consider workable.  The late Milton Friedman did this when he argued that such a natural treasure as the Grand Canyon should be privately owned rather than be part of a "commons."[4]  (Friedman did get into subtlety about whether the private property axiom should apply when he discussed, and then decided against, the appropriateness of what he called a "neighborhood effects" exception to the axiom; but he remained faithful to the deductive approach.  That he did so with regard to the Grand Canyon isn't altogether typical of his thinking, though, since he was ingenious in devising strategies – such as the fixed rule for monetary increase, the voucher system for education, and the negative income tax – that were calculated to accomplish classical liberal objectives while addressing needs that free-market theory wouldn't otherwise take into account.  Friedman mixed purity and practicality.  Charles Murray does this, too, in What It Means to be a Libertarian, where he sets out a series of axioms but also indicates that he isn't as strict an adherent to them as many libertarians are.[5])

          The examples of pacifist or libertarian purists illustrate any philosophy that deduces strictly from axioms without evaluating consequences.  Thus, we come to what is perhaps the single most important division within moral philosophy.  The sociologist Max Weber many years ago described two opposing approaches to ethical theory: one holds that "the intrinsic value of ethical conduct is sufficient for its justification," and this contrasts with those who hold that "the responsibility for the predictable consequences of the action is to be taken into consideration."[6]  Lord Robbins made the distinction even more graphically: "The critical division in social philosophy… is surely between those who judge laws and institutions in terms of conformity to an abstract scheme of rights, deduced in some way or other from the principles of pure reason, and those who judge them in terms of the utility of their consequences – the judgement being, of course, in terms of rational analysis but the ultimate criterion, as both Hume and Bentham showed, being something outside reason.  It is the division between those who cry ‘let justice be done, if the skies fall,' and those who would regard the falling of the skies to be one of the consequences which must be taken into account before it is decided whether a particular action or a particular framework of action is, or is not, just."[7]

          In my opinion, the system that evaluates consequences rather than adheres unwaveringly to deduction from axioms is much to be preferred.  The problem is that axioms, if they are to be used for strict deduction, must contain within themselves a distillation of all human experience and wisdom, and all preferences, needs and wants that people, now or at any time in the future, or in any culture or situation, might feel.  Any failure to include all of this in formulating the axioms, as well as to consider all possible emergencies and contingencies, will subject the theory to devastating "counter-examples," which will raise points that people consider imperative or valuable and that the axioms don't take into account.  But it is impossible to devise in advance a set of axioms that will be so all-seeing.

          The core issue is whether all relevant considerations and consequences are to be taken into account at some point or other.  A seductive aspect of the axiomatic method is that after the axioms are selected the process is intended to be one of pure deduction, without a willingness to evaluate its results.  This is my fundamental criticism of the axiomatic systems of, for example, philosophers John Rawls and Robert Nozick.  For many proponents of a deductive system, the conclusions are drawn by rote, with the result being an unthinking over-simplification. 

          When I was a young man in the Marine Corps stationed in San Diego, I wrote the first draft of Emergent Man, which I published in 1963.  I remember a week of intellectual turmoil as I fought to clarify in my own mind the fundamental principles of a free society.  In Emergent Man I followed these principles through to their implications, using a deductive method.  If my process differed from the iron-clad deductivism I am criticizing now, it was in the fact that both before and after the publication of that book I remained open to new considerations and to criticism of the principles themselves.  (Although I am today very much a critic of the axiomatic method, my having started with that method gives me some empathy toward those who pursue it.)

          Still further, I eventually came to think that the axioms stated in Emergent Man weren't fully sufficient: that it is too narrow to make even so desirable a thing as "liberty" the one and only consideration.  Liberty (which I defined as life within a society in which coercion is reduced to a minimum and the voluntary is accentuated) remains vital to me both as an end and as the most important means; but other aspirations demand to be fitted into the mix.  It would seem better to make "advanced civilization, with liberty at its core" the goal.  Indeed, for those in Europe and America who see great value in continuing the culture of the West, it is desirable to make the goal more specifically "western civilization, with liberty at its core"). For people in the West, this would be more all-inclusive, not necessarily omitting anything that people insist upon in a philosophy.  Even with that, it would be a mistake to set up the theory as a closed deductive system.  We will almost certainly never come to the end of consequences and new circumstances that demand to be considered.  The message of the present book, that emerging world realities force a drastic rethinking, is a demonstration of that.

          There is even a problem with trying to lay down a universal philosophy, which is inherent in the axiomatic approach.  There are several widely varied civilizations in the world, and many individual cultures to whom millions of people are deeply loyal.  A theory that ignores such specifics may think it is a “universal” theory, but it is not.  This means that my suggestion of looking to “western civilization, with liberty at its core” recognizes that it is a philosophy that is fitted specifically to a given civilization, not to all.

          None of this should be taken to contradict the fact that within a given culture or philosophical system there is great value in formulating principles in light of one’s best understanding, and then thinking and acting in a "principled" way.  "Principled" behavior is essential in life as people deal with each other and as they try to avoid all sorts of preventable difficulties.  Still further, there are important reasons for moral principles to be adhered to without everyone's constantly questioning them, and for the community to enforce them by social pressures.  This is because if moral behavior is important there needs to be an acculturation to make it habitual.  People aren't well situated to be "judges in their own case" (consider, for example, a husband or a wife's pondering, in a time of temptation or of stress within the marriage, whether adultery is ever justified) and for each person to be a philosopher. 

          If this is so, how is the "openness" to come in?  The answer lies in something that John Stuart Mill pointed out: that a free society needs an intellectual culture appropriate to itself.  It is within that subculture, where ideas and theories are seriously considered from a reasoned perspective, that the openness to new considerations is essential.  This involves a certain compartmentalization: there needs to be openness in serious philosophic discussion at the same time the society benefits from a culturally enforced ethic.  Both needs exist, even though they are at odds.  (The fact that the intelligentsia of the past 200 years has been deeply alienated from the “bourgeoisie” and a commercial culture has made it ill-suited for the purpose just stated.  An intellectual subculture most appropriate to a free society will have to be vastly different from the one we have known. It will necessarily support the norms and ways of life of the mainstream society while at the same time seeking to critique and elevate it.)  

 

Unfortunately, part of the conventional wisdom in the United States today (at least until the crisis of 2007-8) is that "the market is adequate for all contingencies."  Many people committed to limited government and a market economy can't think past it, since it takes the form of a closed system.  The ideas are mutually reinforcing and have a built-in normative criterion about what is good and bad, so that the system seems entirely sufficient in itself.  The system combines economic theory and the sort of classical liberal axiom-driven theory I have just criticized. 

 

The next chapter will critique the ideas one at a time, showing that they have had a number of weaknesses.  (The flaws were present even before the emerging technology and global market.  They should never have been accepted without question, and certainly shouldn't be as we go into the future.)  In the present chapter, we will review what those ideas are, laying the foundation for that later critique.

          Private property.  The existence and rightfulness of private property is an important starting-point.  In The Law, Frederic Bastiat considered it "a gift from God" and proceeded with an analysis of the "theft" that comes from any governmental action that goes beyond the minimal function of defending life, liberty and property.  The philosopher who served as the main source of classical liberal property theory, however, was John Locke, who traced it to a person's mixing his labor with nature.  In a 1996 essay, Peter J. Hill expressed the Lockean rationale when he said that "a person whose creative effort adds to the stock of wealth without decreasing the well-being of others would seem to have a moral claim to that new wealth."[8]   Robert Nozick starts there and argues that anything that arises out of voluntary contractual dealings with the property is legitimate. 

          Ludwig von Mises, though, took an interestingly modern view that reflected his economic perspective.  He acknowledged that "again and again proprietors were robbed of their property by expropriation.  The history of private property can be traced back to a point at which it originated out of acts which were certainly not legal."  But he added:

 

          The fact that legal formalism can trace back every title either to arbitrary appropriation or to violent expropriation has no significance whatever for the conditions of a market society.  Ownership in the market economy is no longer linked up with the remote origin of private property.  Those events in a far-distant past... are no longer of any concern for our day.  For in an unhampered market society the consumers daily decide anew who should own and how much he should own.  The consumers allot control of the means of production to those who know how to use them best for the satisfaction of the most urgent wants of the consumers.[9]

 

          From this, we see that classical liberals cite various justifications for private property.  Suffice it to say that it is fundamental to their philosophy.  What is meant is the type of transferable property typical in a market system; it presupposes a legal order suitable to it.  Classical liberals fought, for example, the medieval principle of "primogeniture" whereby land passed to the eldest son to maintain aristocratic estates.

          Note that the ownership is seen as total, without any notion that society has even a partial claim upon it because of the social preconditions for its existence.  Henry George was different.  He was a classical liberal a century ago who said that land existed without anyone's having made it, and that therefore the rent from it should rightly go into a social fund to be used for general benefit.[10]  Some classical liberals are followers of George, but they are a minority.  Most have felt that it is better not to dilute the sanctity of private property, so as not to encourage an incremental destruction of a system that they see as necessary to individual autonomy and self-sufficiency. I agreed with this myself under the conditions of the twentieth century during which incremental moves away from private property were distinctly part of a socialist program, though never admitted as such in the United States outside the intellectual culture's in-house literature.  The next chapter will come back to George's insight, since it will be crucial for the conditions of the future.  For now, it is enough to notice that the predominantly accepted system of market thinking does not qualify its adherence to private property in the way George did.  That allows it to be much more "stalwart" in its conclusions than it would otherwise be.

          The “Act of Exchange”.  In the non-coercive setting desired by classical liberalism, the "act of exchange" is a key form of human activity that serves as the building-block for economic efforts, large and small.  Each party to a voluntary exchange values what he is receiving more than what he is giving up, so each party benefits as he perceives it.  One person's benefit does not come from somebody else's losing.  Since this is so, exchange is an engine for enormous service to people.  The whole market economy, with all its features as described by economists, arises out of it.  Private property is important to it for various reasons, one of which is that the exchange frequently involves property.

          UCLA’s William Allen has often made his "Midnight Economist" radio commentaries entertaining by having one fanciful mouse talk to another.  Here's a good description of the act of exchange he has made in that context: "Trade is a very good thing.  It must be, for everyone does it.  And no mouse would participate in exchange if he did not gain from it.  No one will trade unless he himself puts a greater value on what he receives than on what he gives up... An activity which benefits everyone involved ought not to be curtailed."[11]  Jacob Hornberger gives an example that relates it to marginal utility theory: "Suppose you have ten oranges and I have ten apples.  I value one of your oranges more than my tenth apple; and you value one of my apples more than your tenth orange.  We trade – one apple for one orange.  Our standard of living has improved – through the mere act of exchange!  Thus, the more people are free to trade, the higher the standards of living tend to be."[12]  Peter J. Hill puts it more abstractly: "Under a set of well-defined and enforced property rights, the only transactions people engage in are ‘positive-sum' or wealth-creating transactions, those that occur because all parties to the transaction believe they will be better off as a result."[13]

          "Consumer sovereignty."  Mises emphasized that people as producers operate in an "entrepreneurial" role of anticipating what at least some portion of the consuming public will want.  If the businessman is successful in this anticipation, profitable exchange ensues; if not, the entrepreneur fails.  Accordingly, it is ultimately the consumers who determine what is offered: "Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced.  The consumers do that."  Producers "are bound to comply in their operations with the orders of the buying public... With every penny spent the consumers determine the direction of all production processes...."[14]  The economist John Van Sickle made the same point: "The consumer calls the tune.  He is the king, exacting and frequently capricious... In a market economy every income receiver is a voter.  His dollars are his ballots."[15]

          The Left likes to emphasize how consumers are subject to manipulation by advertising, packaging, etc.  It is true that there are all sorts of determinants of what consumers want.  But in keeping with his view of human nature generally, the classical liberal credits the public with being primarily composed of people who are competent and self-determining.  He considers the fact that they are influenced irrelevant to the point about their sovereignty.

          "The optimum allocation of resources."  The point about consumer sovereignty is a description of how the market works.  It leads to the further observation that serving the consumers in the marketplace creates the "optimum" allocation of resources (and, as part of it, the most appropriate assignment of economic and social position to those who succeed or fail).  This was expressed by Mises when he said that "the social function of catallactic [market] competition... is to safeguard the best satisfaction of the consumers which they can attain under the given state of the economic data" and when he added that "to assign to everybody his proper place in society is the task of the consumers."[16]  The same point was made a century ago by Henry George: "On the whole, the ability of any industry to establish and sustain itself in a free field is the measure of its public utility, and that ‘struggle for existence' which drives out unprofitable industries is the best means of determining what industries are needed under existing conditions and what are not."[17]

          It is sometimes argued that this is a point that has a purely technical meaning in economics, and that "optimum" has nothing necessarily to do with "good" or "best" as a value judgment.  But that isn't the way the concept is used in the system of thought I am describing.  There, the value judgment definitely does come in, just as we saw it did in the quotes just given from Mises and George.  In the book from which I have been quoting published in 1996 by the Foundation for Economic Education, John K. Williams argues that "profits simply show that people want" [a certain thing]... "Limited resources are being allocated in a people-serving, responsible way."[18]  In the same book, Garet Garrett includes a quote from Adam Smith's The Wealth of Nations (1776): "Each individual... generally... neither intends to promote the public interest or knows how much he is promoting it... [H]e intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention... By pursuing his own interest he frequently promotes that of society...."[19] 

          Exception is taken to this view when William Allen has one of his mice say that "the theory of trade tells us much about why and how trade takes place; it does not pass final judgment on the ultimate desirability of trade" [his emphasis].[20]  Some classical liberals will acknowledge that objects of trade can be illegitimate, and would agree, for example, with Richard Cobden of the early-nineteenth century Manchester School of Economics that a landlord shouldn't knowingly rent space for use as a house of prostitution. (Cobden’s point goes far beyond the relatively narrow issue of prostitution; it implies that market transactions should be subject to moral considerations.  This is a major qualifier.)

          Others see it as consistent with their voluntaristic principles, however, to say that it is none of the landlord's concern.  It is enough for our present purposes to see that, when speaking on a "macro" scale, the advocates of the closed-system don't hesitate to affirm that the market makes the best allocation of resources.  The next chapter will point to the logical fallacy in this, but that is not our present concern.

          What needs to be noticed now is that even though Mises and most economists argue that economics as a descriptive science has nothing to say about value judgments, so that science is one thing and preferences are something totally separate, the "optimum allocation of resources" concept does in fact introduce a massive value judgment in the course of describing how the market works.  This is no small matter.  It provides the basis for the often-heard argument that any deviation from unhampered free exchange, such as from "free trade" in international affairs, will "distort" the allocation of resources, introducing an "inefficiency" that produces a sub-optimum satisfaction of wants.  That it might do so is treated as a definitive argument against the action.  Nothing could better serve a theory of pure laissez-faire.  It is the linchpin of the closed system, since it provides a powerfully persuasive, virtually conclusive argument against anything that would alter or deviate from unhampered exchange.

          Emphasis on consumers.  Out of Mises's stress on "consumer sovereignty," we can see why the supporters of the current free trade, global economy school (in common with other "free trade" proponents historically) put their emphasis totally on consumer well-being, without any comparable preoccupation with the well-being of the same people in their role as producers and earners.  Recall George's point about the desirability of a "struggle for existence" among producers.  To this we can add Joseph Schumpeter's famous praise for the "creative destruction" that in effect welcomes burnt-out hulks all over the marketplace as those who don't satisfy the consumers fail.

          The assumption underlying this seemingly one-sided preoccupation is that the system as a whole works quite well.  Failures on the producer side can be tolerated, even welcomed, in such a dynamic setting.  Each failure is a passing phenomenon that doesn't go to the heart of the matter.  There is no reason to worry about people as they wear their producer hats, since that will take care of itself within the competitive framework.  A value judgment that mobility of location and of economic and social station is an accepted part of the system is certainly a part of it (in contrast to the traditionalist "conservative’s" love of long-lasting community ties and family attachments), as well as the expectation that the economy, with the vast majority of people in it, will thrive even though some fail temporarily.

          As mentioned in the preceding chapter, this emphasis on the consumer co-exists within classical liberal thinking with a rejection of the notion that there is a ready-at-hand “pie” to be divided, such as is presupposed by an outlook that looks mainly to “distribution.”  Clearly, the production side of the economy is important and not to be taken for granted, even though that production is left to arise out of a fierce competitive struggle.

          The role of supply-and-demand.  As the theory sees it, there is no such thing as unemployment in an “unhampered market economy” other than the "frictional unemployment" that occurs temporarily as someone moves from place to place or job to job.  "Supply and demand" adjusts everything on an on-going basis.  If, for example, there are a lot of people wanting to work but only a few jobs, the price of labor will be bid down to a level at which  entrepreneurs find it profitable to employ everybody who then still wants to work (some will have responded to the fall in wages by going elsewhere, either physically or market-wise by training for new skills, or by dropping out of the labor market).  In the absence of an out-of-kilter monetary system, the economy develops no long-standing maladjustments.

          The market has very few, if any, imperfections.  The argument that raged early in the nineteenth century between classical economists and critics of a market economy largely had to do with whether the market had flaws that kept it from working.  The occasion for David Ricardo’s  formulating his "law of comparative cost" was to counter the argument that some people (such as one country in international trade) might be better at everything than someone else, and hence would get all the business, leaving the others to starve.  Jean Baptiste Say formulated "Say's Law" (that each person’s production creates demand for what others produce) to counter the anti-market criticism that if one person produces something there may be no one to buy it. 

          In the twentieth century, classical liberals haven't been sold on the idea of "bargaining power disparities" as meaningfully vitiating the "act of exchange."  In this connection the commonsense of the American people, who do believe in bargaining power disparities, has overridden what I have called the "classical liberal underlay."   Most people do see that the parties to a transaction often aren't equally prepared to protect their own interests.[21]  This causes them to support a good many legal protections that classical liberals usually consider uncalled-for "interventions."  (In the next chapter, I will discuss the validity of the concept “bargaining power disparities.”)

          At the beginning of this chapter, I spoke of a difference of opinion among classical liberals about whether there is any problem of combinations or conspiracies-in-restraint-of-trade within a market economy.  In the closed ideological system, however, there is no dispute about it; its proponents are clearly on the side of the view that there can be no such imperfections.  They believe that government favoritism is the source of any such warpings of the market, since unrelenting competition would quickly wipe out any anti-competitive effort by firms unless they are shielded from it.  This becomes especially true in a global marketplace with its limitless competition.

          Wants are infinite, so there will never be any limit to "scarcity" and the need to satisfy consumers.  This thought picks up on a truism that was stated by economic theory long ago and that has certainly been descriptive of the world as we have known it.  Socialists and many environmentalists have argued that "people don't really need all the things that are made available to them in a consumer society," and that's a sentiment cultural conservatives are inclined to share.  Each may prefer a simplification that would restore a leisured pace to life and a variety of less gadget-oriented pleasures.  Such a view is bound to take on more significance as the new technology allows an ever-higher affluence, and it may be forced by the displacement of people from the market.  But until now the market-oriented philosophy has been able to point toward expanding wants, as things that once were considered luxuries (or hadn't even been thought of) come to be considered necessities.  We can see that there is vast room for upward expansion of desires in the context of technology's new possibilities.  And we also know that much of the world is a sink of poverty and unmet needs.  So the premise that wants are infinite remains a  good one as we go into the future.  (Whether, as is often assumed, this will provide unending demand for billions of unskilled workers, or even for billions of skilled ones, is much harder to affirm.)

         

These are the concepts that, along with a number of associated ideas, make up the conceptual system behind unwavering support for a “free market.”  We can readily see how they form a closed system, providing an answer to any objection.  I count many good friends among the holders of this body of ideas. 

          The conceptual system has some attributes that are poorly suited to classical liberal philosophy and that are especially important today because they may reinforce any unwillingness to adapt.  Here are some:

          Much of the closed-system's argumentation is put forward adversarially, as a lawyer does who is "building a case."  This lack of objectivity weakens its intellectual quality.  The writing tends to be for an audience of true believers, who see doubts or introspections as weakness.  It follows that there is often an unwillingness to give credit to other views.  (This is a common human failing, and one that the Left has also been guilty of for many decades about ideas other than its own.) 

          It is no wonder, then, that intellectual shallowness discolors the system of thought.  In the twentieth century, the thinkers behind almost every philosophy have finely-honed each concept, exploring nuances that weren’t thought of in the nineteenth century.  But this hasn't been true of the market philosophy, which has stayed almost exactly where it was a century ago.  Little new thinking is given to any of its concepts, and very little to the legal, institutional, cultural and moral prerequisites of a market society.  Those are taken as givens that don't need further thought.

          The vastly increased role of the federal government in the United States in its response to the economic crisis of 2008-9 gives classical liberals a legitimate reason for concern.  This should not obscure an important criticism: the fact that despite all of the cultural change of the past half-century, the central preoccupation of American conservatives has been with the growth of government.  Their preoccupation has been with issues identical to those in the 1950s, even years after the New Left and its aftermath brought on the "culture war" by so many attacks on the society.  When the United States is condemned for having displaced the American Indians from the continent, or for having created “concentration camps” when it evacuated the Japanese-Americans from the west coast during World War II, or for historically “being racist in lynching blacks," almost nobody in today's "conservative movement" looks back to study what really happened and why, which is essential if the country is to retain an accurate memory of its past. This default is in part due to the myopia of the ideological closed system, since its enthusiasts have little inclination to see anything outside its circle. 

          This inability prevents concern about values that the system doesn't accommodate. Thus, the system lends itself to the world-cosmopolitan outlook that cares nothing for national or cultural values. It is the perfect philosophy for the multinational businessman's denigration of national loyalty, and will remain so as long as it continues as a closed system.

          Part of the shallowness comes from a confusion of theoretical economic models with reality. Recall the example above about how supply-and-demand is expected to lead to adjustments that will clear the market of everything that is offered for sale.  "If there is a large supply of workers, wages will fall until it becomes profitable for entrepreneurs to hire the full supply."  No doubt that is exactly the way the theory’s models say things will work; and it is fine as model-building, which is a way of conceptualizing.  But the model doesn't seek directly to replicate reality.  To understand what happens in fact, it is necessary to ask "how long will it take for entrepreneurs to see the profit opportunity and to respond to it?  How long to raise the capital, to establish the organizations?  How low will wages go, and with what effects on the society?"  Economic theory doesn't speak to these questions; it only predicts a "tendency" for some entrepreneurs to spot profit opportunities and move toward them. One would never know this from the sugar-coated descriptions in the free-trade literature. 

          The same shallowness is seen in the expectation of human rationality.  The theory realizes that rationality and perfect knowledge are hypotheticals, inserted so that it becomes possible to deduce the behavior that will follow if they are present.  (The Left is mistaken when it attacks the theory's use of such constructs as part of its criticism of the theory.  It is like criticizing a mathematician for using the concept of a perfectly straight line.)  But often these theoretical constructs are used as though they describe reality, which they don't.  A good example is the recent enthusiasm in libertarian literature for "free banking," in which totally unregulated banking is projected to be disciplined by the ever-watchful eye of the marketplace.  Friedrich Hayek's ideologically purist side is perhaps best revealed by his work in this area. 

          But how is it possible to think that "the market" is capable of exercising a splendid attentiveness when we see all around us situations in which economic actors, even in the most competitive situations, are acting half-blind (and continue to do so over many years)?  An example would be having a home built in a large city where there are many contractors.  In the United States, no industry is more laissez-faire than home construction.  The assumption of market rationality would predict that the contractors who serve consumers well would be rewarded and the bad ones forced out.  My experience as an attorney tells me it just isn't so.  It may not be necessary to supply these examples, since the events leading up to the economic crisis of 2008-9 have amply demonstrated what a weak reed it is to rely on “rationality” as a sure guide.  Billions of dollars of “derivatives” were purchased by sophisticated investors with their “due diligence” amounting the relying on credit rating agencies that were fixated on prices always going up.  

 

This provides a warning.  The market ideology in its currently popular form is the one that will most resist the changes needed to meet displacement and polarization. Failure to adapt will be a tragedy, not the least for those who are devoted to “a free society.”  Those who are inclined to make the necessary adaptation will welcome the next chapter, where we will critique the concepts mentioned here.

 

 

ENDNOTES