Free markets: a proposed trade

Since the collapse of the US financial system became undeniable, I’ve been struck by the number of people insisting that this has no implications for free-market policies because the US (and particularly its financial sector) is not truly a free-market economy. [1]

In the spirit of market economics, I want to offer a trade to all such people. I will agree that
(a) the US is not a free-market economy, and its failures do not constitute evidence against the claim that a pure free-market economy is the best possible form of social organization
(b) no other actually existing society is, or has ever been, a free-market economy, and no actual or conceivable events anywhere constitute evidence against the claim that a pure free-market economy is the best possible form of social organization
(c) In discussion with parties to the agreement, I will not contest the claim that a pure free-market economy is the best possible form of social organization

All I ask in return is that the counterparties to the deal agree not to advocate, oppose, criticise, or comment on any policy or political position that might actually be implemented, to ensure that the purity of the free-market ideal is not compromised by actual experience.[2]

fn1. Since I haven’t checked, I’ll assume that this set of people has zero overlap with those I once debated who insisted that the supposedly superior performance of the US economy over social-democratic competitors demonstrated the superiority of free market economics.
fn2. I’m willing to make the same offer to Marxist-Leninists and (two for the price of one) to combine both offers for free-market Marxist-Leninists

25 thoughts on “Free markets: a proposed trade

  1. “My people and I have an arrangement: they can say what they like and I can do what I like” – Frederick the Great.

    Seriously, what sort of empty deal is that, in which you concede every principle on the condition that nothing be admitted in furtherance of those principles?

  2. Umm, that was kind of the point. The position these guys are taking makes nonsense of any substantive policy argument they might make, since any change that does not achieve the goal of a pure perfect market (say, a shift from a social-democratic to a US style system) is just as likely to make things worse as to make them better.

  3. The free market polemicists have the advantage that their position can never be tested and is therefore unfalsifiable. In other words, it is faith.

    In the case of many who post here, there is the added bonus faith we have been damned because people have been listening to the false prophets, instead of the True Prophets, the Austrians.

    This is pure Old Testament. Only the names have been changed.

  4. JQ, can I assume you are, broadly speaking, a “Keynesian”, at least in the senses you implied in your Fin article? Do you think Keynesianism failed to some extent in the 1970’s (stagflation etc.) or do you think western governments failed in to keep to a reasonably Keynesian approach?

    These are not rhetorical nor Dorothy Dix style questions. I am genuinely interested in your ideas on these points.

    My position is basically that of advocating social democracy plus a Keynesian approach. I’ve read Wealth of Nations and Das Kapital Vol 1 and part of Vol 2 (some time ago) but not Keynes works. My knowledge of Keynes’ broad theory is second hand and related mainly to the idea of counter-cyclical goverment spending and the general idea firm but not suffocating government regulation of the financial system.

    I also feel an affinity to the ideas of the Newcastle “Coffee mob”; namely that practical experience shows an approx. 80-20 allocation (80% private – 20% public) through the economy gives us a realistic best-of-both-worlds; namely the best of capitalist dynamism melded with worthwhile social-democratic goals. Do you have a position on this?

    Finally, do you agree with the “Coffee” (Centre of Full Employment and Equity) analysis that running chronic government surpluses is the (or a) major determinant of growing private debt, especially consumer debt? I am very interested in your answer on this one.

  5. I think this really misses the point John. The argument wasn’t “the US isn’t a real free market so the crisis can’t be blamed on free markets”, it was “government intervention lead directly and clearly to the crisis”. Only an Anarchist could be a counter-party for your trade and I don’t see much incentive for them to take it up.

    It is very slippery of you to suddenly claim the middle ground here as a pragmatist against unreasonable ideologues on the left and right. Your argument, as far as I can make it out, is well on the fringe of economic thinking and clearly ideologically motivated. I don’t think this is a bad thing at all, quite the opposite, but you give up the right to criticize other ideologues for arguing from their ideology.

  6. John, you’re suffering a “basis mismatch” with your proposed trade, because none of the freaks you want to trade with will agree with what your commonly used terms mean.

  7. “Your argument, as far as I can make it out, is well on the fringe of economic thinking and clearly ideologically motivated.”

    Poll many economists to come to that conclusion?

  8. Sj makes a valid point.

    After my recent argument that “socialism” has become a meaningless term I’m reluctant to say this, but I’m inclined to decline in future to debate the supposed benefits (or evils) of “free markets” with anyone unless they can provide an objectively measurable definition of what “free markets” are.

  9. John is chopping and changing for effect. A lot of what has been said by him is (allegedly) about neoliberalism, which does not prescribe fully unregulated markets (which I assume to be “purely free” in John’s language). In very general terms, neoliberalism prescribes regulation to a lower degree than, say, social democracy, but it prescribes regulation nevertheless. It’s astonishing for John to claim the moral high ground on this in view of his triumphalism and misrepresentation of those with a more balanced perspective (ie. those of us recognising the ways in which government has contributed to this mess).


  10. #4 Keynesianism failed to a significant extent in the 1970s. Broadly speaking, Friedman’s critique, based on expectations, was correct. But, after incorporating this critique, Keynesian economics remains an important part of the mainstream view on macro, and Keynesian ideas still largely guide short-term macro policy.

    I have a lot of sympathy with most of what you say. I haven’t seen the “coffee club” argument on debt before, but I’m not immediately attracted to it. After all, the US has both large government deficits and growing consumer debt.

  11. I find the use of the word “free” in phrases like “free-markets” and “free-trade” can be rather vague. Perhaps these terms should be thought of as weasel words.

  12. Isn’t the situation a little like the 80’s fashion of one size fits all. People were clothed but often had clothes that fitted badly.

    Much of the financial system has also been fitting badly but like the Beau Brummels of the 80’s nobody could change that fashion – because of the status attached to it.

    A mixed economy with elements of choice and protection requires leadership with ethical values and intelligence. Any system requires faith – however a system which allows those with power and money to aggregate ever larger amounts of both without checks will result in a situation akin to robber barons or piracy.

  13. As Joe said… this is a disingenuous offer. If a crisis is caused by government intervention, then the problem is government intervention. Whether the US is or is not relatively free market is irrelevant.

  14. Joseph nails it, and Quiggin ignores him. A pity – it would be nice to see his response. Then again, maybe this post was just trolling disguised as snark, and isn’t meant to be defended.

  15. #10 is it really coherent to admit Friedman’s critique but still claim the broad validity of Keynesianism? I can’t see how you integrate the two.
    Why not go for an economic history approach, which might suggest that stagflation had more to do with oil price shocks and the resultant printing of “petrodollars” and abandonment of Bretton Woods currency pegging?

  16. I’d say, rather, that Joseph nailed most of it. I like the terminology that Rafe used, over at ClubTroppo, that the US meltdown resulted from a “witches brew” of factors, including government intervention/regulation as well as the animal spirits of actors in the market place.

    Whatever the precise weight that each of the multiple contributing factors deserve, it is clearly simplistic in the extreme to assert or imply, as Q has, that the meltdown reveals the failure of ‘free market’ policies.

    Further, contrary to the implications of Q’s post, the fact that the US is not a free market, and that such a thing exists only in text books, does not mean the merits of ‘free market’ policies cannot be sensibly and usefully discussed and analysed. Certainly, direct observations of the effects of a free market is not available to us, but that does not mean that one cannot make reasonable inferences about those effects from other evidence, together with theory.

  17. I wasn’t addressing my offer to those making claims (really, talking points since no analysis supporting them has been offered AFAIK) that specific government interventions (for example the Community Reinvestment Act) caused the crisis. Such claims are, however, easy to refute. CRA was a nonbinding constraint, and in any case far too small to contribute much here.

    My objection was to people making the more generic observation that since the US market is not perfectly free, the failure of most of the mechanisms normally expected in a free market financial system (ratings agencies, risk management by banks, derivatives markets and so on) doesn’t enable us to make inferences that free market policies have performed poorly here.

  18. “My objection was to people making the more generic observation that since the US market is not perfectly free, the failure of most of the mechanisms normally expected in a free market financial system (ratings agencies, risk management by banks, derivatives markets and so on) doesn’t enable us to make inferences that free market policies have performed poorly here.”

    That sounds like a reasonable point to me.

    Can Humphreys et al finger the Government for the woeful performance of rating agencies, for example? What about poor risk modeling done in the private sector?

    I note that those who peg the blame partly or wholly on bad regulation on forums such as this have made very little effort to spell out what they mean and attempt to quantify it.

  19. For the record, Melaleuca, I am not a general supporter of free markets, and so do not belong in the Humphreys et al camp in that respect. But to quote from one member of that camp (Rafe, over at Troppo):

    … the problems can be traced to a witches brew of causes including over-complicated (and hence ineffective) regulations, moral hazard (knowing the Government will eventually come to the party with a bailout), other regulations that mandate loans to bad risks and old fashioned irresponsible borrowing (yes, and irresponsible lending).

    Various commentators have ‘unpacked’ such comments in greater detail, and I will leave it for others to do so here.

    But to your point of whether such people have ‘quantified’ the extent to which government intervention caused the meltdown. No doubt the answer is no. But equally, one could ask whether those claiming that the meltdown undermines the case for free market policies have quantified the extent to which the actions of market players, independent of the effects of government policies operating on them, caused the meltdown. Again, the answer would problably be ‘no’.

    But even if one were to arrive at an answer to these questions in this particular episode, that would only be the first step in proving the general superiority of alternatives to free markets.

  20. Tom N, to say that Rafe’s analysis is vague and nonspecific would be charitable. Rather than “leave it to others” perhaps you could spell out your explanation.

    I’m happy to concede the significance of moral hazard, in the sense that everyone knew that in the event of a really big blowup, the losses would be shifted either because the authorities would bail the system out or because of the operation of bankruptcy laws.

    But unless you propose abolishing bankruptcy and allowing financial collapse (quite possibly Rafe’s view) this doesn’t help you. You need to match these interventions with further measures to stop protected institutions engaging in high-risk moral hazard. This is something the US system failed to do.

    I agree with your last para, but I think it’s pretty clear that this episode does justify the first step you describe.

  21. “How much is 800 billion dollars – is mathematical economics busted”

    When I look at my dollar coins I note that a small heap of 4 measures one centimetre. So a pile of coins worth $400 would reach 1 metre. But there are 2 billion such piles in the $A800 billion being sought by George Bush. This is 2 million kilometres! That was the size of George Bush’s bailout.

    The moon is less than a million kilometres away. In fact George Bush’s bailout, in dollar coins, would reach the moon 5 times with some left over. $800 billion will not fit into my calculator.

    Rudd’s bailout of 2 billion, though small in comparison, still represents a diversion of dollar coins that would extend to 5,000 kilometres.

    What sort of economic theory, economic modelling or econometric equation ever noted the existence of this gap in their numbers?

    What do our mathematical economists say now? What sayeth the ORANI oracle now?

    I suppose they should look to so-called “free market Marxist Leninists� but they would have to blow the dust from their books and the rust from their brains.

    Chris Warren

  22. Re #10. JQ, Several commentators were not happy with my comments about the Nobel Prize winner, M. Friedman. Given your statement about M. Friedman having introduced expectations, I take the opportunity to refine my criticism.

    I concede M. Friedman has introduced ‘expectations’ into macro-economics. However, this is not all. He promoted at the same time his ‘view’ as to what these expectations should be. The ‘view’ is, IMO, late 19th century general equilibrum thinking. Furthermore, M. Friedman totally ignored the financial sector. Keynes did not.

  23. John I don’t agree with what you are saying here. Your contention is based on a false assumption. What most free market advocates claim is that the more you free an economy then the better outcomes seem to follow. This is certainly verifiable over the course of history.

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