Diane Coyle — 'Free' markets

The rhetoric of ‘free markets’ is misleading.

I certainly agree with this last point, as does anybody who (like me) has spent some time as an economic regulator (the UK Competition Commission in my case). Modern economies are highly regulated, and that goes for the Anglo-Saxons as much as anyone else.

The Enlightened Economist

Free’ markets
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Chris Dillow — Free Markets Need Equality

I would change the title by replacing "equality" with "symmetry."

There’s one thing that’s crucial – equality [symmetry] of power. For free markets to have public acceptance, the worst-off must have bargaining power. Without this, “free” markets merely become a device for exploitation.

The basis of economic liberalism is free markets and free trade.

Classical and neoclassical economics provided the foundation of economic liberalism historically. Classical and neoclassical economics assume perfect competition. Perfect competition is vitiated by asymmetries, especially asymmetry of power and information. Perfect markets also presume symmetrical opportunity of participants.

Concentration of capital vitiates these assumptions of economic liberalism about free markets and free trade. Capitalism is about favoring capital as an economic factor on the assumption that growth is chiefly a function of capital formation. This disadvantages labor (workers) and land (the environment).

Owing to the economies of scale, free market capitalism leads to concentration of capital in fewer and fewer hands, which leads in turn to monopoly and monopsony in economics and oligarchy and plutonomy in politics. This vitiates both economic liberalism and political liberalism.

Free market capitalism based on economic liberalism is antithetical to the foundations of liberalism.

This is one of the chief paradoxes of liberalism.

There is no way to generate a truly liberal system, which involves integration, when one factor is favored over others.

As Aquinas said at the outset of De ente et essentia, paraphrasing Aristotle, "A small mistake at the beginning becomes a large by the end."

The inference here is, for me, obvious. If you are serious about wanting free markets you must put in place the conditions which are necessary for them – namely, greater bargaining power for tenants, customers and workers. This requires not just strong anti-monopoly policies but also policies such as a high citizens income, full employment and mass housebuilding.

In short, free markets require egalitarian policies. Free marketeers who don’t support these are not the friends of freedom at all, but are merely shills for exploiters.

Stumbling and Mumbling
Free Markets Need EqualityChris Dillow | Investors Chronicle

Nick Johnson — Free-market policies rarely make poor countries rich (Ha-Joon Chang’s Thing 7)

These telling extracts from Ha-Joon Chang‘s 23 Things They Don’t Tell You About Capitalism come from ‘Thing 7’ (p. 63-5):

[the country described above]…is the USA, around 1880…one of the fastest-growing – and rapidly becoming one of the richest – countries in the world…[following] policy recipes that go almost totally against today’s neo-liberal free-market orthodoxy.”

When the US was developing in the 19th century, the British economy was dominant and the British system was therefore the model. However, developed the American system to counter it as more suitable for an emerging economy, initially under the aegis of Alexander Hamilton. Hamilton sought to emulate the aspects of the British system that were useful to the developing US, but to adapt it and add methods that would be more appropriate for current conditions.

The Political Economy of Development

Free-market policies rarely make poor countries rich (Ha-Joon Chang’s Thing 7)

Nick Johnson

Martin S. Feldstein — Why the U.S. Is Still Richer Than Every Other Large Country

Will America maintain these advantages? In his 1942 book, Socialism, Capitalism, and Democracy, Joseph Schumpeter warned that capitalism would decline and fail because the political and intellectual environment needed for capitalism to flourish would be undermined by the success of capitalism and by the critique of intellectuals. He argued that popularly elected social democratic parties would create a welfare state that would restrict entrepreneurship.

Although Schumpeter’s book was published more than 20 years after he had moved from Europe to the United States, his warning seems more appropriate to Europe today than to the United States. The welfare state has grown in the United States, but much less than it has grown in Europe. And the intellectual climate in the United States is much more supportive of capitalism.

If Schumpeter were with us today, he might point to the growth of the social democratic parties in Europe and the resulting expansion of the welfare state as reasons why the industrial countries of Europe have not enjoyed the same robust economic growth that has prevailed in the United States.

What's wrong with Martin Feldstein's argument?

First, he defines national wealth based on real GDP per capita regardless of distributional effects. Biased and skewed away from distributed prosperity.

Secondly, he proposes no rigorous method for identifying causal factors, determining their relationships and priority of importance, and isolating confounding factors. Methodologically unsound.

Thirdly,  it is blatantly political. A view of economics is used to promote a political viewpoint. Ideology rather than science.

He knows better. Fail. A grade for persuasion based on ideology though. It even appeals to authority (Schumpeter). And Feldstein is also using his own authority to persuade.

Harvard Business Review
Why the U.S. Is Still Richer Than Every Other Large Country

Martin S. Feldstein | George F. Baker Professor of Economics at Harvard University, and the president emeritus of the National Bureau of Economic Research

Lord Keynes — Trump on the Free Market

When was the last time a Republican president was so hostile to free trade and dismissed the usual “free market” apologetics as the “dumb market”?

It would be so much better if he had said something like this:

“I love free trade in principle, OK? But, in practice, we just don’t have it, OK? We just don’t have it. Everybody cheats. China cheats. Japan cheats. The Europeans cheat. So therefore we need to be smart, and have fair trade, and protect American jobs and manufacturing. And, if we need tariffs, then that’s smart trade.”

Social Democracy For The 21St Century: A Post Keynesian Perspective
Trump on the Free Market
Lord Keynes

Blake Smith — Slavery as free trade

For nearly four centuries, the Atlantic slave trade brought millions of people into bondage. Scholars estimate that around 1.5 million people perished in the brutal middle passage across the Atlantic. The slave trade linked Africa, Europe and the Americas in a horrific enterprise of death and torture and profit. Yet, in the middle of the 18th century, as the slave trade boomed like never before, some notable European observers saw it as a model of free enterprise and indeed of ‘liberty’ itself. They were not slave traders or slave-ship captains but economic thinkers, and very influential ones. They were a pioneering group of economic thinkers committed to the principle of laissez-faire: a term they themselves coined. United around the French official Vincent de Gournay (1712-1759), they were among the first European intellectuals to argue for limitations on government intervention in the economy. They organised campaigns for the deregulation of domestic and international trade, and they made the slave trade a key piece of evidence in their arguments.

For a generation, the relationship between slavery and capitalism has preoccupied historians. The publication of several major pieces of scholarship on the matter has won attention from the media. Scholars demonstrate that the Industrial Revolution, centred on the mass production of cotton textiles in the factories of England and New England, depended on raw cotton grown by slaves on plantations in the American South.

Capitalists often touted the superiority of the industrial economies and their supposedly ‘free labour’. ‘Free labour’ means the system in which workers are not enslaved but free to contract with any manufacturer they chose, free to sell their labour. It means that there is a labour market, not a slave market.

But because ‘free labour’ was working with and dependent on raw materials produced by slaves, the simple distinction between an industrial economy of free labour on the one hand and a slave-based plantation system on the other falls apart. So too does the boundary between the southern ‘slave states’ and northern ‘free states’ in America.

While the South grew rich from plantation agriculture that depended on slave labour, New England also grew rich off the slave trade, investing in the shipping and maritime insurance that made the transport of slaves from Africa to the United States possible and profitable. The sale of enslaved Africans brought together agriculture and industry, north and south, forming a global commercial network from which the modern world emerged.

It is only in the past few decades that scholars have come to grips with how slavery and capitalism intertwined. But for the 18th-century French thinkers who laid the foundations of laissez-faire capitalism, it made perfect sense to associate the slave trade with free enterprise. Their writings, which inspired the Scottish philosopher Adam Smith’s Wealth of Nations (1776), aimed to convince the French monarchy to deregulate key businesses such as the sale of grain and trade with Asia. Only a few specialists read them today. Yet these pamphlets, letters and manuscripts clearly proclaim a powerful message: the birth of modern capitalism depended not only on the labour of enslaved people and the profits of the slave trade, but also on the example of slavery as a deregulated global enterprise.…

Powerful article.
AEON
Slavery as free trade
Blake Smith | PhD candidate in history at Northwestern University in Illinois and the School for Advanced Studies in the Social Sciences in Paris

Let's stop right now talking about the fictional "free market." Newsflash, there is no free market.

The "free market." Who invented this phrase? Whoever did should get an award for marketing.

That's because there's no such thing as the free market. There never was. Everything is policy driven and that means governments, authorities and large enterprises decide what happens. Before that, armies and conquerors.

Where do people think they live anyway? On the moon?

We all live in nations and that means there are laws, rules and policies. It's the governments, authorities, rulers, etc, that make the rules and they're usually the rules of those who "rule," which, increasingly, has come to mean large corporations or the very wealthy and powerful.

So please, this phrase--the FREE MARKET--let's ban it from our lexicon for good. Or, at the very least, put it in children's fairy tale books.

Bill Mitchell — The government really is instrumental in creating growth

Sometimes one reads a press article that is so obviously misleading that it is hard to know where to start with it. But perhaps the conclusion is the best place to start sometimes. Such is the case of a Bloomberg article (January 15, 2016) – What #ResistCapitalism Gets Wrong – written by American academic Noah Smith. Basically, the article attempts to attribute all of the post-Second World War prosperity to the “free market economy”, which he says is “a term many use synonymously with ‘capitalism’”. By the end of the article we learn that in fact that prosperity does not come from ‘free market’ liberalisation and that strong governments are essential for growth and reductions in inequality. The “boring old mixed economy” where, in Noah Smith’s words “government really is instrumental in creating growth”. Start with the conclusion and read backwards is my advice in this case.…

Bill smacks Noah down for purveying conventional wisdom by setting for the facts. But Bill admits that Noah finally comes around in the end and wishes he had begun the post that way.

Considering that the post appeared in Bloomberg View, I think there's a good chance that Noah suckered his audience in with confirmation bias by reiterating the conventional nostrums about "the free market" as synonymous with "capitalism," and then turned it on them in the end. If that is the case, it was a good job of persuasion.

Bill Mitchell – billy blog
The government really is instrumental in creating growth
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

John Komlos — 15 Curses of Unregulated Markets

Markets don’t work the way economics textbooks say they do. While I do believe in the power of markets to cultivate social good, they have many natural limitations that any credible scientific approach must recognize for public policies to be effective. Listed here are fifteen curses—yes, I call them curses—that markets must deal with to work as the textbooks say they do.

Evonomics
15 Curses of Unregulated Markets
John Komlos | Professor Emeritus of Economics and of Economic History at the University of Munich 

Mark Thoma — The Problem with Completely Free Markets

Some weekend reading.

Econ 101 — because some people need constant reminding of the difference between so-called free markets and genuinely competitive markets. 

Mark Thoma reminds that government institutions and supervision are required for competitive markets. Markets "free" of government "intrusion" are not likely to be competitive, and imperfect competition constitutes market failure, e.g., rent extraction based artificial market power.

The Fiscal Times | Opinion
The Problem with Completely Free Markets
Mark Thoma | Professor of Economics, University of Oregon

Peter Radford — Is Economic Orthodoxy Anti-Democracy?

Yes it is.

The explanation is found in the genesis of classical economics and then in its idealization of the marketplace.

"It's the assumptions, stupid."

The Radford Free Press
Is Economic Orthodoxy Anti-Democracy?
Peter Radford

The Economist — John D. Rockefeller Defended [Review of Titan: The Life Of John D. Rockefeller Sr. By Ron Chernow]

Nowadays, says Ron Chernow, most people imagine that American businessmen believe in competition. In fact, as he shows, in his thorough and thought-provoking biography of the greatest businessman in American history, combination has been as constant and perhaps as creative a force in the history of capitalism as competition. 

“It was forced upon us,” John D. Rockefeller said. “We had to do it in self-defence. The oil business was in chaos and daily growing worse.” And he spelled out his economic credo in words that were as shocking in the 1870s, when he built his great combination, or in the 1890s, when he had to defend it against the attacks of the muckrakers, as they may be to free-market theorists today. “The day of combination is here to stay. Individualism has gone, never to return.”...

Mr Chernow has written a worthy biography of a truly titanic figure. He conceals none of the seamier side of Standard Oil's practices, but his overall view is sympathetic. In his opinion the vast accumulation of Rockefeller's fortune and the almost equally fabulous disbursements of his philanthropy were not in contradiction, but were two sides of his Protestant capitalist ethos. “Many of Rockefeller's critics alleged that he divided his life into compartments and kept two separate sets of moral ledger books: one governing his exemplary private life, another sanctioning his reprehensible business behaviour,” Mr Chernow writes. “But he saw his entire life guided by the same lofty ideals.”

 Like Ayn Rand, he must have liked Nietzsche, too.

"Combination" = oligarchy, cartel, trust

The Economist
John D. Rockefeller Defended

Peter Radford — Adam Smith – Socialist?

It is, apparently, not odd to attend classes in a business school and learn all about modern microeconomic theory. The lessons hammer away at efficiency and marginal pricing. They drill home the arguments about efficient markets, especially those that relate to capital. And they go on about the great laws of supply and demand that operate in the timeless vacuum of a market uncluttered by human frailties.

Then off go the students to be drilled into how to make those very frailties into weapons for profit. These other lessons are about how to impede the free market by rigging the game, and by building ‘barriers to entry’, by enforcing patents and copyrights, by eliminating competition, and by interfering in the labor markets to reduce wage bills.

What is learned in a business school education is almost exactly a negation of what is taught to economics students. Both sets of students are taught the wonders of market magic, but then the business school students are taught a myriad tricks to defeat that magic in order to produce long term profits and rents unsustainable under a true market magic regime. Only the economics students, cut off from reality as they are, continue on blissfully unaware that their magical world is being riddled with holes dug by their business school peers.

Peter Radford asks,

Should society be indifferent to profit levels but scandalized by higher wages? Does a rise in the minimum wage undermine employment the way the economists preach? If so, does not high profit?

Smith certainly seemed to know the answer. I will leave it to you to think about. I know what I think.

Real-World Economics Review Blog

Adam Smith – Socialist?
Peter Radford

David Edwards — Fox Business’ John Stossel ‘upset’ poor people aren’t selling kidneys for $1,200 (via Raw Story )

Fox Business’ John Stossel ‘upset’ poor people aren’t selling kidneys for $1,200 (via Raw Story )

Libertarian Fox Business host on Thursday said he was outraged that most government services like the military and “organ selling” had not been turned over to private business. In a segment titled “Time to Privatize,” Stossel told the hosts…

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Daniel Little — Friedman on racial discrimination

Daniel Little buries Milton Friedman's argument in Capitalism and Freedom on the free market as the antidote to racism.

Understanding Society
Friedman on racial discrimination
Daniel Little | Chancellor, University of Michigan at Dearborn

What's wrong with Friedman's argument is that it doesn't fit the evidence. 

Why it is wrong is more significant. It is wrong because the choice of methodological individualism rests on an implicit assumption of ontological individualism, which is an erroneous assumption as shown by life and social science. It is also rejected by long-standing tradition. Aristotle defined human being as social in Polítics, 1253 a 2.

Hunter — Conservative guns-in-schools plan runs afoul of the insurance industry

The market gods speak. Conservatives feel the corporate power:

Now the private insurance industry is balking at conservative notions of putting guns in schools because they're not buying the conservative line that arming teachers or other employees will make the buildings safer places to be in. On the contrary, the insurance companies are estimating that it would cost them considerably more money in payouts, enough money that they'd rather drop policies entirely than try to insure that mess.

So another conservative utopia is threatened by, of all things, the very corporations that they vow we should treat as gods. When you have to turn a profit, you see, you tend to look on these things with a rather colder eye than the conservative legislators who demand the thing merely as ideological stance; sorry, state lawmakers, but the Free Market ain't buying it. The Free Market, in its infinite and infallible wisdom, has determined that arming schoolteachers is a measurably bad idea. By the transitive property of Corporate Awesomeness, this means conservatives now have to drop that idea and come up with something less freaking insane.

Daily Kos
Conservative guns-in-schools plan runs afoul of the insurance industry
Hunter

Mark Thoma — 7 Important Examples of How Markets Can Fail

Omitted the one that Bill Black has been documenting — white collar crime, the creation of criminogenic environments, and control fraud. The global financail crisis can be traced largely to this as the chief causal factor.

Enron and Bernie Maddoff were not outliers. Jailing Martha Stewart for insider trading was a joke.

The Fiscal Times

7 Important Examples of How Markets Can Fail
Mark Thoma | Professor of Economics, University of Oregon

Rowan BosworthDavies — How the legacy of Thatcher and Reagan made the 2008 financial crisis inevitable

The consequences of Thatcher and Reagan's Friedman and Hayek-inspired free market utopianism and market fundamentalism. Adds more detail to Bill Black's exposé.

Max Keiser
How the legacy of Thatcher and Reagan made the 2008 financial crisis inevitable
Rowan BosworthDavies

Chris Dillow — Jungles, Matches & Optimality

What I'm edging towards here is a point made (pdf) - in a different context - by Amartya Sen, that Pareto optimality isn't as great an ideal as economists think.If you can't abolish slavery without making slave-owners worse off, then slavery is Pareto optimal.

Stumbling and Mumbling
Jungles, Matches & Optimality
Chris Dillow | Investors Chronicle (UK)

Lynne Kiesling — “Free Market Fairness” and self-authorship

John [Tomasi]’s project is laudable — rediscover and synthesize common ethical ground between the two dominant branches of classical liberal thought. Roughly speaking, the bifurcation into what John labels “libertarianism” and “high liberalism” arose out of John Stuart Mill’s argument for the treatment of economic liberty as less essential than other civil liberties.

Thus the two branches of thought bifurcate from the classical liberalism tree trunk: modern libertarianism, which prioritizes property rights and economic liberty as foundational to all other civil liberties (e.g., Rothbard), and high liberalism, which picks up Mill’s moral demotion of economic liberty and builds upon it to justify a substantial government apparatus for regulation and intervention in the private economic decisions of individuals, with the stated objective of designing a social system that will generate benefit particularly for the least advantaged in society (Rawls’ operationalization of the maximin principle).

Read it at Knowledge Problem | Commentary on Economics, Information, and Human Action
“Free Market Fairness” and self-authorship
Lynne Kiesling | Distinguished Senior Lecturer in the Department of Economics at Northwestern University. At Northwestern she is also a Faculty Member in the Northwestern Institute on Complex Systems (NICO) and a Faculty Affiliate in the Center for the Study of Industrial Organization (CSIO)

Most provocative paragraph:

Ironically, actually, one justification often offered for this regulatory system is to maintain uniform treatment of residential customers in a way that will ensure that prices stay low and stable for “vulnerable” consumers such as elderly and low-income consumers; this justification sounds Rawlsian. But it also does constrain the self-authorship of other consumers, producers, and innovators in ways that may make them worse off, and moreover, if those others were allowed choice and freedom of expression through their technology and energy consumption decisions, they may bring about a world in which new products and services actually drive down costs or create unanticipated value that could benefit those vulnerable consumers. Is that tradeoff worth it, ethically or economically?

What is questionable here is the "may." Evidence seems to point in the direction of the most vulnerable becoming worse off through deregulation initially with out some countervailing action like a subsidy.

What is the evidence that they "may" be benefited in the long run. What does that mean exactly? What are the social costs in the meanwhile even if it does transpire some time out? Is there a realistic estimate of a time frame? What evidence is it based on?

The basic contention between Libertarianism and Liberalism revolves around this issue. Libertarians claim that government intervention is less efficient than "economic freedom" and that given a chance laissez-faire will also be more effective at meeting social goals. Liberals are skeptical of the claim based the objection that they see little evidence for it, and much more evidence of abuse, so they suspect it is based more on ideological preference stemming from norms than on factual analysis.