By eliminating the analytical straightjacket imposed by neoclassical economics, economists could have a lot more to offer about how to improve the world. They would start thinking about changing preferences, not just incentives. FULL ARTICLE by Edward Strigham and Jeffrey Rogers Hummel
Source link: http://blog.mises.org/13777/if-a-pure-market-economy-is-so-good-why-doesnt-it-exist/
If a Pure Market Economy Is So Good, Why Doesn’t It Exist?
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This was a good article, I enjoyed reading it. I don’t actually agree with it, but I was glad to see the criticisms of Cowen’s ideas, and I think it’s a good contribution to the topic in general. I was actually discussing many of these things with a friend the other day – reading this was a perfect supplement to that conversation. Thanks.
Thanks for the interesting, well-reasoned and well-written article. However, I’m still a pessimistic friend of anarchy. I think optimistic friends ignore the realities of human nature. Human nature is not a blank slate upon which parents or society writes. Parenting should convince anyone that humans are born with a tendency toward evil. This is the ancient Christian idea of original sin, but even agnostics like Mises recognized that humans are wild animals unless domesticated. That domestication requires good parenting, education and religion. Anarchists can achieve the first two, but are totally unarmed to do battle with the last one.
Freedom requires institutions that support it, and institutions are determined by culture, but religion (or lack of) is the dominant creator of culture. Religion gives us our worldview, or paradigm for organizing the world. But worldviews are extremely difficult to change. Public relations research divides thought into opinions, attitudes, and worldviews. Opinions are easy to change and the target of almost all advertising. An example of an opinion might be which brand of toothpaste to buy. Attitudes are more ingrained. An attitude example might be the choice of whether to brush one’s teeth or not. It’s a healthcare issue and requires a major emotional event or years of counseling to change. Smoking is an attitude issue. Education can change attitudes, but it takes a long time.
Worldviews are an entirely different matter. Worldviews are so deeply ingrained in us that only major crisis events can change them. Religion is a worldview thing. That’s why cultures change very slowly and when they change it’s usually a major crisis that provides the catalyst. Here are some examples: The former communist nations are now open to freer markets, but they didn’t change until the experienced mass starvation, as in China in the 1960’s, or came close to it as in the former USSR and Eastern Europe.
Classical liberalism was forged in the fires of the Reformation and its mass slaughter at the hands of states and in war. The first modern, free nation was the Dutch Republic, which suffered decades of slaughter of Protestants at the hands of the King of Spain followed by an 80-year long war for independence. That crisis gave birth to a respect for freedom and opposition toward coercion in religion first and economics later. At the same time, the leadership of the Dutch Republic was devout Erasmian (not Calvinist) Christians who found religious support for individualism and freedom. I think optimistic friends of anarchy fail to appreciate the unique convergence of crisis and religious belief at this point in time. It was extremely rare in history. Other nations have experienced similar crises, but without the religious background of the Dutch Reformation to guide the people toward greater freedom.
Freedom began to wither in direct proportion to the decline of traditional Christianity. Traditional Christianity held in check mankind’s natural tendencies toward envy and covetousness. Someone wrote of Russians just after the collapse of the USSR that the typical Russian would rather live in poverty than have his neighbor do better than him. That’s not just a Russian attitude; it is universal. It is the nature of mankind. Socialism elevates envy from a vice to a virtue; that’s why it is so popular worldwide.
Human nature and the difficulty of changing worldviews explain why freedom is in such short supply after so many years of success.
Here’s your homework reading assignment for the week.
1. http://en.wikipedia.org/wiki/Islamic_Golden_Age
2. http://en.wikipedia.org/wiki/Islamic_Golden_Age#Market_economy
The argument from human nature is completely futile. It will never convince anyone of anything because every side claims it as their own. I think a pure market economy can exist, and likely will at some point in the future. The only real question is when.
An argument should not be judged on the basis of whether or not it convinces many or few or any but on whether the argument is in conformity with reality, whether it is TRUE.
Well, I definitely don’t think that particular argument is TRUE.
I’m inclined to think that both the authors and those they’re criticising both go too far. To me there isn’t a dichotomy between ‘anarchy’/anarco-capitalism and an all powerful state or socialism. The sensible position to me (and I think, Hayek and Popper) is to ask ‘what is the proper function of the state’ and then ensure that the state cannot escape those functions. I think the answer to that question is relatively simple; the state should be the upholder of private property rights – that formulation leaves a lot of ‘grey’ areas, but I don’t have much space here). This would have the effect of creating a small state, but also avoiding the question of whether anarchy can function (regardless of whether it will ever be preferred, which I think unlikely). To me, anarchy seems almost as utopian as Marxism even if it is theoretically more convincing. I think we should also remember that we have a hard enough time reducing the state, let along eliminating it! Of course, even assuming that we could reduce any state to such a role (without a major catastrophy necessitating it, and I hope that’s not the way to do it), restraining it there is very difficult – the failure of the US Constitution and the British tradition suggests neither approach is inevitably successful.
I understand your frustration.
Two avenues toward liberty:
(1) Everything blows up and civilization starts all over again, within a property-rights framework;
(2) There is a roadmap approach from where we are today, step by step.
I don’t wish for the first.
Re the second, I can dig it. I’ll accept incremental success.
So who goes first? Who gives up his government bennie? Who shuts down his government department first? Who creates the herd mentality for government workers so they gleefully toss in their employee badges at the Department of XYZ?
This is why government will continue to grow per capita until the barely recongizable, current morsel of property rights is completely extinguished. Unless there is a cataclysmic change in minds.
Not a pleasant thought, is it.
You are presenting a false dichotomy. Secession and other forms of organized evasion of the system are an obvious alternative to confronting it or attempt to reform it on its own terms.
I think that’s splitting hairs, Ryan. Many, like me, have already seceded mentally. But so what. I’m not talking about flying under the radar.
I’m talking about sitting on my ass in plain view, on my front porch, exactly where it currently stands, between two oceans of this planet, and not have the sheriff show up and forcibly collect taxes when I ignore the bill in my mailbox.
If you live in this same country, try seceding with your physical property and the land you homestead, and see how long it will be before your hunkering down behind the sand bags.
I believe the root cause of conflict is envy. The question then is can we eliminate envy with education? I don’t know. I think it’s unlikely, given the history of humans.
Since envy is an emotion based on desire, it reduces to, can we control our desires. It’s possible to control our actions, but how do we control desire.
In this age of the genome, perhaps we will discover that the only way to control desire is to change our DNA pool – to root out genes for envy. It sounds pretty awful, sort of 1984 vs. brave new world. But is there any other solution? Humans have tried for many thousands of years to find a way to live together in harmony. If the last 100 years are any judge, we are still very far from any solutions. And we are closer than ever to destroying ourselves. I’m not sure education alone is going to stop this.
Eliminating the envy gene sounds promising, but that might take a while. Meanwhile, all we have is persuasion. I don’t think anarchists have grasped how rare and fleeting the brief period of liberty in the West was and how unique the circumstances that brought it about. It may have another chance. China is rapidly becoming Christian and freedom is popular, both as a result of the hell of 40 years of pure Marxism. But the West will have to go through a major life changing crisis before its worldview will change, and then it will need traditional Christianity to provide the culture and institutions again.
“China is rapidly becoming Christian”? Really? Links, materials, proof? I would be rather surprised if the Chinese were still open to adopting a West is Best attitude.
And Christian culture and institutions? Please. Plato dressed up with some proletarian propaganda. I don’t trust the morals of an institution that crucified its own god and then pretends to eat the flesh and drink the blood each Sunday. Creepy and gross.
Envy does not have to be a pejorative.
I envied my closest friend’s skill (with no malice) and it made me better.
It’s a first cousin to admiration.
Envy generally implies feelings of spite or resentment towards the person envied, not just wanting what another person has. The best example I can think of is a Russian fable I recently read about. Boris and Ivan are two peasants, who are almost exactly the same, except that Boris has a goat and Ivan does not. Ivan finds a bottle, and when he cleans it off, a genie pops out and tells him he can wish for any one thing, and he will get it. Ivan say, “I wish that Boris’ goat would die”. Note, he doesn’t wish for a goat of his own; he wishes for the person he envies to be worse off.
While I’m not sure that Eric is right that all conflict is based on envy, I do believe that socialism is based on envy.
Envy without malice isn’t envy. Admiration is what you had for your friends skill. Envy is not the first cousin of admiration – but an evil perversion of it. Admiration motivates one to emulate someone to strive to achieve to the degree possible the same strengths and advantages. Envy motivates one to hate and harm someone because of their strengths and advantages. Mises.org sells an excellent book – “Envy”.
Eric: It’s an alluring trap for those who are doing well, to dismiss those who are doing less well as being merely envious. This approach trivializes their very real problems in being able to get a leg up, and begin their first steps on the path the fortunate were able to tread with ease.
They don’t want what you have. They want to be able to get theirs too, by their own efforts. But the atmosphere of depression and hopelessness that descends onto people born in areas of high chronic joblessness, combined with poor access to quality education and to inspiring influences, condemns all but the very most resourceful of individuals to a lifetime of failure.
In formulating your theory about the “genes for envy”, did you actually meet any envious people? Or is this just something you thought up in isolation? Hungry people want food, and poor people want money. But they don’t want your food or money, they want their own. They are normally, in my observation, willing to do what it takes to earn it, if only they could find opportunity.
Cowen’s pessimistic “paradox of libertarianism” is nothing new. Schumpeter presented this view of capitalism sowing the seeds of its own destruction decades ago.
http://www.econlib.org/library/Enc/bios/Schumpeter.html
A deterministic seed exists in both presentations of this idea.
I wonder what the Tipping Point would be for a libertarian revolution. I’ve only started reading Gladwell’s book, but if there is a Point, there’s some hope for rapid success rather a slow, methodical process that is vulnerable at every turn.
“Herein lies the key to changing society — changing public opinion or people’s preferences toward government. And the only way people are likely to change their preferences is through education and persuasion; force is ineffective.”
Yes, that rings true. The issue however is not whether all government intervention is removed, but the incremental one of moving us ever closer to self-government. This is akin to the matter of evil. It cannot be abolished, but it can be reduced.
Regarding Fukuyama’s argument for the inevitability of liberal democracy, that is his second most mistaken view, which has already been refuted by the behavior of Islam. (His first mistaken view is in his name, because you shouldn’t do that to you mama.)
A pure market economy requires equal knowledge of the market and equal smarts for the participants. Anyone else that gas prices tend to be uniform within a similar grades of gas in a small community but there is price competition in large cities?
The key to Stinghams argument is his statemenht about “ideological altruism.” A phrase I have never heard before, and I think for good reason. It cannot be embraced for very long because it destroys the host. All humans seem to require some ideology in order to successfully deal with the infinite choices of existance. Embracing “ideological altuism” suggests that you give no value to your own ideology, in which case it will be of no use to you in sustaining your own life, or you spend your life giving it away to anyone who will listen, in which case it will be of no use in sustaning your own life. A truly anti-human concept.
I think many statists are like partners who stick with an abusive relationship because it makes them feel secure. Do they do it because of misconceptions, is it an education issue? I don’t think they do. I think most people in abusive relationships deep down know that they are in one, but something deep down inside keeps them from leaving. It often has to get really bad before they leave. I think they need a counsellor more than they need an education. It’s something much deeper and personal than just knowledge.
The Trend Towards A Pure Market Economy.
Let’s go even deeper: both preferences and incentive-motivated behavior are dependent upon beliefs and ideology. As we move away from these, the Dark Ages of economics – which is characterized by economic ignorance and economic illiteracy – and as we move towards a more enlightened knowledge of human action and of the human reality, the preferences and the incentives that motivate behavior will be different. This is the inevitable movement (and intellectual and spiritual evolution) associated with an ever-advancing civilization which is what has been happening from the beginning of recorded history.
Bruce, I appreciate your reference to ‘beliefs and ideology’, but how can our statist beliefs and ideology indicate “an ever-advancing civilization?”
Dear Allen,
There is no doubt that we are living in the Dark Ages of economics but from it we will emerge just like we emerged from the European Dark Ages. Our statist beliefs are part of the allegorical illness of this period but our immunity (manifest as economic equilibrium) will bring back balance and health. Once back to full strength energy will be expended on improvement, in all facets of life.
I agree with the idea that ideology matters significantly. That is one of the ideas I like in the writings of Ludwig Mises. I suspect that many people outside of academia would just consider that obviously true, not needing any journal articles or books to establish.
There are no arguments with which I agree, of which I know, for completely eliminating the military. A region that tried this one would get invaded, and would find itself a new territory of another country that has a military, and is more serious about not living in fantasy land.
Once you make that concession, you accept significant taxation. Once you do that, then you will probably ask if there are any other government expenditures that are overall improvements. I believe there are, such as laws that help rectify information asymmetry problems. Taxpayer funded schools would be another candidate.
In the stateless society fantasy land, I think you would have regions where people agree to pay a military defense fee in exchange for being allowed to move into that region. Once you have that, then it is hard to tell the difference between that arrangement and a nation-state with a military and taxes.
Anon, I agree that a military is indispensable, but that does not necessitate “significant taxation”. A small potion of our taxes is for the necessary functions of government, while taxation funded schools can only be justified (if at all) for the very few who cannot afford it.
The massive state power that exists is a function of the ideology of which you speak, rather than of the necessity of survival.
Yes, we have to change people’s preferences. And how does one do that? Ad campaigns can do it, sure. But more thoroughly and at a deeper level, it will and must be done through the arts. We need to support and promote works of literature, etc. that are pro-market. More, we need free market artists to produce such works — and such works need to be GOOD works of art first and foremost. Propaganda pieces won’t do it.
Awesome article: rigorously defines the problem and fairly and respectfully describes the opposing positions before addressing a key and fundamental issue. So many seem to reject this ideal. Sometimes I wonder if I am still a conservative (with libertarian tendencies
) rather than a libertarian because I keep running into and debating the immature libertarians rather than the grown-up variety.
An interesting post; however, it misses one of the chief factors that continues to drive the growth of the state: the state grant of limited liability to shareholders of corporations.
I’ve touched this number of times: http://mises.org/Community/blogs/tokyotom/search.aspx?q=limited
As I noted previously in another context:
http://mises.org/Community/blogs/tokyotom/archive/2010/07/06/the-cliff-notes-version-of-my-stilted-enviro-fascist-view-of-corporations-and-government.aspx
I fail to see how this is relevant to whether a libertarian society could be stable, or if it would unavoidably tip in a society with a government.
But wouldn’t that pretty much kill the public company? If Bert held a few shares of BP then he’d be seriously worried about the new explosion and if the ongoing costs broke the company then the authorities would be going after the owners to pay damages, which would include Bert. So would minority shareholding come to an end?
No, the removal of the corporate veil would induce individuals to set up dual companies: company A is the active company, and its shareholders are liable; company B is limited to two roles: financing A and receiving dividends from A; its articles restrict it from all other actions; Joe Blow invests in company B; the most he can lose is what he put into it; shareholders of A, however, are on the hook; those shareholders would very likely be officers of the company.
In anarchism, I think the market would decide on the level of liability. Free market arbitration would either go for it or against it based on consumer demands.
Whether you like it or not, I don’t think most people are going to want to hold shareholders responsible for the crimes of management. They aren’t going to expect people who invest to know absolutely everything about the company. It’s reasonable to expect a certain level of knowledge, but not everything, in my view. Feel free to try to convince everyone the opposite way, but none of this matters in the current system.
Further to my previous comment, I note that modest steps towards undoing the damage caused by the institution of limited liability would be for states and the federal government to reduce the our burgeoning but ineffective regulatory burden in the case of entities that have unlimited liability – such as partnerships and unlimited liability corporations (there are such things on some state statutory books).
Further, the states could limit the ability of corporations to ring-fence risky activities by prohibiting corporations from owning subsidiaries.
Government could also insist that entities doing business with the state – such as those engaged in mining and offshore oil development – act only via unlimited liability entities.
like a turtle taking a bath in a sewer
Good article.
One more thing to consider, which “fundamentalist” above alluded to, is human nature. In particular, I wonder if parenting itself does not give us an inclination towards paternalism and government.
Basically, in order to survive and grow up, it is necessary to obey your parents and other adults. It is good for them, as parents, to make you think that other people know better than you and should tell you what to do. This is true when you are a child, and it is convenient to secure their role as teachers. It is only later, if ever, depending on the individual, that one really starts to question authority and accepted assumption.
I wonder how the parent-child relationship would have to function in order to avoid such a source of bias towards government.
Any good parent knows his role — ensure that his child can live independently, after the parent is dead and gone. I believe this is true for virtually all parents (some pathetic exceptions), libertarian or otherwise, regardless of beliefs in alleged “social safety nets.”
The dependency on/acceptance of expansionist government is borne mostly of miscalculated utilitarianism and a guard against the free-rider problem.
If a pure market economy is so good, why does it not already exist?
there may very well be pure markets operating. barter systems via iphone and god know what else.
there are heavily regualted markets operating .
Yes, Ryan alluded to this yesterday. No doubt this quasi-secession is occurring, and thank heavens for it.
But battle fronts are foggy still, some pockets of rumblings on the horizon as the oligarchy takes note. Agents diligently craft new tax schemes, devising new oversight like a creepy schoolyard bully. The landscape is no longer the five-and-dime but now the internet, the airwaves. The digital IP trading controversies cause early stir, provoking the eye-brow raising greed of the bureaucrat.
It’s not as simple as taxing my snow tires from Sears, but the tentacles creep outward, insistently, boldly and, in the end, ruthlessly.
Step by step
http://hosted.ap.org/dynamic/stories/U/US_CRAIGSLIST_ADULT_SERVICES?SITE=OHRAV&SECTION=HOME&TEMPLATE=DEFAULT
“These legal codes need not be libertarian, in Friedman’s view, although he argues that unlibertarian law will be more expensive to enforce than libertarian law.”
That might be true, but it isn’t my argument for why the market will tend to produce libertarian law. The essential difference is not the cost of producing the product but the value to the customers of the product that is produced.
Your essay seems to me to confuse changes in preferences with changes in beliefs. Most people, if they shared my (and your) beliefs about the consequences of socialism and of laissez-faire, would prefer the latter—including, I think, most socialists. Most people, if they shared the beliefs of many socialists about the consequences, would prefer the former—including, I think, many or most libertarians. So much of what you are proposing could be done with no change in preferences, merely a change in beliefs.
I don’t think I assume that the reason enforcement agencies don’t engage in taxation is that their customers have an ideological objection, merely that the customers prefer to patronize firms that don’t try to stop their customers from leaving.
Going back to your more fundamental question, my “Positive Account of Property Rights” piece (on my web site) provides a somewhat different explanation of why existing arrangements are stable and other arrangements might be, seen in terms of a structure of commitment strategies.
Non-libertarian economists criticize the array of goods and services provided by the market; when they do, they often say that a “shortage” of a good or service exists. For example, we hear, “In a free market economy, there will be a shortage of food safety inspection services.” These supposed instances of shortage are used as justification for government intervention in these lines of business. When economists discover a “shortage”, the government is supposed to step in and fill the gap.
Libertarians deflect this sort of argument with the quip, “If there is a shortage of good X, why doesn’t more of good X exist?”
This is not a good way of phrasing the argument, but I have used it to illustrate the question at hand. A better phrasing is, “If a shortage of good X exists, why don’t entrepreneurs alter the structure of production to produce more of it. If the costs of producing it are low, and the price is high, it will be profitable to do so.”
This argument suggests that consumers are not willing to pay a price for good X that would justify a shift of factors of production away from other goods and services into the production of good X. If this is the case, there is no cause to believe that a shortage of good X exists.
Genuine shortages are the result of government price controls and prohibitions. Entrepreneurs could profitably produce a greater amount of good X, but are prevented from doing so by the government.
The question, “If a pure market economy is so good, why doesn’t it exist?” is an attempt to apply this common libertarian counterargument to “the free market economy.” It is a badly phrased question. It is clearer if the words “free market economy” are replaced with “law and defense services.” A better phrasing would be, “If a shortage of law and defense services exists, why don’t entrepreneurs alter the structure of production to produce more law and defense services. After all, if the costs of producing them is low, and the price is high, it will be profitable to do so.”
The answer is very simple. Entrepreneurs could profitably produce more law and defense services, but are prevented from doing so by the government.
Preferences determine what people want to be and may determine what they try to act to bring about. But they do not determine what exists, how people will be able to act or what will be the actual consequences of their actions. Reality determines the result of action and that relation between cause and effect are the incentives people face. Those incentives determine which actions can sustain and reinforce themselves. What exists will be whatever is the consequence of those self-sustaining actions. Preferences play no significant direct role.
So a libertarian society cannot be brought about by education itself. To change the outcome you must change the incentives. Preferences are only relevant to the extent that they motivate people to figure out ways to make state producing actions no longer sustain themselves. An entire society of people who want freedom, by itself, will not do this.
No, it won’t work. You would like to build a new world that cannot be constructed with the existing materials. You might as well try to repeal the law of gravity by educating people.
Weird that no one has considered Patri Freidman’s and Michael strong’s ideas here.
http://www.athousandnations.com
It is very difficult to change the larger consensus. It is easier (but still very difficult in an absolute sense) to create new regimes in unclaimed ocean waters and start a new life there.
It is a contradiction to have only academics and opinion makers fight the libertarian fight. When entrepreneurs get into the fray, that is when the real action will begin.
The Pure market economy will exist when the technological level of the world increases to the extent that safe, secure and reasonably priced habitats on the sea can become the permanent destination of enough people to call themselves a nation.
Excellent article. The freedom of Austrian Schoolers from theoretical models divorced from reality is refreshing. Please someone advise me how the public can be better persuaded against big government when the elapsed time between (1) voter or legislator choices for predatory or foolish interventions and (2) the consequences wrought by the interventionists and the interventions, is so great (–I call this lack a lack of proximation), and when we humans are so disposed to believing the hero-villain myths that political and media charlatans love to ply us with for their own predatory and irrational-preference purposes?
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