Four Arguments for the Free Market

This morning, as part of an independent study, a cohort-mate and I discussed Talcott Parson’s The Structure of Social Action. The book is a bit surreal – the entire thing is almost a shaggy dog story in the Sociology of Knowledge, wherein the theorists he reviews (Marshall, Pareto, Durkheim and Weber) are proven to be correct simply because they said vaguely similar things at the same time in different places. Let’s just say the strengths of the book, and its enduring legacy, are neither in its style nor the logical strength of its main conclusions. I don’t mean to be too harsh – there was a lot of interest in the sections we read, especially on the development of liberal political thought and Sociology’s emergence as a reaction against it.

But none of that has much to do with the thrust of this post – the free market. Somewhere in his exposition of liberal theory from Hobbes to Marshall (my copy is elsewhere at the moment [EDIT: Page 104, about Malthus’ idea that competition served as a social regulation mechanism, Parsons doesn’t actually use the phrase free market]), Parsons notes that the importance of the free market for liberal* theory has a lot to do with the way it prevents anyone from exercising power over anyone else, and less to do with the way it maximizes productivity. Parsons is not the only one to make this argument – it shows up also in a lot of the work in the “corporate governance” tradition in the mid-20th century, authors like JK Galbraith and Carl Kaysen argue that the rise of large corporations is potentially dangerous because such corporations have discretion in a way impossible under a competitive market.

More generally, I think in sociology we can sometimes forget that the Free Market has been praised, defended and fought over not simply because of its virtues in allocating resources. Rather, I can think of four analytically distinct arguments in favor of relatively unfettered markets as the best way to organize economic life**:

  • 1. Market allocate scarce resources efficiently. This is the most commonly used argument, and is associated most strongly with the entire neoclassical economic tradition. Supply matches demand, markets clear, everybody maximizes their welfare. Hooray! It’s most closely related to the next argument.
  • 2. Markets take advantage of all of the information in society. This view is expressed most clearly in Hayek’s famous essay, The Use of Knowledge in Society. Hayek argues there that centralized planning systems cannot adequately capture all of the everyday and local sorts of knowledge about production techniques, materials, demand and more possessed by workmen, shopkeepers, etc. all the way on up. Top-down coordination fails because information is too expensive to centralize, and the free market reigns supreme because it lets society have a kind of distributed cognition. It’s mostly an argument against central planning.
  • 3. Markets generate the perennial gale of Creative Destruction, that is, innovation that produces wondrous new goods and cheaper and better ways to do everything. This view obviously comes straight out of Schumpeter and his classic work Capitalism, Socialism and Democracy. Schumpeter argues that markets are good not because they allocate resources efficiently on a moment to moment basis (and thus refutes argument 1 above), but rather because they promote innovation. Businesses with some limited monopoly power emerge naturally, and are healthy, as they provide some stability in the face of the perennial gale, while simultaneously investing in the R&D that produces it. Capitalism = Innovation. Innovation = Win.
  • 4. Markets limit discretion and power. This argument is most famously explicated and belittled in Karl Polanyi’s The Great Transformation. According to free market liberals, in a competitive market, no actor has the power to set prices (see any microeconomics textbook), and thus no actor has power over any other. The system runs itself, no one fights, and no one tells anyone else what to do. Polanyi calls this a “stark utopia”, and argues that it is as unreal and destructive as the communist utopias inspired by Karl Marx and lambasted as impossible by liberals. As mentioned above, authors concerned about the rise of the large corporation in the 20th century also draw a lot on this notion of the market. Anti-trust law, for example, is seen not just as a way to make the market more economically efficient, but also to prevent the enormous build-up of power in the hands of the corporate elite.
  • Ok, so there you have it. Four arguments in favor of the Free Market (along with some bits of some counter-arguments). Enjoy! And leave a comment if you think I’m missing any, or grossly mis-characterizing the ones I have.

    * In this post, I use liberal in the older, non-American sense, relating to the “liberalism” of thinkers like Locke, and the “market liberalism” of free market proponents throughout the ages. Parsons actually does a nice job of parsing these arguments (especially the early emphasis on individualism as a normative claim about how things should be rather than a positive claim about how things are), but for my purposes there’s no real need to disaggregate, as the arguments I’m getting to are all in the 20th century.
    ** Note, I’m not arguing for any of these in particular, I just want to put them out there and associate them with a few names to see what y’all think.

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    23 Comments

    1. Tommy Lasorda

       /  September 26, 2009

      Dan, I’m worried about you. Shouldn’t you be working on your comps instead of this blog? How much time and effort do these long, detailed, and frankly impressive posts take you to write?

    2. Tommy,
      Aww, thanks!
      But don’t worry, I passed my big prelim last Fall, and now I’m working on sort of dissertation prep.

    3. Pleykam

       /  September 27, 2009

      One that you’re missing is Ayn Rand’s Capitalism as a moral order that rewards those who, through superior ability and effort, do more for society than others. While its the easiest to dismiss on its intellectual merits, its probably the most influential in American politics and culture.

    4. Pleykam

       /  September 27, 2009

      Very interesting post. One argument that you’re missing is Ayn Rand’s Capitalism as a moral order that rewards those who, through superior ability and effort, do more for society than others. While its the easiest to dismiss on its intellectual merits, its probably the most influential in American politics and culture.

    5. @Pleykam – You’re right. After writing this post, I’d been thinking about moral arguments. The one I had come up with was more of a liberal theory argument – the “free” in free market has to do with the government not restricting your liberties, your property rights, etc. More freedom being good, markets should be unfettered as an end in itself.

      The Ayn Rand argument (which I’m taking on faith here, not having read any of her stuff myself) would be another moral argument for markets – markets reward the productive and punishes the non-cooperative or ineffective. That certainly has a ton of sway in debates about labor markets and welfare and the like. And, of course, completely misses the way that the market *defines* who counts as productive, rather than merely rewarding those who are inherently so.

      Thanks for the comment!

    6. I believe Hayek also argued for 4. Here’s Andrew Gamble: “while the Great Society may contain many organisations within it, the secret of its success, in Hayek’s view, is precisely that it has no single directing centre.” This explains another of Hayek’s views: “an enthusiast for the factory system and for the imposition of discipline and precision on the workforce, while remaining utterly opposed to the attempt to organise the whole of society in a similar manner.”

      For Hayek, society’s order should be a cosmos – an emerged order from many points of power – rather than a taxis, a rationally constructed human order.

      So: yes, Hayek is a believer in market-as-guarantor of power distribution.

    7. @Dan – Perhaps, but I’m not convinced from that snippet (while readily admitting that I’ve read very little Hayek). The secret of success being “no single directing centre” could again refer to the information issue. And enthusiasm for “the factory system and the imposition of discipline” does not at all sound to me like a free-market utopia where no buyer or seller of anything – labor included – has any power.

    8. Dan Olner is correct that Hayek appreciated the free market’s distribution of power. In fact, he famously took the argument so far as to claim that socialism was a very slippery slope towards totalitarianism.

      1-3 can all be seen as about the allocation of resources. Your 1 seems to emphasize efficiency at a given moment. 3 emphasizes efficiency over the long-run, inefficient modes are creatively destroyed. 2 is one of the major reasons WHY markets allocate relatively efficiently over short and long time spans.

      I would add another argument, the free market punishes discrimination. You can hire the best workers, or you can hire only the workers who look like you. Similarly, if two countries build up voluntary trade relationships then one might expect they are less likely to fight a war.

    9. ash

       /  May 5, 2012

      I am greatful to you. The information provide is very helpful as I am writing arguements in favour of a free-market system of resource allocation. Thank You!

    10. Graham Peterson

       /  December 16, 2012

      Nice little summary. Very able.

      Other arguments include that markets reduce inequality (Gini fell by a factor of 3 in 19th century Britain, and it usually has in Eastern Tiger et. al. cases of development); that markets present an increasing variety of existential variety and opportunity to people by making time more efficiently used (Cowen’s book on culture and capitalism; McCloskey’s recent talk of “increasing scope”); that they increase altruistic motives (Gintis and his anthropologist buddies showed that the more market-ized a population is the closer-to-fair-offers they’ll play Ultimatum and Dictator games); that they make people more other regarding through negotiation and peaceful trade (an old libertarian argument); and that, well yeah, it goes on.

      I think the libertarian point is extremely important, that most people associate “the market” with “the monopoly,” when in fact it is quite more often governments that tend toward monopolies, and in turn inequality and tyranny and poverty, than markets.

    11. I am certainly not as well read as you on economic theory, however in each study that I have read, the models used and examined are gross simplifications that tend to rely on very distorted views of reality. Oversimplified microcosms. For example, we know that in the real world economies go through boom and bust cycles. These cycles allow the wealthy to hoard commodities and real goods during recessions and liquidity crisis-es. The end result is that the wealthy are able to squeeze the not so wealthy, and amass large sums of wealth. With no regulation this ultimately leads to the formation of monopolies and oligopolies that stifle innovation.
      Simply look at Microsoft. Microsoft puts out some ok products. But the reality is that over that last few decades, they have bought out the majority of their rivals, leaving the consumer with few choices in many areas of technology. There have been numerous software products that were technically far superior to many that Microsoft put on the market. Microsoft was able to out advertise, buyout and destroy most small business that stood in their way. You could argue that in some ways this worked in the consumer’s favor, but you could also argue that it crippled technological advancement in many areas.
      The biggest problem that I have seen with economic theory, is that it is just that. Theory. It always sounds good in the classroom when thought by PHDs and discussed in a microcosm. Like most bad science people clinging to one theory tend to be blind to the empirical data that would suggest otherwise.
      I agree that bad government regulation, can be as bad as no government regulation. The real problem is that while some forms of regulation are absolutely necessary, the elected officials who we have entrusted with this task are simply ill equipped to do so, and often act in counter productive ways.
      For those who would argue that no regulation is needed, consider the cycle of a non regulated economy. Once large monopolies are formed, and the wealthy have sized control of the majority of the wealth, how does the market correct itself? Generally speaking the same advocates of a free market, also believe that government welfare is a no-no as well. So now we are faced with a downturn in the economy that needs to correct itself. We have people with no food losing their houses and livelihoods while the wealthy business owners who frankly caused this situation in the first place are sitting pretty. This is how most revolutions and civil wars start. Simply stated the majority will not stand for gross disparities between the upper class and them, especially when all the wealth was gained by their hard labor and at their expense. This is simple human nature. If I am starving and facing imminent ruin, I am certainly not going down without a fight. A man with nothing to lose is the most dangerous man on earth. A mob with nothing to lose is a revolution. In revolutions the wealthy tend to get slaughtered, and their wealth redistributed. The market has now corrected itself, but at what cost?

      • Graham Peterson

         /  June 12, 2013

        Actually during the communist revolutions of the 20th century, state bureaucrats became the wealthy, and minority groups, intellectuals, suspect neighbors, and pretty much anyone who didn’t publicly profess allegiance to the party, got slaughtered — without much of any wealth redistribution — and a slowing of productivity took place such that basic commodities became scarce and people began starving.

        • Very true. Not the redistribution of wealth people thought they were fighting for. That is a really high cost. None the less a redistribution of wealth. That said revolutions rarely produce a result people are happy with, but the causes are generally the same, the needless suffering of the lower class, caused by the greedy upper class. My point stands, free markets have never been proven to work. They are as much a falasy as utopian marxism. Sounds great until you are its victim.

          • Graham Peterson

             /  June 12, 2013

            The poor have gotten exponentially richer because of economic growth; it is a non controversial measured fact. Though I think your main concern is with relative wealth, not absolute wealth — I’m talking about the poor getting richer in absolute terms. Nobody ever claimed that markets would create an equal distribution of income.

            • Interesting statement, but this is not an indisutable fact. The median houshold income in this country adjusted for inflation over the last 25 years has barely moved. Since this is the median and we know that the disparity between the rich and the poor is infact exponential, this actually points to a declide in the average poor income not an increase. You should check your facts before you spew bullshit. The wealth of the poor has not grown exponentially, it has in fact shrunk. Furthermore, when you figure that the average poor person is not a homeowner, their income does not go toward building wealth.

              Check your facts bore you fabricate statistics.

              Exponential growth my ass. http://www.davemanuel.com/median-household-income.php

    12. 1. markets allocate scarce resources efficiently. This is simply not true during a recession. During a modern recession businesses lay people off, the middle class stops discretionary spending, and the newly laid off have no buying power. This means that the overproduced goods flood the markets, and their prices drop sharply. The only people in a position to take advantage of these cheap resources are the wealthy who buy them up at fire-sale prices, and are then able to utilize these newly acquired resources and commodities to accumulate vast amounts of additional wealth.
      2. Markets take advantage of all of the information in society. Modern markets have been proven to react very quickly to speculation and false information. We have recently seen masive drops in us stock indicies due to a hacked twiter account. Furthermore, information of which you speak is useless in a recession if people have no money with which to react.
      3. Markets generate the perennial gale of Creative Destruction, that is, innovation that produces wondrous new goods and cheaper and better ways to do everything. Microsoft has proven you wrong on this. They habitually bought out competitors, out advertised them, and habitually stifled innovation by competitors and robbed consumers of many new inovations that never saw the light of day, or that only they were in a position to now produce. That said, if you removed pattent and intellectual property law the outcomes might have been closer to what you are predicting.
      4. I think you mean macro not micro. I can’t follow your logic to be honest. You seem to be arguing against the free market here.

      The real problem is that you are sighting economic theories created by people who never witnessed our modern markets. Many of these ideas seem viable when looked at in a microcosm, but in a live economy they simply don’t work. Communism seemed like a great idea on paper, but the reality was much darker. Futhermore, people will always try to learn and gain the market. Human factors will always modify how real economies behave, and cause deviations from the models.

      • Without digging into the substance of this four (!) year old post, let me just say that I was not *endorsing* any of these arguments as especially true, but rather trying to highlight some of the arguments mobilized in support of free markets and thus which sociologists critical of such markets ought to be ready to dispute (or selectively praise – as noted in the post, some of the arguments are contradictory!).

        • Thank you for clarifying, I was a little confused. The interesting thing about these theories, is that there will be parts that are true, but when the whole model is not sound, following the theory would be disasterous. It’s liike being told if you invest in the stock market, you will make money over a 30 year period. This seems true, but as you look at more details you begin to realize it’s not true under all circumstances, and that in fact it is a very risky propasition depending on your timing. Unfortuanately these models are gross oversimplifications. It would be nice to look at the models constructed by the big wall street firms over the last decade or so, but unfortunately these are all propriatery trade secrets, and likley much more complex than anything being taught in schools today.

    13. MAMZ

       /  June 26, 2013

      My question is that do you think that public interest and ethics of care are ignored in the free market economy

      • Graham Peterson

         /  June 26, 2013

        It’s the public who comprise the market, and cater to one another’s interests in trading. And I think it’s a mistake to presume such trades make people more selfish and alienated. The effect may run the other way — impersonal trades end up making people more personal with one another who otherwise would not have been in smaller, isolated, and truly atomized communities.

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