09
Oct
10

Free Market Fallacy

One of the candidates for Roy Blunt’s Congressional seat, in Missouri’s 7th District, is Kevin Craig. Craig is a Libertarian. He expressed his Free Market attitudes in the recent candidate debate in Joplin. The Free Market philosophy is a distinctly Libertarian approach to Economics.

There are several fundamental and severe fallacies of the ‘Free Market‘. Such fallacies have been described repeatedly and effectively. This is my approach to a persistent impediment to sound economic judgement.

The first fallacy is the Rationality Fallacy.
Free Market philosophy is fundamentally a belief that individual decisions will be, collectively, ‘correct’ or ‘best’. Unfortunately, attempts to seek a definition of ‘correct’ or ‘best’ typically find a circular answer: that it is the collective result of a free market. This has some chance of being correct if the individual decisions are essentially rational and informed.

The second fallacy is the the Information Fallacy.
Free Market philosophy’s dependence upon rational and informed decisions is unrealistic. Individual participants in a market often do not have the information necessary for a rational and informed decision. Other market participants may actually actively hide such information to deceive others and cause them to make decisions which are not truly in their own interests. in addition, some market participants are simply ignorant. Even those who are reasonably informed may not receive the most essential information: feedback.

The third fallacy is the Linearity Fallacy.
The famous eponymous Laffer Curve assumed a smooth (monotonic low-order derivatives) function. Various economic relationships are known, or can be expected, to be highly non-monotonic. These relationships are also dependent on a large number (economic models can be plain scary) of variables. Changes in some variables result in changes in the character, not merely the degree, of a functional relationship.

The fourth fallacy is the Stability Fallacy.
The stock markets (which are heavily intertwined) have suffered several catastrophes instigated by automated trading. Feedback in various markets can produce situations which are un-correctable (by any means) when they have reached a certain level. Markets are filled with dependencies which have widely varying time constants and functional relationships. Some relationships are not functions. They may even be chaotic: unreproducable even if ‘initial conditions’ were to be re-created.

The combination of the Linearity Fallacy with the Stability Fallacy could be termed the Determinism Fallacy.

The fifth fallacy is the Independence Fallacy.
Markets are no longer isolated. Local U.S. craftsmen and manufacturers compete with the products of low-wage labor in foreign countries which (may) have highly centralized government control. Foreign governments are often not adherents of Free Market philosophy. They may artificially control prices, often to their short-term disadvantage, to gain market control. The Japanese conquest of world-wide television production in the 1980’s and 1990’s is a classic example.

The sixth fallacy is the Altruism Fallacy.
It is a fundamental tenet of the Free Market philosophy that market participants, in acting acording to their own (and selfish) best interests, benefit the market as a whole. That is, selfish individual actions have a collective altruistic effect. Unfortunately, some market participants are not rational or benevolent. Suppose that a certain (hypothetical) country thought that a military arms competition with a certain opposing country could eventually promote the economic collapse of the opponent. It might then (hypothetically, of course) waste many billions of dollars and the sweat and blood of its citizens to pursue that gamble. This is clearly a strategy which does not maximize wealth. It sacrifices wealth (even that embodied in people) for a particular (and not exclusive) form of power.

The ultimate adherents of Free Market philosophy would accept, and even applaud, some of these flaws which I have described. Market participants who act deceptively, for example, are recognized as being consistent with the ultimately competitive nature of the Free Market. That is believed by such adherents to be (yes, an example of circular logic) a good result.

I have a formal name for these ultimate adherents of Free Market philosophy: Anarchists.

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3 Responses to “Free Market Fallacy”


  1. December 4, 2010 at 1:24 pm

    This is an cogent, insightful description of the issues that must be reconciled when a person chooses to embrace a free market philosophy. I’m quite impressed that you were able to condense these ideas, which are not easy to comprehend, into such an accessible package. Your summary of the altruism fallacy, which is my biggest concern with free market principles, is particularly potent.

  2. November 11, 2010 at 12:08 pm

    I agree with most your suggested “flaws” in free markets, such as limited information.

    I’m not so clear on what you suggest in response. People will and do make bad decisions, that sometimes impact themselves and others (externalities). But any central decision maker, i. e. government will also lack information to make the best decisions. I think you can argue that the a central decision maker will do worse than individuals deciding as best they can what is best for them. Neither will be perfect relative to a standard of perfection, but we live in a world requiring making optimal decisions with limited resources, including information.

    That said, I’m pragmatic and accept that government intervention can sometimes work.

    I’ve added your blog to my subscriptions.

  3. October 9, 2010 at 8:50 pm

    I don’t understand how libertarianism gets such traction. Unbridled corporations are a good thing? Two seconds living in this world, you’d think, would be enough to dispel that notion.

    I wonder why more “libertarians” don’t just call themselves anarchists. Maybe it’s because they associate the word with dirty hippies?


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