Free market logic doesn’t work out.

There is an argument, which is really more of a dogma, used to justify free markets. It is basically a reductionist argument which holds the following:

1. Person-to-person market exchanges are to both parties’ mutual benefit.
2. The free1 market is reducible to a set of person-to-person market exchanges.
3. Therefore, the free1 market serves the general welfare.

This argument is usually presented as if it was rigorously logical and unimpeachable, but nothing could be further from the truth. For one thing, it is predicated upon the truth of the vulgar individualist premise, that society is nothing but a collection of individuals. Otherwise it is impossible to make sense of premise 2. Since social institutions are not just groups of individuals, and they do partake in exchange (e.g. corporations, governments, churches, and so on), it is impossible to reduce the free1 market to a loose set of individual exchanges, and premise 2 necessarily crumbles.

The only way to make any sense out of premise 2 is to assume that it is not descriptive but prescriptive: that it does not mean “we observe that the free market is reducible to a set of market exchanges,” but that it means “in order to be a free1 market, an economy (or subset thereof) must be reducible to a set of market exchanges.” But the only kind of economy that would be so primitive as to remain at the level of pure individual exchange would be a small-scale barter system. Anything more you introduce into the equation, like a ruling class, a currency system, property rights, laws against theft or fraud, or whatever, would be part of an institution, and therefore introduce something that goes beyond “one-to-one market exchanges.”

So let me now review premise 1. This premise is usually introduced as a little story of an exchange between two individuals. Here is a typical example:

Two individuals go to market; Person A owns Good X, and Person B owns Good Y. What needs to happen for A and B to voluntarily exchange X and Y?

If the exchange takes place, it must be true that certain prerequisites have been met. A must value Y more than he values X; otherwise, he would not have given up the greater satisfaction conferred by X for a lesser one conferred by Y. B—on the other hand—must value X more than he values Y; otherwise, he would not have been willing to give up Y for X.

What, then, is the inevitable result of the exchange? A leaves the market with Y—which he values more than he valued the X he used to have. B leaves the market with X—which he values more than he valued the Y he used to have. Both people now have goods that satisfy them more than the goods they gave to the other person. Both people are benefited by the exchange. In that sense, any trade—provided that no party is coerced—is mutually beneficial to all those involved.

The use of the word “market” here is interesting. If we assume it means a market as a public place where farmers and other producers display their wares, then it assumes some level of civil organization which is beyond the level of pure individual exchange. But I may be nit-picking here.

The more relevant point, however, is that this is a just-so story, that is to say, it is a made up story which fits a certain worldview but doesn’t necessarily have any relation to the facts of reality. For one thing, it confuses value with desire. There are many things we desire to receive in exchange but do not value highly enough to validate the exchange. For example, someone who is addicted (no matter to what) will desire the object of their addiction even if they do not value them. Also, many things are desired not for the value they themselves have, but for what they can bring the individual in status or credibility (a college education, a luxury car, expensive art works, whatever). Finally, there are also things we must acquire because we simply cannot get by without them, regardless of how much we value them (car insurance, for instance).

One may reply that, in all my examples, the person buying the things still wants to make the exchange because they get more from doing it than not doing it, and therefore still fulfills the “mutual benefit” clause. But if that’s the case, then either “benefit” merely means that one is willing to do an exchange, which is circular, or it means that the person is actually, factually, always better off, which is simply false. Plenty of exchanges do not actually, factually lead to mutual benefit, especially in situations where the problem of incomplete information, or risk in general, are particularly important. For example, if you buy a new car, and it breaks down within a week through no fault of your own, then you can hardly be said to have benefitted from the exchange, no matter whose fault it is.

The fact that market exchanges leading to mutual benefit entails that a free1 market also leads to general benefit is not nearly as significant as it’s portrayed. Advocates of any economic system can argue that their chosen system also serves the general welfare through a set of beneficial flows of resources, whatever those flows consist of. For example, a libsoc would argue that each individual’s exchange of their labor-time for an equal part in society’s production is to mutual benefit, and leads to the general welfare. A proponent of the welfare state might argue that all valid welfare resource redistribution improve the Pareto efficiency of a society (i.e. they benefit some people while leaving no one worse off). Even a hypothetical advocate of the Grab-What-You-Can system (I say hypothetical because, as far as I know, not even the most consistent voluntaryist is stupid enough to advocate such a system) may, with some credibility, argue that while any individual theft does leave the former possessor worse off, any set of mutual thefts, where each person steals what they need the most, leaves everyone better off.

If anyone can make up a just-so story, even the imaginary Grab-What-You-Can advocate, then they are basically useless without empirical evidence to back them up. I happen to believe that the libsoc view is correct, but you do not have to agree with me on that. My point here is that capitalism does not gain much from the argument, even if it was an entirely valid argument. Whether capitalism leads to the general welfare is not under question, but does not distinguish it from any other economic system that has ever existed: what is under question is whether capitalism is more ethical than those other systems, which is an entirely different issue. People who argue about technological progress or living standards under capitalism, or communism, or any other system, are missing the point.

So now that I’ve cleared premise 1, let me come back to premise 2, the premise that the free1 market is reducible to a set of person-to-person market exchanges. We can show very easily that this is false. Keep in mind that the argument here tries to transpose the fact that individual exchanges entail mutual benefit to show that a free1 market entail general welfare. So, any set of exchanges that are mutually beneficial must therefore lead to the general welfare.

Now, suppose that a person A is buying all the power plants in a region for great amount of money from person B, C, and D. Each exchange was beneficial to both parties involved. Persona A then decides to shut down all those power plants. Persons B, C and D are now out of power and must either make their own or move. This is a huge loss on their part. The set of exchanges did not lead to their mutual welfare.

My example highlights two important conditions which lead a set of favorable exchanges towards an unfavorable result: the formation of monopolies, and clashing values. We already know (except for market fanatics) that monopolies are a good example of market failure. Having one person, or a small group of people, control a vital resource through a series of exchanges is bad news for everyone else, even if it was in the interest of each person who traded it away. But equally important in this example is the fact that person A has a different objective, shutting down power plants, than person B, C and D, who are interested in having power. In a capitalist economy, most people involved in the economy have the same objective, make more money. A monopoly mainly hurts people because of inflated prices (because of the lack of competition) and inequality of power (they can make their monopoly into law, or discourage new entrants more easily).

If a series of beneficial exchanges can turn into an unfavorable situation, then premise 2 must be invalid. The problem here is that individual exchanges do not exist in a vacuum: they are part of a socio-economic context, use resources that come from somewhere and are used by someone, they involve partially or completely unknown information, and they involve people who have a specific status in that society.

To quote an actual, serious economics definition:

A completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.

Note the word “idealized.” The concept of the free1 market is based on a mental construct, a hypothetical, not a reality. Again, the only economic system that has ever come close to this hypothetical is a primitive, small-scale barter system. In real life, market prices are mostly set by institutions (mostly corporations), and people do not transact freely because of pre-existing conditions.

But most importantly, a free1 market, or any kind of market for that matter, cannot exist without some form of property rights. An individual can only trade something if they are in control of it. And this control, in ordinary life (not in cases of theft, for example), is predicated upon the general recognition and respect of property rights. Because property rights are a chimera and generally go against people’s interests, they must be protected and maintained by some form of authority, and that authority is most likely to be a State. Therefore no market can be free from State intervention, because it depends on the State for its survival.

Furthermore, property rights are not the result of market exchange, they are a precondition to market exchange. If, as some market fanatics believe (like “anarcho-capitalists”), the only legitimate impositions are those that arise from market exchange, then that would necessarily exclude property rights, since, logically, property rights cannot arise from that thing which depends on the prior existence of property rights.

The ironic thing is that their objections to State intervention also apply to capitalism in general. Here is an example:

For example, you enter a post office and buy a first-class stamp for 45 cents. May we conclude that you prefer the services the stamp will buy to whatever else you might have spent the 45 cents on? If you were not ordered into the post office at gunpoint, I should think so.

Is the transaction therefore legitimate? I should think not—not entirely. Why not? Because your alternatives were artificially constricted by a system supported by violence.

The phrasing of this last sentence is rather revealing, because it’s an apt description of modern capitalism, where our alternatives are “artificially constructed” by a system “supported by violence.” It is the violence of the enclosure of the commons and the genocide of native people that created the space necessary for capitalism to exist, it is the violence against the third world that gave capitalism its cheap labor force, it is the violence against labor activism that gave the capitalists power they needed to extract more surplus value from their workers.

The author of this particular extract might say that the post office represents embodied coercion, that the violence is not present at that very moment in that particular exchange but that it is part of what made the post office what it is, what gave it its power. The same thing is true of corporations. While none of our exchanges with corporations may be violent, at least in the West, the corporations themselves embody all the coercion that was necessary for their formation. Our alternatives to their products and modes of operation are artificially constrained by a system supported by violence.

6 thoughts on “Free market logic doesn’t work out.

  1. The Fool May 7, 2016 at 13:28 Reply

    Have you heard of Georg Simmel? He is a french philosopher who not only said the greatest things about money but accidentally provided an excellent argument against prostituion: “money robs things of their innate identity and replaces that core identity with a money identity. By making everything interchangeable with money, money often cheapens things and removes their significance…. In prostitution, which is a limited kind of temporary marriage for sexual purposes and for money, the monetization of sex leads to a terrible degradation on the part of the prostitute and on the purchaser of the service. Both are worse for the experience not better”.
    Money is a strange one. It has become oddly out of fashion to question it. Forgetting about whether it is intrinsically good or bad I think the problem lies in the fact that money puts artificial value on things, makes people lazy, makes people forget about quality and the real reason for having things that money buys, and creates entitlement. I theorize that money is an equalizer, it allows people with little charisma, little compassion, little loyalty, little respect, little creativity, or none of those to have social power when normally they would not have any social power. I guess it’s the fact that society of course has to convince me that that paper or that shiny metal is worth anything to me and they never managed so I just don’t get it.

    • Francois Tremblay May 7, 2016 at 15:04 Reply

      No, I have never heard of him. But that quote is very interesting. Would you recommend any books of his?

      What I would question would be: how much of those effects are due to money and how much are due to competition for money, or individualism.

      • The Fool May 8, 2016 at 03:38 Reply

        That quote comes from ‘The Philosophy of Money’. As with most things I believe money and corrupt systems of money can be discussed separately. But simply I would say firstly what is seen as “individualism” today is not so at all, it is a denial of social influence. Certainly this relentless and unnatural alienation causes people to become easily convinced that they can achieve fulfillment through consumption. The consumption as well. I’m not suggesting these things are caused by money. Not at all. Actually it makes more sense that the money system is a symptom of those things. Where did money originate from? Money systems have only existed in systems with governments. Governments exist because of this notion that a few could live in luxury if the many provide the labour and go without. It’s quite deep. Humanity long ago was broken from nature. To most early societies the concept of owning a piece of the earth was quite preposterous. Yet to steal someone else’s personal belonging was unthinkable. When they began to see the earth as something to own they lost the sense that the earth was alive and that they were a part of it. And not a particularly spectacular part. Thus land, although now it had worth–in status, money, whatever–actually lost true worth. Anything once it becomes a commodity loses worth. Most things people made for themselves or shared. And all of these things were in and of themselves-and end not a means. When you exchange something like a necklace for money what does that say about what the necklace is and what it is worth?
        That’s just one small aspect.As for what it does to human relationships, might I recommend a video John Taylor Gatto Beyond Money.

        • Francois Tremblay May 9, 2016 at 16:19 Reply

          I totally agree. The concept of land ownership is absurd. Thank you for the video recommendation.

          • The Fool May 10, 2016 at 08:20 Reply

            I know how dangerous it can be to say money is a faulty system or that humans are better off without it. It sounds trite and reactionary. However people who defend money are just parrots. Money is about entitlement, paternalism, and laziness, not freedom or autonomy. Unfortunately most of the people who are against money seem to think money is the cause of social ills and without it things would immediately be better. Money is merely one thread in the fabric of human enslavement. The way I see it, it’s not so much what does money lead to, as it is what problem is/was money a solution to? The same for government, education, and everything. All of these are solutions to problems. Inevitably you find that the original problem is a hoax or an illusion. Money is the answer to ownership of resources, what problem is the ownership of resources the solution to? The same thing government is the solution to. Certainly a half truth, perhaps a full hoax. Ownership is another one of their religions. What is it a solution to? Being indoctrinated with this belief that other people want to take away your freedom and so you need the eternal Big Daddy (government) to grant you and protect your freedom. I mean, what a scam. I think it was Erich Fromm who wrote about the fear of freedom. Isn’t that the truth? I always say, they don’t understand freedom, and if they did, they wouldn’t like it.

  2. sagor September 22, 2016 at 09:58 Reply

    Hello Tremblay. I want you to debunk the idea that ‘Non-aggression principle’ (i.e people have only the ‘right’ of not being aggressed) is an objective truth. That is important because the right-libertarians seems to argue that no matter the consequence, the NAP is always correct and must be the guiding principle of every human interaction. If NAP is just a subjective premise (like the ‘Golden rule’ or ‘live and let live’ principle), then it is just reduced to an opinion. It becomes easy to convince a right libertarian that NAP may be a good idea but exceptions can be made for pragmatic reasons without being immoral.

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