The Limits of Free Markets, Both Economic and Intellectual
Both in economics and speech, the market is a powerful metaphor. Free economic markets are efficient, and produce the greatest good for the greatest number of people by the fair interplay of sellers and buyers. The marketplace of ideas is supposed to produce truth, and maximize free inquiry of ideas through the competition or rival ideas. Both marketplaces are supposed to support contrasting forms of individual freedom. Except the truth is that neither work in practice compared to theory, fixing their externalities and preventing one from corrupting the other is challenge and task of contemporary western politics.
The market is a metaphor of modern western politics. Belief in the efficiency of economic free markets dates at least to Adam Smith’s 1776 The Wealth of Nations. For some economists, free markets maximize individual freedom producing both what is called Pareto efficiency (no one can be made better off without someone being made worse off) and Kaldor-Hicks efficiency (overall greatest net wealth for a society). Government regulation interferes with economic markets, damaging both individual freedom and both forms of efficiency. Market fundamentalism in the guise of contemporary Republican or neo-liberal politics, ascribes to this belief.
Yet there are limits to this economic market fundamentalism. The same Adam Smith who wrote The Wealth of Nations also penned The Theory of Moral Sentiments and argued how economic markets are circumscribed by ethical values and virtues. The Wealth of Nations in book five recognizes an important role for the government investing in infrastructure. Later on, other economists have described unregulated markets as producing externalities such as pollution or monopolies. Others see externalities to include the mal-distributions of wealth and income in the world or racial and gender discrimination. Economic markets are also plagued by problems such as free riders or collective goods. These problems necessitate government action. Even Milton Friedman recognized the need of the government to enforce the rules of the marketplace against force and fraud so that it would work properly.
The point is markets are not architectonic. Markets are not inherently self-regulating or natural. Karl Polany’s 1944 The Great Transformation made this point. It took enormous state power to construct and maintain market capitalism. The logic of both capitalism and human nature is often against free markets, wanting to produce collusion, monopolies, or engage in rent-seeking behavior or political action to favor oneself. Pure self-interest left on its own, as Nobel Prize economist Kenneth Arrow pointed out, cannot be aggregated to produce collective goods for a society.
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