After reading a variety of material on MP Steve Baker's website earlier today, I ended up reading this summary of Austrian school economics. It's clear and well-written, although it gets a bit polemical at points and the engagement with potential objections at the end is pretty cursory. I am actually quite sympathetic to some of the ideas involved; it seems to me that the interaction of notionally "free" markets with regulation that is at the mercy of powerful lobbying interests is a pretty terrible combination. It also seems self-evident (especially now) that a crude mathematical model of human choice is badly flawed as a basis for monetary policy. And I hope that most right-thinking people can now agree that the inflationary economic policies of the last 50-odd years have finally passed their sell-by date. Nonetheless, I think this radically free-market economics is in many way just as guilty of utopian fallacies as the centralising socialism that it pits itself against. A few observations:
- The assertion about monopolies being primarily a product of intervention seems extremely hard to verify. I'd like to see more genuine examples of monopolies being toppled without intervention. Even at a logical level: if the claim that governments can distort markets is true, how on earth can one claim that companies can't distort them? Surely the more one limits the government's power, the more likely it is the companies will be able to exert influence to distort?
I think it's probably true that given time, a monopoly will either collapse or take over the world, but it seems that in practice this can take decades even in the absence of regulatory distortions, and much harm can be done in the meantime. Is that really an acceptable cost?
- The moderate Austrians seem forced to turn a blind eye to the necessity and cost of providing a framework within which the market can exist. Defence spending is the classic example here. The government is just as much part of the market as everyone else. More recently, Net Neutrality highlights that the freedom in free markets depends on other sorts of infrastructure as well; if a company owns the means by which the market itself communicates, how can this not distort things?
- The whole thing seems to be based on an entirely mythical notion of rational free agency. We are not free at all, we are programmed by our education and the collective cultural output of our society. Those with large sums of money have a disproportionate control over this programming process. This is the biggest distortion of all!
- The model seems to be extremely poor at dealing with catastrophic future costs. Although massive environmental damage will ultimately have a huge impact on prices, current prices do not communicate this to consumers so they will not change their behaviour. In fact, in the short term, a free market penalises those who attempt to deal with long term issues since it makes them less competitive in the short term.
- Free markets are inherently bad at aggregating universally held values that have a low impact on individual, local choices but a very serious impact at a wider level. This is because it is inherently difficult for every individual to factor in all such considerations to every choice that he makes (this is basically a modified version of the capitalist argument against socialist central planing). This is exactly the same problem as with First Past the Post voting systems - something can be an important but not decisive consideration in myriad individual choices, such that in aggregate it is a very, very significant factor in the collective consciousness, but it will be almost entirely unrepresented in the informational structure of the free market because the market only sees the winning result of each of the individual choices.
- The theory runs that free markets are driven by what consumers want. Entrepreneurs have an incentive to offer new products that fit better with consumer desires to make money. But the same theorists also argue that capital isn't inherently self-replicating because the entrepreneurial investment of capital involves risk. You invest money on the assumption that, after a potentially long and complex process of production, you will get a good return. But there's a risk you won't. As a result, only a minuscule fraction of possible products are ever introduced into the market: the others "aren't worth the risk". But exploring even a small part of the complex space of consumer demand would require an enormous range of products to be introduced all the time in order to establish the right combination of attributes and price; and this just doesn't happen.
For example, I want to buy food from an ethical, conveniently located supplier that employs local people and is locally owned; I'm not too worried about the price. There is no such option and there isn't likely to be. So I buy from Waitrose instead, sometimes even Tesco because it's the closest. The information about my values and preferences is being massively misrepresented in the market. In reality our current markets offer a pathetic illusion of choice which undermines the claim that they are likely to converge on what people really want; importantly, there is little incentive for those currently doing well out those markets to change that situation.
- Free markets tend to maximise consumption. Is that really a good idea, particularly in view of the currently environmental situation? The idea that we should strive to satisfy as many of our desires as fully as possible is questionable, at best.
- In the introduction I read by Dr Eamonn Butler, he tries to distance the economic model from the psychology underlying action. This seems deeply disingenuous for an economic model that emphasises the centrality of human choice. Markets have a profound impact on our psychology, they change the way that we decide, even when no deliberate distortions are involved. Subsuming all human choices to a simplistic pricing model is exactly the mistake Austrians criticise in mainstream economists, but in their own way they're just as guilty of it. Although they ditch the simplistic mathematical calculus of value where utility can be added and multiplied, we still have a marketisation of all our choices nonetheless, because the whole system still ultimately revolves around what someone is willing to pay. Yes, it's good that it's no longer a zero-sum game where you have to lose for me to win; but we're still trapped in this mindset of "everything I do must be for some return". I think we've got to recognise that the act of reducing all human interactions to part of a value bartering system comes with some very serious social consequences; the more you tell people that they're fundamentally selfish, the more you legitimise the individualist attitude, the stronger it grows. When the psychological reward for helping another is classified in the same way as a financial reward for the same action, eventually that psychological reward is devalued. The marketisation of our motivations is very real, and very damaging.
- Economic liberals don't think it makes sense to engineer a particular social structure because the market gives people what they actually want. But people are notoriously bad at identifying what they really want. We have traditionally deferred authority (even in democracies) to society "elders" of some sort (be they Kings, MPs, witch doctors or whatever else) on the basis that they are likely to make better decisions about the wider interests of the community than we would ourselves. Genuinely free markets make that extremely difficult because they give ultimate power to the aggregate expression of our unconsidered desires. I'll accept that "elders" often get it wrong, and can themselves become entrenched etc, etc., but I think there's room for a balance here. Are we sure we want to devolve massively more power to the collective expression of our immediate desires than we already have?