Four Arguments for the Free Market

Dan Hirschman

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.

 

Posted via email from Jim Nichols