I was thinking the other day about the curious and enigmatic term the “free market.” One reads about it constantly in popular economic contexts, yet it’s not really defined in standard neoclassical welfare economics, in which the ostensibly optimal market structure is something called a “perfectly competitive market,” not a “free market.” Indeed, I’m not sure I’ve ever heard the “free market” defined exactly in a rigorous economic context. I guess I had always assumed it was just some ancient and now economically illiterate but not particularly troubling way of talking about standard welfare economics, perhaps expressing some sort of quaint, unstated folk belief that if one lets markets run free, however one might care to define that, then one ends up with the perfectly competitive markets of real economic theory. However, it occurred to me recently the ubiquity of the phrase may have a rather more sinister explanation. I wonder now if it thrives not because it’s a relatively harmless bit of simple-minded nonsense no one can be bothered to address but because it provides a crucial pathway to conflating or combining the conclusions of economic theory with other beliefs external to economic theory, beliefs that express ethical beliefs relating to distributions of economic power, in particular, that are not part of economic theory, per se.
Here’s what’s on my mind. Proper neoclassical welfare economics is famous for its ostensible indifference to the distribution of economic power, which is a result that flows necessarily from the form of “utility” it uses to establish the supposed optimality of perfectly competitive markets. Thus, economic theory, properly considered, is indifferent to the redistribution of economic power generated by labor and capital markets, for example. That’s where all the funny rhetorical business and word play associated with economic theory and the ethics of distributional mechanisms and results come in, what I’ve been calling on this blog “bad economics.” If you don’t know what I’m talking about here just yet feel free to skip to the next paragraph. I’ll be explaining all these mechanisms in detail sooner or later. However, if you do know what I’m talking about and I can just review, I’m talking about the notion, for example, that “indifference” as it applies to distributional issues means supporting the distributional mechanism we have, or the one that falls out from some particular legal and political system, or some other mechanism on whatever basis, rather than true indifference in the sense of a refusal to take a stand on such issues. Or again, that distributional “indifference” applies not just to economic theory and economists using that theory but more generally, so economic theory shows no one should have any ethical beliefs about resolving interpersonal conflicts and distributional systems, although again sustaining or not objecting to the system that’s already there is paradoxically fine because acceptance or support for that system is not based on distributional ethics but some other ethical proposition involving the resolution of interpersonal conflicts, such as maintaining existing power structures unless one recognizes there could be a reason to change them. Or again, the ever present opportunity to put one’s horse before one’s cart and say things like we can’t alter the distribution of economic power because the result of changing the existing incentives for labor and capital would “interfere” with the “optimal” allocation of those productive resources, neglecting the fact one cannot define an optimal allocation of inputs except in reference to a given distribution of economic power. Or again, the notion that changing the distribution of economic power is “inefficient” unless done is some obscure and quite possibly nonexistent way consistent with perfectly competitive labor and capital markets, which use wages and returns to capital to simultaneously allocate those productive resources and distribute economic power.
Yes, all those rhetorical sleights of hand might be awkward and cumbersome, but what economist in his or her right mind would want to follow what economic theory actually says and refrain from offering any policy advice that has distributional consequences, including being neither for or against policies that would change the distribution of economic power including changing incentives in the labor and capital markets? What generally conservative leaning economist, confronted with the choice of moving from a perfectly competitive market system and outcome to a non-competitive market system and outcome would honestly want to say, look, does it involve changing the distribution of economic power, because if it does I have no opinion so stop asking me about it. I mean, what would be the fun of that? How could an economist ever slip in his or her own views on the matter, unstated, hidden, immune from criticism, if one just stepped away from such issues as economic theory implies one should?
Well, one rhetorically elegant way to escape all the awkwardness and inconvenience of what real economic theory has to say about distributional issues is to pull what I believe is called in philosophy the Old Switcheroo, set aside the concept of “perfectly competitive markets” (and the assumptions required for that), distributional indifference, funny definitions of utility, and so on, and start talking instead about the “free market” or some other ill defined word of that sort such as the famous old time trigger term “capitalism” (the exact definition of which must forever remain a mystery given the mix of markets and government one sees in all successful advanced economies right now). What’s the point of that? Well, I’m not sure many people interested in discussing the marvels of the “free market” or “capitalism” are particularly concerned about the issue of distributional indifference in real economic theory. I believe the common formulation of what the “free market” or “capitalism” entails is whatever happens on the market or the market in a state of freedom, however that may be defined, is ethical gold, and if economic power is distributed in some way by labor and capital markets (and inheritance and whatever else), then that’s the way it ought to be.
Of course, I must say this sort of conflation isn’t necessarily always involved whenever one starts talking about the “free market” or “capitalism.” There are economic theories other than neoclassical welfare economics. For example, I had one fellow attempt to explain to me in very animated terms why the “free market” was special for reasons that had nothing at all to do with traditional economic theory, welfare economics, utility, etc. It seemed to involve some sort of confusion about the use of government power to enforce property rights, contracts, and just creating the framework required to have what this fellow was calling a “free market.” I found it all rather incomprehensible and idiosyncratic, but at least the fellow knew what he was about and gave it a shot. I suspected, at first, that he perhaps had a vague notion of economic theory in the back of his mind, and although he didn’t really understand how it works he liked the results and had busied himself reinventing the wheel, but on reflection I think maybe that’s not being entirely fair. He made no bones about rejecting the distribution indifference one finds in contemporary economic theory and was quite happy to explain why the distributional mechanisms of labor and capital markets in the “free market” were ethically superior because they were especially consistent with and conducive to freedom in his mind. I don’t remember him mentioning the word “utility” at all. So the “free market” and “capitalism” are not always weasel words. They can be used perfectly sensibly and consistently in other economic and ethical frameworks and in that case would need to be evaluated in those contexts. That’s well beyond what I’m trying to do here, which is to focus on neoclassical welfare economics. But I’ve certainly seen the words used inappropriately often enough. It doesn’t seem unusual to me at all to hear statements like, if you don’t appreciate the superiority of the “free market” or “capitalism” then you need to go back and have another look at economic theory, or retake Econ 101, or basically get your head out of whatever you’ve managed to get it stuck into, etc.
So what’s the point? I guess just be careful out there. If you’re talking popular economics take the time to figure out if you’re dealing with arguments based or ostensibly based on standard neoclassical welfare economics or about arguments based on some other philosophical or ethical or economic tradition because if you don’t you’ll probably be wasting a lot of time in the always amusing and comical Conflation Town. I guess another point is that if academic economists and philosophers would like to take a little time off from their busy schedules and throw the confused man and woman in the street a bone now and then, one thing they could do that might help quite a lot is to get a little more active dealing with some of these terminological issues. There is no “free market” or “capitalism” in standard economic theory. Academic economists need to make that clear. Stress it. If you have some other theory that uses those terms that’s fine, but in that case put a little effort into explaining what theory you’re talking about and clearly differentiating that theory from standard economic theory. Explain, in particular, what ethical beliefs that theory entails and whether those beliefs cover the distribution of economic power especially. Don’t just do some incomprehensible mash up and waste everyone’s time.
