459. Market ideology: freedom

Many good economists grant that the model of the mythmarket, with perfect competition, is unrealistic. That applies even to the original makers of the model (Arrow and Debreu). Some say that it was never meant to approximate reality. Others say that it presents a benchmark against which real markets may be assessed. However, a line of highly vocal economists, from Hayek and Friedman through rational expectations economists, in the new classical economics, were convinced that this Utopia could and should be realized, and many policy makers followed their gospel. The illusory ideal of perfect competition still forms the basis for a market ideology, often hidden, sometimes made explicit, that sees ‘the market’, i.e. the mythmarket, as a universal panacea.

I quote Cassidy (2009: 345): ‘Even today, all too many economists see their primary role as defending the market system against possible encroachments. Privately, they are often willing to acknowledge that a particular industry is wracked by market failure and needs reforming. Somehow, though, these individual flaws don’t add up to an overall critique’.

‘The market’ came to be taken for granted, as a law of nature, inexorable and inevitable, and economic ‘crises’ were and still are made to sound like natural disasters, like hurricanes, that happen to us, while in fact both markets and crises are of our own making.

Behind the model lie deeper, tacit, implicit views, mostly from the Enlightenment, concerning the rational, autonomous individual; freedom; an ethics of utility; the virtue of self-interest, universal principles and laws, and the rigours of mathematics. Here I discuss freedom, here freedom of choice for consumers and producers, which is arguably the most powerful driver of market ideology. That is why ‘the market’ is associated with ‘the free world’, and any compromise on the operation of markets is a compromise on freedom, and therefore unacceptable, or so the rhetoric goes.[1]

In real economies, freedom of choice is often severely hampered by lack of alternatives to choose from (in monopoly), the difficulty to judge differences in quality between competing goods and services, and high costs of switching between them.

Nevertheless, the claim of freedom, though imperfect, for markets is valid, and indeed one of its strongest points, but it does depend on what notion of freedom one endorses (see item 49in this blog). What applies here is so-called negative freedom or freedom from constraint or interference. But there is also a notion of positive freedom or freedom of access to resources, knowledge, abilities, networks and the like, and here markets perform much less well.

Few economists include this (Amartya Sen is an exception). To the extent that competition approaches what economists call ‘perfect’ indeed there is little room to make any compromise on maximum profit, but in fact that is seldom the case, due to market imperfections, arising from economies of scale, product differentiation, lack of information, transaction costs and other factors, to be discussed later in this blog. While ‘imperfect competition’ is a vice for economists it can be a virtue for the good life, and thereby I reverse the famous dictum that private vices (of cupidity) are public virtues (of economic efficiency): economic virtues can be public vices.

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[1] A great impulse for this lay in Friedrich Hayeks Road to serfdom and Milton Friedmans Capitalism and freedom.