And now I shall be off scarfing smoked salmon and fresh apple pie seasoned with free market tears, or
Why a collection of confused retards does not amount to a free market.
Note that this isn't the longest title of a Trilema article.
The free market is the most efficient solution to a specified class of problems. It is not a universal panacea, it is not a means to violate basic thermodynamics, it's not a procedure to bring forth milk out of stone and cheese from the very moon.i
For the benefit of those who seriously aim to improve their understanding of this vaunted concept past naked, naive fetishism and into some sort of rationally usable system, there are two major limits on the applicability of the free market :
I. The free market requires information symmetry. The cannonical form this problem is captured in could be the observation that "an exchange in which Joe trades sight unseen a satchel in which he might have put some gold for a sack in which Moe might have put some potatoes is not free nor can it be part of a market."
A very common example to easily understand how this works in practice is the used car market. For those looking to buy it is expensive to establish exactly the wear&tear levels of any one used car. This creates an information asymmetry : the seller knows much better than the buyer what the item is worth. Consequently, the buyer hedges his bets, and in order to make sure he is not taken advantage of too badly he is unwilling to pay more than what he perceives to be "the average price".
The problem is that the seller is also in a position to know this "average price"ii and so he has an array of attacks at his disposal. In the car market what he does is he avoids putting on the market any car which is objectively worth more than the "average price" cutoff. What this does over time, of course, is lower the average value of cars on sale, which in turn lowers the "average price" which in the end ensures that nothing but lemons will ever be available to buy. Left untreated the situation can devolve to absolutely comedic extremes.
In other cases the seller favours other attacks, such as for instance manipulations of the perceived "average price". In the case of the alleged "domain name market" the sellers of fundamentally worthless items (domain names are under no circumstances worth more than what they cost to register) enter into highly publicised self-trades aimed to create a convenient if unsupported impression among the general buyer population that the "average price" is significantly above the value of the items on sale. Other Internet scams, such as the stuff Burnside or Nefarioiii were peddling use a very similar approach to prop the value of insubstantial "assets".
II. The free market requires completeness. The free market fails to work - and spectacularly so - when it is applied over partial fields, in which actors are able to hide externalities.
For instance, take the case of the girl that baked my apple pie depicted above. If she is allowed to not clean up the kitchen after herself, she will be able to bake pies at a lower per-pie cost than the other girls, which do also clean up afterwards as part of baking the pie. The net result of this will be a very dirty and also increasingly dirty kitchen tableiv.
This problem becomes extremely serious when coupled with welfare or entitlement systems. For instance, in a country in which health care is offered free to all citizens, a fast food place which sells very cheaply extremely bad food secure in the knowledge that the public budget will treat for "no cost" all the people it makes sick is in fact running more of a tax fraud business than a legitimate eatery business.
To understand each other : it's absolutely true that free markets are very good at allocating resources. It is however the case that free markets need some items to work their magic, they don't just operate by nominal invocation, like the Holy Spirit. One major such element is information symmetry. Another such element is containment, or the absence of hidden externalities. Absent either of these, it can not be the case that whatever is going on qualifies as a free market, even if it appears that way to the naive observer.———
- Notably, a century or so ago Romania's national poet was complaining of the same disease brought by a different fetish :
Da-i soseaua rea, încât ti se frânge caru-n drum? Libertate, egalitate si fraternitate si toate vor merge bine. Dar se înmultesc datoriile publice? Libertate, egalitate si fraternitate da oamenilor, si s-or plati. Da-i scoala rea, da' nu stiu profesorii carte, da' taranul saraceste, dar breslele dau înapoi, dar nu se face grâu, da'-i boala de vite?... Libertate, egalitate si fraternitate, si toate or merge bine ca prin minune.
which in English would read,
So the road's broken and unmaintained, so your cart breaks down ? Freedom, equality and brotherhood and everything will be fine. But is the public debt growing ? Freedom, equality and brotherhood so that it may be paid. But the school's bad, the teachers can't read, the peasants are growing poorer, the artisans are disappearing, the crops falter, the livestock sick ? Freedom, equality and brotherhood and everything will miraculously improve.
The impact of the French revolution is quite visible in the form the disease was taking in the XIXth century, but its substance is the same, unchanged. [↩]
- The reason for the quotes is that averages can only be calculated over collections of identical items. There's no average gender of the human race, nor is there an average fruit. [↩]
- Aka James McCarthey [↩]
- Speaking of which, if you're young, fetching and comfortable being topless I'm looking for more pie bakers, apply below. [↩]