Thursday, December 23, 2010

Free Market Mythology

With the economy in the shitter, our culture is resting on the old, wobbly crutches of empty phrases such as: capitalism, democracy, founding fathers, free-market, and socialism. The good folks at WhatUpWally? have decided that it is time to address some of these words and reveal them for what they are: meaningless.

George Orwell (yes the guy who wrote 1984) said it best:
"…the word Fascist has now no meaning except in so far as it signifies 'something not desirable.' The words democracy, socialism, freedom, patriotic, realistic, justice, have each of them several different meaning which cannot be reconciled with one another." (Orwell 1946, Politics and the English Language)

The three words we would like to focus on are capitalism, socialism, and the free-market. The myriad of meanings placed on these words are all reduced to meaning good or bad.

For instance, when your well meaning, George Bush loving friend says "Obama is a socialist;" all he is really saying is: socialism = bad, Obama = socialist, Obama = bad.

Another example, when your trust-fund-friend declares "Reagan is a champion of free market capitalism;" she could use less words and just say Reagan is good. (WUW? will not comment that of course she thinks the free market is good – she has a trust fund! Duh!)

The point is, these words are used as if they have some concrete meaning but in reality, they are difficult ways to describe something as good or bad.

"All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia." (Orwell 1946, 8)

Let's make this short and sweet: even economists know that there is no such thing as a pure free market. Economists build "clean models" in a attempt to isolate variable of human behavior. Human behavior is not clean and humans operate the economy. 
Adam Smith's basic idea was that individuals are motivated solely by economic self-interest and therefore make rational decision. As individual buyers and sellers pursue self-interest market prices move towards equilibrium (the invisible hand). This idea rest on 7 basic assumptions:
  1. Rational Action 
  2. Perfect Information 
  3. Zero Transaction Costs 
  4. Anonymous Exchange 
  5. History does not factor into exchange decisions 
  6. Institutions do not influence decisions 
  7. Individuals can rank order their preferences
The first assumption of neoclassical economics is that individuals are motivated to make rational decisions based solely on economic self-interest. Buyers and sellers attempt to maximize utility and minimize costs. Sellers attempt to maximize the price of their goods while minimizing their costs. As they compete against other sellers in the market, buyers compare the goods, find the product with the highest utility value and lowest cost, and make their final purchase decision on price alone. Buyers and sellers, pursuing self-interest, push the market to equilibrium where the price of goods equals utility value. The assumption of rational action is dependent on six other assumptions. "Economic man" makes rational decisions because it is assumed that he has perfect information, no transaction cost, and anonymous exchange. Economic man is also assumed to make decisions without consideration of the past and is not influenced by institutions. Lastly, economic man makes rational decisions because he has his preferences precisely rank ordered and his preferences are formed outside of the market.

These seven assumptions create a clean model for an ideal, free-market, self-regulating economy but even the founders of neoclassical economics were aware that the assumptions were not realistic.

Gary Becker, Nobel Prize winning Economist:

"… Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences." (Becker 1993, 385)

I love this quote from Fred Block:

"… actual economies represent an extremely complex mix of microeconomic choices, social regulation, and state action. Given the complexity of these arrangements, the kinds of sweeping claims that are made by both defenders and critics of the market appear intellectually suspect. The idea that allowing greater market freedom will invariably increase economic efficiency is a purely ideological one." (Block 1990)

Yoram Ben-Porath:

"Economics deals with agents who are stripped of identity. Faceless buyers and sellers, households and firms that grind out decision rules from their objective functions (utility, profits), meet in the market place for an instant to exchange standardized goods at equilibrium prices." (Ben-Porath 1980, 4)

Going back to my favorite, pre-24 hour news channel, political commentator, George Orwell, the way we think changes the way we speak but the way we speak can also change the way we think. It is crucial that we stop using words that no longer have definite meaning because they corrupt the way we view the world. Socialism and Capitalism are neither good nor bad. They are only philosophy. They are theories about human behavior and how humans might behave in better ways.

"But if thought corrupts language, language can also corrupt thought. A bad usage can spread by tradition and imitation, even among people who should and do know better." (Orwell 1946, 8)

We devalue our language and our culture by employing empty phrases as political rhetoric. It is time that we start analyzing our thoughts and our words; stop living in the black and white world of good and bad; and refuse to let political leaders and commentators manipulate our society with fear inducing, empty words and phrases.

WUW? would like to leave you with one last quote before signing off for the Christmas break:

"One of the greatest threats to the continuing affirmation and evolution of a culture of civil liberties in the United States is the modern day McCarthy's of the media whose often irresponsible rants appeal to the worst rather than the best in the American people. The Bill O'Reillys, Rush Limbaughs, and Ann Coulters of the current generation debase public discourse and endanger democratic values. That they have a right to speak their piece goes without saying. The challenge for Americans is to be sufficiently thoughtful, informed, and discerning to separate the wheat from the chaff."

Geoffrey Stone - War and Liberty: An American Dilemma: 1790 to the Present (2007, 174)

HAPPY HOLIDAYS! Now go shopping,


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