Dissecting the Market

I have written about this before – the oxymoron “free market.” I keep hearing it and reading it, so I guess I’ll keep writing about it.

We all know what the “free” in “free market” means – unrestrained or unregulated. The term “market” has more moving parts. I have read many definitions of a market, and they could be summarized as “a set of rules governing a particular type of commercial transaction.” Sometimes the particular rules are as simple as a defined place and time, but they are always backed up by a host of general rules concerning buying and selling.

Markets can’t be unrestrained because they are made out of restraints. They are intrinsically not free.

The same goes for “free trade.” The trade in question is across national borders, which are, by their very nature, restraints. Part of the very definition of a nation state is the ability to restrict what goes across its border. True “free trade” would means a complete transfer of sovereignty from governments to international businesses. Visualize one world government by Wal-Mart and you get the idea.

“Free enterprise” goes down the drain on the same arguments as “free market.” In short, no rules, no trust. No trust, no transaction.

The thing that surprised me as much as coming to this conclusion was the fact that I hadn’t heard of this basic logical contradiction somewhere else. This is not a political argument, really. It is a matter of the accepted meanings of the words contradicting each other.

It makes me think that popular economics is in the same condition today that human anatomy was 467 years ago. That was just before the publication of De Humani Corporis Fabrica (The Structure of the Human Body) by Vesalius. He had performed many dissections of human bodies and published a seven volume illustrated treatise of his work. It angered a lot of anatomy professors.

Before Vesalius, the medical community relied on the works of Galen, a Roman physician who formulated the four humors theory of illness and wrote about human anatomy. Unfortunately for the clients of medieval physicians, both his four humors theory and his anatomical studies were wrong. Forbidden to dissect human bodies, Galen had dissected apes and pigs. The apes were somewhat close to humans, but pigs are quite different in their internal arrangements.

This resulted in ongoing absurdities in the medical schools of the Middle Ages. The students would sit in an operating theater, grouped around a body and a barber-surgeon. The surgeon would cut apart the body as a professor read from a book of Galen. The surgeon would lift up and display a human liver. The professor would describe a pig’s liver. The description would not correspond to reality, as it hadn’t in any of the past dissections, but the students would nod, take notes, and go on to slaughter another generation of patients. Galen, after all was an authority with 1400 years of tradition. The corpse must be defective, not the theory. (See my essay on triumph of doctrine.)

This disconnect was vital to the medical schools of the time. If the discrepancy was acknowledged, the medical establishment would have had to admit that it didn’t know jack, and that paying to hear its members spout nonsense was a waste of time. Likewise paying for actual treatment. Bleeding and purging, anyone?

Today we have economists spouting self-evident nonsense every time they use the word “free” in conjunction with “market,” “trade,” and “enterprise.” They also write about leveling the playing field, as if a single set of economic rules could equally benefit T. Boone Pickens and a retail clerk. They theorize about an economic environment populated by fully informed, rational individuals making decisions with enlightened self interest.

The students nod, take notes, and go forth to change the rules, bend the rules, obscure the facts, and generally rig the game. After all the analysis they still play hunches. All the while they continue to spout about free markets and rational actors. Our economy goes to hell.

The economists have arguments about the greater or lesser role of governments in regulating markets. The free marketeers would have you believe that there is some possible ideal state where government doesn’t interfere with markets. This is impossible, because governments are the necessary makers and enforcers of laws that make markets possible. The New York Stock Exchange is the bastion of free market economics, right? Utterly wrong. The NYSE couldn’t exist without thousands of laws regulating the sale of stocks. In fact, the NYSE is, in essence, a huge set of laws regulating the sale of stocks. Those laws are enforced by the Securities and Exchange Commission. When the SEC fails to do its job of enforcement, and/or Congress fails in its lawmaking responsibilities, we have disasters such as the present economic collapse.

Proposing that government should stop meddling in markets is like proposing that bricklayers should stop meddling in the building of brick houses. The real question is one of architecture. What design will best serve our needs and protect us from the elements?

There are economists who are beginning to study the real, ill-informed, irrational behavior of human beings participating in markets. There are critics pointing out the imperial nudity of classical economics. We need to start listening to these scientific economists who recognize that economics isn’t an exact science. We need to pressure our government to stop playing a supposedly hands-off game with our economy that is actually hands-on in favor of big campaign donors.

We need to start calling bullshit on the use of the expression “free market” and its siblings. That would get us into the realm of modern economic medicine. We need to acknowledge that any system of economic rules has winners and losers, and that as a society we can and should decide that question.