About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Friday, October 28, 2011

What Is A "Free" Market?

Recently on CNN Peter Schiff debated Cornell West. Schiff's point is that the Occupy Wall Street crowd should be protesting government because if the market were truly free, a financial crisis would have been averted. Insolvent players would have suffered losses and would have ceased to be participants in the market. Cornell West argues that government is necessary to protect small players by guaranteeing fair play, i.e., preventing big business from running roughshod over small business. He says there is a natural tension between the free market price and social justice. Thus, he says, government was responsible for doing away with child labor and providing workers with a 40-hour work week.

Such debates are tedious. The debaters make economic assertions and then rely on historical examples to justify their assertions. Was it the free market that eliminated child labor or big government? Was it runaway capitalism that caused the Great Depression of the meddling of the Federal Reserve and Washington politicians? Such debates devolve into little more than noise, pointless shouting matches which prove nothing and teach nothing. They aren't even good theater because listening is so frustrating.

Economics is a logical science, not an experimental science. You can't do economics in a test tube laboratory. You can't make sense of historical data by observing trends and cause and effect. In the real world the truth is that it is impossible to isolate variables, which is the method of experimental, laboratory science. The chemist isolates conditions in ten identical test tubes, adds a different chemical to each test tube, then observes the effects caused by the added chemical. The chemist knows the added chemical is responsible for the observed effects because conditions are controlled and constant. The added chemical is the only variable. It's effects are isolated.

In the world of human action, which is the subject matter of the science of economics, variables cannot be isolated. In the real world millions of individuals are making individual decisions based on ever-changing conditions. Economic data is simply a distilled, numerical snapshot in time of these actions. When the data changes over time, who is to say that it changed because of a new Washington policy or a new product innovation or a new state policy or a conflicting local policy or because several actors came down with the flu? All of these "causes" are happening at once.

In addition, the truth is these phenomena do not "cause" the actor to act in a certain way. They simply present varying conditions to the actor who decides and acts based on his personal preferences. No two actors necessarily make the same decision or necessarily act in the same way when presented with similar circumstances.

So how do we gain economic knowledge if not by experimenting in the real world, observing and gathering data?

We gain economic knowledge by reasoning, i.e., logical argument. We imagine actions which take place in a vacuum. We create mental circumstances which are controllable and constant, and then introduce a variable. We can then learn the effects of that variable. We define human action as purposeful behavior and then examine our mental experiments in the light of that definition.

For example, let's examine the Peter Schiff vs Cornell West debate over the "free" market. Schiff and West could not communicate on the same page because each defined the free market differently. Schiff thinks of a "free" market as a market which is truly free, i.e., no government intervention, no incumbrances, no coercion. In Schiff's "free" market all trades and exchanges take place voluntarily between willing individuals. There is no duress. No force. Traders are not forced to trade by any other trader or player in society.

West on the other hand sees the "free" market as a jungle market, wherein some individual traders have the power to coerce other traders into making trades, wherein some individual traders use physical force to adjust the conditions of individual exchanges in their favor.

So, when the discussion turns to child labor, Schiff assumes that in a "free" market, if children are working for a business owner, the agreement to work is mutually agreeable. He assumes that if children could be forced to work for a business owner, either by the owner or the child's parents, then the market in which the child works is not truly "free."

West, on the other hand, recalls a time in human history which historians describe as having a "free" market. He notes that in these times children worked involuntarily in factories. Thus, he concludes children can be forced to work in a free market and that government is required to pass labor laws to prevent children from working in factories, period.

Schiff would argue that, because law must be written and applied impartially, such a government intervention necessarily prevents ALL children from working in factories. However, in a truly voluntary and "free" market, there are bound to be children who want to work in factories voluntarily. Why should they be prevented from doing so by the government?

Similarly, West would probably argue that no individual should work for less than a wage of, say, $10.00 per hour, which we will assume for the sake of this argument is the government mandated minimum wage. However, such a government law prevents ALL individuals from working for less than $10.00 per hour. Why should individuals and business owners who want to voluntarily agree on a lower wage be prevented from doing so? It should be obvious that a government mandated minimum wage would create unemployment in this case.

When an analytical economist, i.e., an economist who reasons and reaches conclusions by means of logical argument, speaks about the effects of a government mandated minimum wage, he says that such a mandate will create unemployment PROVIDED there exist individuals willing to work for less than that minimum wage. For instance, a minimum wage law would create unemployment if the minimum wage were set above the prevailing "free market" wage. In other words, the economist KNOWS which conditions will prevail when certain conditions are assumed because he has reasoned the problem out in an imaginary scenario with these conditions controlled and isolated, just as I did above.

Now, when an experimental economist goes out into a community and compares employment data from one year to employment data from another year and claims his research proves that a recently passed minimum wage law did not create unemployment and concludes, therefore, that there is no necessary connection between unemployment and a mandated minimum wage, he is mistaken. The analytical economist knows he is mistaken. The analytical economist knows that there must be other factors, other variables that exist in that particular community that the experimental economist did not consider and could not measure.

Peter Schiff is an analytical economist who studies the logic of human action. All his statements about the "free" market ASSUME a market in which all individuals make trades of goods and services freely and voluntarily. If he had made this plain to West, West could not rely on historical examples to disprove Schiff's point. He would have to debate the logic of Schiff's argument.

Alternately, if West could not prove Schiff's argument illogical, he could contend that the concept of a totally free and voluntary market is impractical to establish in the real world. Or he could contend that such a market could be established, but that it should not properly exist because it is unjust or immoral. Schiff, of course, could then argue with West, not on the pure economics of the matter, but on the practicality or morality of the matter.

The most irritating aspect of discussions, such as the Schiff vs West TV discussion, is that the science of economics is ignored and abused.  Economics, properly understood, should help resolve disagreements, not prolong them. Austrian economics, indeed all economics, must rely on precise definitions and exact language. Analytical, free market economics must be understood to refer to a market that is absolutely free and voluntary. Experimental observations aimed at discrediting the logic of the analytical economist have no place in such a discussion.

Imagine two matheticians in a TV discussion about baseball statistics. One mathematician claims that the top player in the league has a batting average of .358. The other disagrees. He claims the players batting average is .249. The two go back and forth, citing different years in the player's career and the batting average of retired players for comparison. The first mathematician argues that batting average is the ratio of hits divided by at bats. The second mathematician scoffs that such math might work in theory but in the real world social justice issues must be factored in. He cites a study made by two Nobel Prize winning mathematicians. He says the data from that study of Ted Williams' career in Boston in the 1950's showed that Ted Williams average was, in reality, much lower than the record books say, if the data is adjusted for certain social factors of the day.

An argument such as this would seem absurd on its face. Anyone listening to it would quickly be frustrated and switch channels. If mathematicians cannot agree on the theory that two plus two equals four everywhere and always in the universe, then what's the point of continuing the discussion about mathematical phenomena in Boston in 1950? Analytical mathematicians with scientific integrity must agree on basic logic and method before they can disagree on theory or its application in the real world.

Yes, mathematicians may disagree on the social or moral issues surrounding specific applications of their theory. For instance, mathematicians working on a doomsday weapon of some sort may disagree on whether or not it is moral to use their theories in the construction of such a weapon. But it would be absurd and illogical to claim that mathematical theory itself is invalid and useless when applied to doomsday weapons.

Properly reasoned, economic theory is valid and useful everywhere and always. A minimum wage set by law above the free market price of labor absolutely creates unemployment. Cornell West may argue that there is a "tension" between this free market price of labor and someone's understanding of social justice. However, he may not call this tension "natural." He must be prepared to acknowledge that the free market price is the result of the free, uncoerced and voluntary actions of all traders in that market. In this context, the only "natural" relationship is between price and the voluntary actions of market participants whose actions set that price. This truth cannot be disputed. The question of whether or not such a price satisfies some individual's conception of "social justice" is another matter entirely, separate and distinct from the free market and the science of economics.

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