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, June 1, 2012

You Can't Make A Silk Purse Out Of A Sow's Ear

In a previous post I suggested that private property is the keystone of liberty. Today I'd like to focus on the "free market," which is the hallmark of a proprietary society, i.e., a society in which individuals are guaranteed an absolute right to own and control property. Property and the free market go hand-in-hand because mutual and voluntary trade is the only legitimate means by which property may be exchanged in a proprietary society.

The "free market" is an economic concept. As such it has no physical reality. It is not a thing, like the New York Stock Exchange. Neither is it a place, like Wall Street. The "free market" is a mode of human action in which free individuals mutually and voluntarily exchange what they own and control in a manner of their own choosing, without supervision, interference or intervention from a third party.

There are those who despise the free market. They say that capitalism, which is the economic system based on private property and free markets, is biased in favor of the rich, that it fails to help the poor, that it exploits workers, that it must be regulated or even eliminated in favor of a fairer and more equitable economic system, namely socialism, or some "mixed" hybrid of socialism and capitalism.

Consider the arguments made against capitalism in Section C10 of something called "An Anarchist FAQ." The author(s) deride free market capitalism based on aggregate, economic statistics which supposedly describe the historical outcomes of proprietary societies:
Looking at the history of capitalism, it appears that social-democratic capitalism, with strong unions and a welfare state, produces not only more growth but also more equitable growth (as one expert notes, "[i]f the 'welfare state' were abolished and taxes reduced accordingly, society would become a great deal more unequal." [John Hills, "Inequality and the State," p. 195]). Movements to more laissez-faire capitalism has [sic] resulted not only in lower growth but also growth which accumulates in fewer hands (which makes sense considering the basic anarchist insight that a free exchange benefits the stronger of the two parties).
We all have heard the famous Mark Twain quotation: "There are three kinds of lies: lies, damned lies and statistics." I am always amused by critics of the free market who are eager to ground their arguments in the fog of history and statistics. Economic analysts on cable TV debate historical economic statistical data nightly, literally for hours, and in the end they must always agree to disagree because economics is not physics. Economic theory must be proved or disproved by ratiocination, not empirical data.

For example, I've defined the free market as follows:
The process by which free individuals in a proprietary society, in the manner of their own choosing, mutually and voluntarily exchange what they own and control without supervision, interference or intervention from a third party.
I challenge critics of the free market to demonstrate, by means of statistical analysis, that the process described above must somehow result in unsatisfactory outcomes for particular individual participants in the process, when satisfaction is considered from the point of view of the individual participants themselves.

When two individuals mutually and voluntarily trade property, both individuals must benefit or the two would not trade in the first place. This is an obvious and indisputable truth. Each trader, for reasons known only to himself, values the property exchanged differently. For instance, if trader A and trader B agree to an exchange of A's apple and B's orange, isn't it obvious that trader A values the orange more than the apple and that trader B values the apple more than the orange? Doesn't it stand to reason that in this trade both A and B benefit from the exchange, when "benefit" is considered from each trader's own point of view?

Now expand and extend this trading experience to an entire proprietary society of individuals, millions of A's and B's mutually and voluntarily exchanging property. Isn't it true that all individual traders in this scenario must benefit? How could the critic of the free market use statistics to "prove" that each individual trader did not benefit, or that some group or class of traders did not benefit, or that some class of traders exploited another class of traders and thus benefited at the other's expense?

The truth is the critic can prove nothing...unless he makes one or both of the following assumptions. First, he analyzes each trade from his own point of view rather than from the point of view of each trader. Second, he assumes the trade was not really mutual and voluntary. Honest readers will notice that the anarchist response above makes both assumptions. 

First, the anarchist argument uses value-laden and nebulous concepts such as "growth" and "equitable growth" as arbitrary benchmarks of analysis and, second, it relies on something called the "basic anarchist insight" to prove "that a free exchange benefits the stronger of the two parties," which is an obvious contradiction in terms. How could an exchange be "free" on the one hand, i.e., mutual and voluntary, and on the other hand be coerced, i.e., not mutual and voluntary, by the "stronger" of two individuals making the exchange?

Psychobabble and sloppy logic is not economic analysis. A market is either free or not free. An exchange is either mutual and voluntary or coerced. Logic won't allow us to have it both ways. In a free market both individuals benefit. End of story.

Of course, critics of the free market do not end the story there. They are quick to point out that some traders are clever and others are not. Some traders are liars and others are gullible. Some traders own much property and others not so much. As a consequence, some traders are unsatisfied with their trade after the fact. Critics of the free market are quick to create arbitrary classes of these types of regretful traders. They are quick to aggregate traders suffering from buyer's remorse and create statistics describing that remorse. In short, they indict the free market not because all individuals are free to engage in mutual and voluntary trade of their own property, but because the outcomes of these trades may be judged by an outside observer, for one arbitrary reason or another, as unsatisfactory after the fact.

This is where, as they say, the rubber meets the road in discussions of private property vs. public property, of capitalism vs. socialism. Capitalists concern themselves with the circumstances of the trade. They insist that all property traded be private. They insist that all trades be mutual and voluntary. Socialists concern themselves with the outcomes of trades. They insist that property be either collectively owned or collectively controlled. They insist that all trades be supervised and coerced by the rules and regulations of some social authority.

Obviously, by means of society individuals can organize themselves into any trading or economic system they can mutually agree upon. But, as Ludwig von Mises and other economists deftly point out, each of these economic systems produces differing results and consequences. Aggregate individual satisfaction in these societies is not independent of the means by which trades are consummated, and production of goods and services in these societies is not independent of the means by which these goods and services are distributed.

In free market capitalism all property is privately owned and controlled by individuals. You make all life's decisions and decide what's best for you. All trades are mutual and voluntary. At the time of the trade both parties are always satisfied. Prices are determined strictly by the interplay of individuals in the marketplace. The aggregate demands of individual consumers decide which goods and services will be produced, in what quantities and how they will be distributed. Individuals are free to choose with whom they do business. Individuals decide for themselves the ends they will seek and the means they will use to attain them. Success or failure in attaining these goals depends on each individual's personal ambition, talents and fortitude, as well as on his willingness to participate in the free market and to satisfy consumers' most urgent demands.

In socialism all property is publicly owned or controlled by the state. All decisions are made for you by expert do-gooders who know what's best for you. Trades are coerced by an authority. At the time of the trade one or both parties may not be satisfied. Prices are determined by supply and demand, but supply and demand are determined by state authorities, resulting in low prices and surpluses for some goods and services and high prices and shortages for other goods and services, when compared to conditions that would prevail without state intervention. State authorities decide which goods and services will be produced and in what quantities and how they will be distributed. State authorities decide with whom an individual can do business; they decide what ends an individual may properly seek and which means may properly be used to attain them. Success or failure in attaining these goals depends upon the individual's relationship with the state authority and his willingness to obey or influence that authority.

In a capitalist system the young, the old, the poor and the infirm are provided for by insurance and discriminating friends and family, along with religious and other private fraternal organizations and associations. In a socialist system, all individuals, by virtue of their being human, are provided life's necessities as determined by availability and the will of the state authority.

Readers can decide for themselves which system will best satisfy them. The important point to consider is that there is no "mixed" economic system which will maximize the perceived virtues of one system and minimize the perceived vices of the other. The two systems, capitalism and socialism, are separate and contradictory. The consequences they each create are always present to a greater or lesser extent depending upon the degree to which intervention by state authority is present. Attempts to "control" or "regulate" capitalism is in fact socialism, but to a lesser degree.

There is no such thing as a free market socialist. That would be like trying to make a silk purse out of a sow's ear...


No comments: