Thursday, October 11, 2018

The Ironic Curse of the Free Market

For about the millionth time the siren song of socialism is alluring the gullible. Even though socialism has a perfect record of disasters it continues to rise from the grave. Today it’s manifested in the young socialist challengers in Democrat primaries who are prevailing over the entrenched old-guard incumbents, as well as the popularity among liberals of Senator Bernie Sanders, an avowed socialist.

The embrace of socialism is a two-sided coin. The other side of the coin is the rejection of the free market. There are only two alternatives for organizing an economy: coercion or voluntary exchange, i.e. socialism or the free market, a centralized or decentralized system.

The free-market, voluntary exchange economy that spontaneously developed roughly 250 years ago has generated wealth far beyond what anyone could have imagined previously. That miraculous achievement, however, is mostly unappreciated by so many of its beneficiaries. That’s a rather astonishing fact. An important question is why?

The free market economy is like Rodney Dangerfield — it gets no respect. The main reason is that its biggest advantage is also, ironically, its curse. A free-market economy is simultaneously blessed and cursed by this reality — it works automatically and organically. The elements that allow it to work so efficiently are below the surface. A free market economy is guided by what Adam Smith famously described as “an invisible hand.” In regard to appreciation and understanding, invisibility is a disadvantage.

Furthermore, when something works automatically there is no inherent need to know how it works. When something functions with no apparent need for intervention or guidance it will be taken for granted. There will be little or no appreciation for its value.

Socialism, in contrast, does not operate automatically or organically. It requires deliberate conscience guidance and control. A fundamental characteristic of socialism is centralized control. That, in fact, is why dictators prefer communism rather than a free market. For dictators and liberals that is an incredibly desirable feature.

Liberal policy goals cannot be achieved in a decentralized system because liberal goals are usually not the goals of free individuals. What liberals want to happen cannot be achieved voluntarily. They do not like the free market because they’re not in charge.

The subtleties of how a free market works are over the heads of liberals. That’s not true of conservatives. You won’t find conservatives advocating socialism or voting for socialists.

A free-market economy is decentralized. Decisions are made at the outer edges of the economy. Decisions are based on the information imbedded in prices and the incentives inherent in voluntary exchange. Producers profit by providing consumers with what they are willing to pay for.

But a modern massively complex economy cannot be a hodgepodge interaction of participants. What makes possible the coordination and cooperation of millions of players?

The price system, private property rights, the profit system, competition, and freedom are all vital to the functioning of a free-market economy. Most people, however, are unaware of their crucial importance. Socialism fails because it has none of these devices and no substitutes for them. Socialism has no internal guidance system. The free market does.

An advanced, modern economy is far too complex to be consciously managed and coordinated by a centralized authority. The complexity makes centralized, conscious control an impossibility.

As Friedrich Hayek explained so well, the issue is primarily one of information. The amount of information necessary for a complex economy to function is millions of times greater than what could be collected and processed by a central authority. In a free market economy that information is possessed by millions of decision makers throughout the economy. That is where the information, as well as the proper incentives, reside. It can be thought of as the logistics of information.

One of the main depositories of information is the price system. Supply and demand determined prices absorb and then broadcast information. Prices are the language and the DNA of the economy.

In free-market economies there’s an automatic, internal process that’s been proven to work. All external, alternatives have never been successful. In fact, they’ve all been disasters.

The market economy has contributed more to human welfare than any other breakthrough since the dawn of civilization. In his book The World Economy: A Millennial Perspective, Angus Maddison documents the details of the economic explosion set off by the free market and the related industrial revolution.

Until the year 1000 per capita income in Western Europe, inflation adjusted, was about $450 a year. Throughout most of human history there was virtually no economic growth. Beginning in 1820 economic growth in Western Europe went from .15 percent per year to 1.5 percent per year. That’s been roughly the average rate of growth since then.

There is no way the significance of that achievement can be exaggerated. Economic growth does far more for human welfare than any government “welfare” program possibly could. Economic growth is a creature of the free market.

For a number of reasons increased wealth is closely connected to health and life expectancy. Until 1820 life expectancy was increasing at .05 percent per year. Since then it’s increased by more than .5 percent per year. In 1820 life expectancy in Western Europe was 36 years. Today it’s approaching 80 years.

Thanks to President Trump and his administration, we are once again experiencing robust economic growth. Economic growth is the only thing that “creates jobs,” especially net jobs. That’s why we are now experiencing a labor shortage.

President Trump understands that the less an economy is constricted the faster it will grow. That’s why he’s doing his best to cut regulations.

Socialist countries such as Cuba, Venezuela, North Korea, and Zimbabwe not only are not growing, they are shrinking. Per capita income in each of these countries is less than it was a hundred years ago. Socialism is a growth killer. South Korea is an economic powerhouse. In North Korea people are starving.

Barack Obama had not the earthliest idea how a market economy operates, but that did not slow him down in his desire to control it, especially with regulations and tax increases. In his opinion robust economic growth was no longer possible. Obama is an economic pessimist; Donald Trump is an economic optimist.

Although Adam Smith did not invent the market economy, he dissected its interworking and inherent structure. He was the first to argue for a free market and explain why regulations and protectionism are counterproductive. He was the first and most persuasive free trade proponent.

Smith made it much easier for people to believe in the blessings of the free market. Smith’s magnum opus is usually referred to simply as The Wealth of Nations. However, its full title is An Inquiry Into the Nature and Causes of the Wealth of Nations.

Smith both asked and answered the most important economic question of all time. He was the first person to even think about that monumentally important question. His answer in so many words was the free market and voluntary exchange. It was true when he wrote it and it is true today.

Smith was the first to see and appreciate how voluntary exchange and economic freedom result in growing wealth for all. He made it possible for readers to understand and appreciate market economies.

The Wealth of Nations was published in 1776, not coincidentally the same year as our Declaration of Independence. They reflected the temper of times. Our founding fathers laid the foundation for political freedom. Smith identified the foundation for economic freedom. Voluntary exchange is the essence of freedom.

It’s been said that that in the 19th century invention was invented. The major reason for the explosion of inventions was the presence of powerful incentives for being an inventor. Thomas Edison and numerous others became wealthy as a result of their many inventions. Even more importantly their inventions benefited their customers. Electric lights are vastly superior to lanterns and candles. We are no longer “a world lit only by fire.”

Today we continue to be beneficiaries of the accumulated inventions since then — electric lighting, automobiles, airplanes, air conditioning, hot water heaters, just to name a few.

Combating the underserved but resilient popularity of the socialist dream is one of the requirements for continued economic growth. That will remain a challenge for conservatives for decades to come.


The Ironic Curse of the Free Market October 11, 2018

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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