Mises Wire

Is Free Market Economics Too “Ideological”?

Free market economics is often ignorantly dismissed for being “ideological” rather than scientific. It probably sounds smart to the economically illiterate, but it is decidedly not. It doesn’t mean nearly what most people assume it does. The word “free” in free market economics is not used as a normative value judgment but indicates an economy that is unaffected by exogenous (from the outside) factors.

“Free” therefore means that it is the market economy in and by itself that is subject to theoretical analysis. This is, in fact, the only way to identify any and all “pure” market mechanisms and processes.

If economics tried to inductively extract theory from data, we could never know what it is we capture in those data: is it the actual (underlying) economic mechanisms, or the effect of regulations, or of a specific temporal context, or some mix?

As all such things in the real economy always coexist and are interdependent, we could never accurately separate them, and so could not figure out how the economy actually works. The results would be haphazard and contingent, which would make both predictions and understanding impossible. Any actual and specific mechanisms that are intrinsic to a market economy, i.e., its nature of market qua market, which determines the outcomes also when other things are involved, would be beyond our reach.

One can, of course, claim that there are no such mechanisms, and therefore that studying and theorizing about the market without such influences is irrelevant. But this claim requires first that the idea of “pure” economic mechanisms is properly dismissed. It is not sufficient to just claim this so, especially if the claim is made based on one’s own preferred worldview and/or wishful thinking (i.e., ideology).

To dismiss any workings or mechanisms of the “pure economy” one need first seriously consider them, which means that one must still begin by theorizing on the free market economy.

In other words, such a critique of free market economics must itself take free market economics as starting point.

Another common but mistaken critique of free market economics is that it is based on presumed ideological concepts. Some claim that the individual as actor is ideological, which is too absurd to take seriously. But another and, at least on the surface, seemingly better critique is that free market economics assumes some form of (private) property. Especially those who are ideologically opposed to the concept consider this an unjust infringement on people’s basic or natural right to freedom.

Yet they miss the point. The fundamental building block of any market is the exchange, which necessarily is an exchange of some claim of ownership. Exchange without ownership is no exchange. Whether or not one agrees with ownership, it is a necessary prerequisite for markets.

We can study socialist regimes without making the study itself ideological, and similarly we can study markets (assuming some form of ownership) without taking a normative stand on the existence or nature of ownership. Needless to say, any such free market reasoning would not (and could not) apply to situations where there is no ownership. But to the degree that free market mechanisms are simply human action, even though the specific outcome may be contingent on some form of ownership, the mechanisms should apply also to nonownership contexts. (Note, however, that this is the case for and due to the nature of human action and not the nature of markets, which are emergent from human action given ownership and exchange.)

These critiques are further mistaken for the simple reason that without a theory of “pure” market mechanisms we cannot separate, trace, and measure the effects of other influences on the market economy. How do we know the effect of, say, dramatically increasing the minimum wage on unemployment? Just looking at employment before and after is not enough (and it certainly provides no guidance regarding what to expect from such change).

A lot of things are involved before and after such a change, and in order to accurately assess the effect of the minimum wage increase itself, we need to know all those other things. This is simply impossible. But if we understand the mechanisms in play in the “pure” (free) market, we can predict how such other influences should affect the outcomes and workings of the market.

We can thus separate this impact, which allows us to make predictions and produce knowledge about the world. Yet any such predictions and knowledge require that we first have a good idea of how the mechanisms of the free market (would) work. If we do not, we are lost—and any attempts to understand are futile. And, as was already noted, even the assumption or assertion that there are no such mechanisms requires that the idea of a “market qua market” be properly rejected (not ideologically, but rationally, logically, and theoretically).

Consequently, it is blatantly ignorant, and a fundamental mistake and misunderstanding, to dismiss all free market economic theory as “ideology.” Such claims cannot and should not be taken seriously, because they are only ignorant; they reveal a fundamental misunderstanding of the study of economics.

Yet it is sadly done all the time by people who should know (a lot) better. 

Formatted from Twitter @PerBylund

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