Why Markets can Never be Free

After being at the center of the economic practice and dialogue for decades, the concept of “Free Markets” remains one of the least understood concepts of the field. This is quite a statement in these times, where it appears that there is very little that is well understood about the economies and markets around the globe.

The current economic conversation reveals a growing gap between the government interventionists who promote adding more stimulus to get the market moving, which according to the Keynesian school will serve to prime the pump of investment until the laws of supply and demand can kick in and keep the markets in a growth mode, and the deficit hawks who believe that government-led spending is sure path to serfdom, à la the early theories of Frederick Hayek’s.

Hayek softened his position on government involvement in his later work, but the young Hayek guided the thinking of Milton Friedman, Alan Greenspan and much of America with the ideas in his most famous book, “The Road to Serfdom”.

Hayek’s early ideas put forth fascism as the capitalistic reaction to socialism, claiming that a democratic society could grow to depend on the state to the point where freedom was reduced to the point of fascism.

But even in this early work, which he eventually referred to as a political rather than economic text, Hayek goes on to say that the government has a role in monetary policy, labor rules and the provision of institutions to insure the proper flow of information.

Hayek extended the basic ideas of Ludwig Von Mises, who had borrowed heavily from Emmanuel Kant, which began with an a Priori set of conditions and then developed a model that predicts the end point of those conditions based on government actions or actions predicated on inherent natural characteristics of mankind.

Von Mises was the person who originally grabbed onto the a priori requirement for understanding why we do the things we do, and he set out to establish this point in the midst of the success of logical positivism, a movement swept along by findings in the physical sciences and a new public faith in the scientific method based on falsifiable theories, which treated past events as interesting but not important as what happens next.

Von Mises didn’t argue with the claim that perfect facts would yield perfect understanding, he argued that no facts were perfect, and that therefore all fact-based methodologies would never been anything but theories. This idea of facts being “tricky things” showed up in speeches by Reagan and others in the 1980’s when Hayek’s ideas were being placed in the center of economic policies that we are still working within today.

Von Mises used a Kantian dualistic methodology composed of categories of known human ideas that interact with the a priori economic state. Humans are able to use self-reflection to draw upon an innate pool of purpose providing unquantifiable experience-based knowledge, the axiom, and we then operate on the quantified knowledge that is available at the time to chart our course of action.

Von Mises dealt with the problem of which axiom, or set of rules, to use by claiming that the proper of reflections would result in a perfect axiom becoming apparent as the core categories have developed along with Darwinian evolution. The six categories of the “axioms of action” are: temporality, causality, uncertainty, dissatisfaction, an imagined preferred state of affairs, and beliefs or expectations about the means available for the satisfaction of wants.

Von Mises’ argument was based on Kant, and like Kant he believed that these axioms were the connectors from the a priori state to the methodology of action. The axioms had stood the test of time and were responsible for us making it this far so they had to be good. This was based on the simplistic concept that theories that you think about for decades are superior to the real-time facts used by competing forms of economic models.

This premise has some faults, and most of them have to do with the idea of praxeology, the study of human action, a concept that has been updated since Von Mises.The core idea as applied to economics is that if you know the a priori situation and understand the axiom of action then understanding what the economy will do is a simple matter of feeding the system with the right amount of money and all will work out for the best.

The Austrian school idea that the markets are free, then, is a misconception of the reality that reveals that the markets are not anymore free from the manipulation of information than with Keynesian economics. The illusion was to take the uncertain, empirical facts and hide them in a set of individual behaviors that are supposedly better understood, a dubious proposition indeed. Even with Behavioral Economics providing new information on our behavior it is clear that understanding the group dynamics that come out of individual actions is an impossible task at this time, so we are guessing while sounding certain.

With a populace, captured on one hand by marketing-type communications that change what we are dissatisfied with, and on the other by a set of tax laws and tariffs that distort the price of market offerings there is truly no magical free zone to hide. There are no markets “running free”, only an increasingly skilled group of financial workers designing increasingly complicated financial instruments that put another layer of abstraction between the decisions we make as individuals and the movements of the global markets.

Eliminating the faith component of economics does not mean refusing to accept the value of narrative descriptions as tools in understanding the markets any more than it means we shouldn’t use advanced mathematical techniques. What it does mean is that we need to stop confusing free with unregulated, and that there is a need to apply liberally to any consideration or plan the realization that past performance does not assure future results.

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