Monday, January 09, 2006

Dangerous ideas about the free market

Michael Shermer has a "dangerous idea" about free trade (hat tip: Cafe Hayek):
Where goods cross frontiers, armies won't
Where goods cross frontiers, armies won't. Restated: where economic borders are porous between two nations, political borders become impervious to armies.

Data from the new sciences of evolutionary economics, behavioral economics, and neuroeconomics reveals that when people are free to cooperate and trade (such as in game theory protocols) they establish trust that is reinforced through neural pathways that release such bonding hormones as oxytocin. Thus, modern biology reveals that where people are free to cooperate and trade they are less likely to fight and kill those with whom they are cooperating and trading.

My dangerous idea is a solution to what I call the "really hard problem": how best should we live? My answer: A free society, defined as free-market economics and democratic politics — fiscal conservatism and social liberalism — which leads to the greatest liberty for the greatest number.
The Edge feature on "dangerous ideas" also has this from Mihalyi Csikszentmihalyi (the man who popularized the creative "flow"):

The free market

Generally ideas are thought to be dangerous when they threaten an entrenched authority. Galileo was sued not because he claimed that the earth revolved around the sun — a "hypothesis" his chief prosecutor, Cardinal Bellarmine, apparently was quite willing to entertain in private — but because the Church could not afford a fact it claimed to know be reversed by another epistemology, in this case by the scientific method. Similar conflicts arose when Darwin's view of how humans first appeared on the planet challenged religious accounts of creation, or when Mendelian genetics applied to the growth of hardier strains of wheat challenged Leninist doctrine as interpreted by Lysenko.

One of the most dangerous ideas at large in the current culture is that the "free market" is the ultimate arbiter of political decisions, and that there is an "invisible hand" that will direct us to the most desirable future provided the free market is allowed to actualize itself. This mystical faith is based on some reasonable empirical foundations, but when embraced as a final solution to the ills of humankind, it risks destroying both the material resources, and the cultural achievements that our species has so painstakingly developed.

So the dangerous idea on which our culture is based is that the political economy has a silver bullet — the free market — that must take precedence over any other value, and thereby lead to peace and prosperity. It is dangerous because like all silver bullets it is an intellectual and political scam that might benefit some, but ultimately requires the majority to pay for the destruction it causes.

My dangerous idea is dangerous only to those who support the hegemony of the market. It consists in pointing out that the imperial free market wears no clothes — it does not exist in the first place, and what passes for it is dangerous to the future well being of our species. Scientist need to turn their attention to what the complex system that is human life, will require in the future.
How's that for contrast? Shermer is a well-known author and editor of Skeptic Magazine, and one of my favorite columnists (his column appears in Scientific American). I was pleasantly surprised to see him picking this as a dangerous idea.

It appears CHICK-sent-me-high (official pronounciation) is voicing the vague unease of many regarding the market. Shermer's upbeat assessment ties in economic with political liberty - a connection forcefully argued by Milton Friedman. So Csikszentmihalyi's advocacy of _________? as an alternative to free markets, would probably end up constricting the very liberties that make, instrinsically or indirectly, for the high quality of life he advocates.

8 comments:

cvj said...

It's possible to agree with both since they address different aspects of the 'free market'. In the first case, the free market stands for freedom to trade and its collateral benefits to peace.

I think the latter definition cautions against trying to overextend this wonderful idea to areas where it may not be the best mechanism. One example is trying to assign monetary value to human life. This approach is at best debatable.

The respective value of the market mechanism and institutions/organizations need to be recognized and studied at the same level. This is the message i get from economists like RH Coase & Oliver Williamson.

Econblogger said...

CVJ,

Perhaps you are right about Mihalyi. He could have qualified his rejection further; likewise Shermer could have also qualified his support. Still Mihalyi's entry strikes me as not simply harping on exceptions to a generally sound institution (i.e. free rider or common pool problems). Rather he seems to be suspicious of free market in its entirety. In relative terms I would put him to the left of even Stiglitz.

mell ditangco (this is my pseudonym) said...

both views has its place for different situations.

Mihalyi Csikszentmihalyi views are more apt for the Philippine context; or for other countries that came from a crony capitalist system, or other similar systems...

for third word countries, like the Philippines, democracy and the free market did not exactly improve the majority of Filipinos, but the elite have definitely prospered some more after Marcos.

All this stems from the political elite's attempt to gain more power.... it manipulates the poor and the middle by scapegoating the opposition or the incumbent...

As we have seen in the Philippines, we are in constantly in political chaos... All this amidst democracy and capitalist system...

as such, democracy and capitalist are not the silver bullets in our context...

the real challenge is how can we redistribute wealth, when the government is too corrupt in enacting laws such as CARP.

We cannot expect the likes of Lucio Tan et al to just fork it over...

This post is somewhat related to this topic...

http://divergentpoles.com/?p=189

Econblogger said...

Mell,

Thanks for your comment. Under Marcos the Philippines was neither democratic nor was the market free. In fact it was very heavily regulated to favor Marcos allies ("crony capitalism"). By unfettering markets such special interest regulations will be removed.

Of course free markets cannot eliminate inequality. As seen in the experience of China, rapid economic growth could very well be accompanied by rapidly worsening inequality. However it was also accompanied by rapid poverty reduction. In attempting to enforce equality, one should not throw out the baby (efficiency and innovation gains from the free market) with the bathwater (disparity between rich and poor). I would rather err on the side of rapid poverty reduction rather than on maintaining an equality among paupers.

Amadeo said...

Sorry, but this looks like a no-brainer with regard to which side to choose.

If we are aiming for a perfect model (a silver bullet?) that will work for everybody, no such thing. We might as well aim for heaven and die. That’s where we can find perfection.

While here on earth, the best we can hope for is what is most feasible and most likely to bring out the best in man, and the best possible means to utilize scarce resources for the satisfaction of human wants. And man is wired to be free.

Thus, even the “full” employment theory of JM Keynes allows for a few percentage points out of the total to account for those who are qualified and have the time to become employed, but willfully decide not be employed. That’s human nature.

mell ditangco (this is my pseudonym) said...

econblogger,

yep I agree the Philippines a crony capitalist during the marcos era.

I think you totally missed my point.

I am not saying its a dichotomy between demoracy and dictatorship.

I am saying that one cannot just re-introduce democracy and capitalism and expect instant results of poverty alleviation.

not suggesting to substitute democracy for dictatorship, am just making an observation that third world countries that come from crony capitalism will not see "instant results". It is almost better to introduce democracy gradually as to prevent the political free for all that we see in present day.

I think we are not in disagreement.

Econblogger said...

Mell,

Right, I don't really see the disagreement. In fact I didn't suggest that there is a choice between dictatorship and democracy - my main point is that freedom in general requires both political and economic freedom. I do think that economic freedom can exist with little political freedom, but the reverse is difficult to achieve. Finally, the gradual introduction of democracy is a viable option for the Philippines.

mell ditangco (this is my pseudonym) said...

now thats clear and i agree 101%.