Economic principles are crucial not only to arguments for economic freedom, but also for personal and political liberty and for peaceful coexistence. Yet many people are ignorant of economics, or have heard some misleading or incorrect information. Still more people don’t see how economic principles can be applied to everyday life, liberty, and the pursuit of happiness. It is the job of the libertarian to show the world how closely tied economics is to freedom.
Economics and Abstraction
The trouble that many people seem to have applying economics, or accepting the libertarian view that economics is much more widely applicable than traditionally believed, is that they view economics as an abstraction, a set of patterns or guidelines, or some philosophy or social science that attempts to model reality. Since economics is viewed only as a model, when economics and reality do not coincide it is simply assumed that the model is flawed, and thus economics is seen as just one way of looking at things, that is sometimes useful and often inaccurate.
Some economics is abstraction. The supply and demand curves, for example, are abstract, not real. There are no actual curves, physically manifest in the real world, that are supply and demand curves. They are a mathematical model, and as such, they are useful only in helping us to visualize the data they represent not to predict outcomes with great accuracy.
On the other hand, the core principles of Austrian economics are real, universally applicable laws. In the real world, physically, things are produced and consumed; they are supplied and demanded; the laws governing these actions are just as real as the laws of the physical world.
Every action one takes involving any resource that is scarce, anything that can be spent, is an economic action. Whether you are spending money or material goods, or time, attention, or effort, or whether you are spending any social capital, good will, influence, or credibility any time you shrink your pool of anything that’s available to you, for any reason, you are engaging in an economic action. Taking these actions while ignoring the rules governing them is just as potentially hazardous as driving a car without knowing how to steer, or walking around on top of a steep mountain while ignoring the laws of gravity.
The problem the libertarian faces in convincing people of the veracity of these claims is that there is, within the field of economics, a lot of junk science. Every time a war, hurricane or tsunami hits, someone proclaims that the economy is stimulated, promptly convincing practically everyone within earshot that what’s good for "the economy" an abstraction is not necessarily good. Actual economists cringe at this, pointing out the fallacy that Bastiat is credited with exposing, which is that this view does not consider the opportunity cost of the resource being spent repairing the damage. In fact, disasters natural or man made are disasters, and throwing the economy in front of the train of public opinion is generally an attempt by those in power to placate the population and maintain the status quo. After all, a public that can see the positive side of hurricanes and tsunamis is that much more likely to buy into a war or some other State-sponsored disaster.
The Market Real or Abstract?
People speak of the market very often in economics, so it’s of paramount importance to determine the reality behind this term. Is the market a real, actual thing, or is it an abstraction? The answer is both, and neither.
In some cases, the market is a real, physical place. When you buy groceries, you buy them at a supermarket, or a mini-mart, or a convenience store (the name convenience store is all too accurate, since their main commodity for sale is not groceries, but convenience, and you certainly pay for it), which is just as much a market as the supermarket is. Generally, any place where you buy something can be called a market. So in this sense, the market is real.
In other cases, the market is not physical but inferred. You can buy things on the Internet web sites are "places" in one sense, but not another. The market becomes a facilitator. When we refer to the market value of a thing, we aren’t referring to the price we saw the thing for sale for at the actual market. We are in this case speaking of a metaphorical market. The black market isn’t an actual place one goes that is actually colored black. It’s an abstract term. (One could argue that the place where an exchange takes place becomes a de facto market, so if I sell things at my house, my house is an actual market for those things for that time. Either way, the term market is sometimes used as an abstraction, sometimes not.)
In this sense the market is both real and abstract, depending on the circumstance. However, the sense in which the term is often used is neither a physical location nor an abstraction of such. It is a situation, or a description of the state of things. When things are traded "on the market" it means that ownership of the things has been exchanged publicly, voluntarily, and legitimately. When we refer to a market as free, we mean that there are no barriers to these exchanges placed by others in other words, no taxes, tariffs, price controls, or other interferences. When we say that something is "placed on the market" we mean that it is being offered for sale or trade.
It is important to distinguish between the abstract and situational uses of this term. For instance, if something is "on the market," it’s available to be purchased there is an actual good or service that is really available. If something has a "market value," however, you can’t infer anything about that thing itself. "Value" is subjective, and relative; "market value" simply refers to the price one could fetch for the item if it were sold publicly. It might be based on the MSRP (manufacturer’s suggested retail price), or on the appraisal of a third party, or on the price that previous, similar items have sold for. There’s no way to predict or know market value you can only guess, estimate, extrapolate, or average.
The Reality of the Free Market
Detractors of libertarianism complain that the free market is idolized and worshiped by libertarians, and that it is just another abstraction, that can never come true; they say it is idealistic or Utopian to expect a free market to ever arise.
The term "free market" often does not refer to a market at all. For instance, some would claim that the free market reduces prices and increases quality as time passes. However, there isn’t an actual marketplace that accomplishes this feat. Rather, "free market" is an abbreviation; what we are really referring to is the collected efforts of individuals acting on the free market. Markets don’t act people do. The "free market" is simply the state of people acting without barriers to exchange.
Economic law proves that when individuals act without barriers to exchange they bring about states of affairs more desirable to themselves than if they act with barriers to exchange. When the "free market" reduces the price of a commodity, what’s really happening is that individual suppliers are reducing the prices of their goods in order to maximize their profits in the face of competition. When the "free market" increases the quality of a good, what’s happening is that suppliers are making better products, in order to maximize profit in the face of competition. When the "free market" bankrupts one supplier and makes another a millionaire, what is really happening is that individual consumers chose to spend their money on the latter supplier’s product, in order to maximize the utility of their money.
Libertarians do not worship the free market; however, we hold as an ideal that state of affairs brought about by the free market a situation where everyone is free to act to benefit him or herself, as long as they do not harm others. Theory holds that this leads to maximal prosperity. Empirical evidence shows that the fewer restrictions on non-harmful, non-coercive behavior, the greater the prosperity that is achieved. This is not because of an abstraction or a model, but because of human nature and physical reality.
As for the final accusation, the situation described by the free market is not Utopian. Free exchanges are made every day. What prevents many people from seeing this fact is the limitation of economics to financial matters.
The Scope of Economics
Economics govern not merely financial exchanges but the allocation of all scarce resources, and the actions people take to satisfy their desires. People desire material goods, but they also desire other things. Let us consider the example of interpersonal relationships, and the applications of the free market scenario vs. the hampered market.
Daily, we trade our affections for the affections of others. Friends, family members, lovers, even pets, are capable and willing partners in exchanges of time, energy, favors, and good will and these things are scarce resources. Governments do not currently place a tax on any of these things; however, I am certain that if a politician could figure out a way to do it it would happen. However, there are plenty of limitations or restrictions. A person cannot legally give a large monetary gift to their spouse, parent, child, or best friend without the government taxing it, even if the giver initially paid income tax on the money. A man cannot legally engage in sexual relations with another man. Consenting adults are limited in their behavior to varying degrees in different states.
Consider the question of voluntary exchange in a romantic relationship. You exchange affection, love, intimate relations, and promises of exclusivity, among other things. In a free market, these exchanges are voluntary and unrestricted. However, imagine if you had to pay a fee to love someone. This is relationship tax. Imagine if you had to give affection or romantic relations to a person who claimed to be unable to attain these things from free exchange! This is relationship welfare. Imagine if you had to marry someone of a specific race because statistics showed it to be harder for people of that race to find spouses! This is relationship affirmative action. Imagine if the State paid some people to have relations with each other, but not others. This is relationship subsidy. Imagine if the government provided everyone with a pet and demanded extraordinary amounts of money from them to take care of this pet. Yet this is what State roads, schools, and every other State bureaucracy is.
We live in a society with a relatively free market in interpersonal relationships. Very few filial, friendly, and romantic relations are taxed, limited, restricted, or forbidden. Many agree that the few restrictions there are should be lifted. Most people would be outraged by any further limitations or by any of the policies outlined above. It is clear to everyone that when it comes to matters of the heart, the freer the better.
But when it comes to matters of the wallet, it’s not clear to them at all. People are willing to force others to spend their money to contribute to the good of society. Money is seen as the root of all evil. Desire for material goods is looked down upon. The only reason for this is that it’s easier to benefit from someone else’s material goods than from their affections. Armed with enough firepower you could steal a million dollars but couldn’t make one person love you. Politicians have spent ages, for this reason, convincing us that it’s their right to steal money from us practically at gunpoint, and they have largely ignored our love lives except to appease their religious constituency.
Due to centuries of influence by the political apparatus, many people believe that we rely on government interference for our safety and security and that it is necessary to sacrifice some freedom toward this end. However, when we consider that our finances are not the only economic situation we’re in, it becomes easier to see the stark differences between liberty and oppression.
Whenever an individual acts to meet his or her desires, he or she is subject to the rules of physical reality of cause and effect, of scarcity, and of gravity and other physical laws. He or she is also subject to the rules of economics. Free trade allows the most efficient specialization, which means the greatest productivity. Disasters are bad. People trade things they have for things they want more. Scarcer goods are more expensive. These and other laws are immutable and both empirically and aprioristically proven.
Abstraction is a tool some economists overuse, but this should not be construed to deny the validity of economic laws. The free market is not an abstraction but an actual state of affairs, one that is to be striven for. The scope of economics is wide, and the rules thereof apply to things you might not expect them to they apply to any action taken to meet a desire.
The denial of economic reality can be as disastrous as the denial of physical reality. The belief that you can defy economics is similar to the belief that you can fly by sprinkling fairy dust on yourself and thinking happy thoughts it’s a fantasy that could prove harmful or fatal if taken too far. Libertarians should stress the applicability of economic principles and attempt to educate the public about them if we are ever to have victory for the cause of freedom and liberty.
January 20, 2005