Saturday, April 18, 2009

Free Markets (10) - Fallible

Those who have lost faith in markets had a false understanding of what markets can do. They tended to assume that allowing markets to function freely would lead to a perfect world. They assume that when Adam Smith referred to an “invisible hand” working through the market, he was saying that the invisible hand will “work all things together for good”. Anyone who understands how markets function knows that this is not true. Those who believed this view trusted in a false religion.

“The market” cannot think or act, so it cannot produce a perfect world. Adam Smith understood this well. He only referred to the "invisible hand" three times in his writings. He used the term to describe a situation where the a business owner acting in self interest does things that benefit the rest of society in a way that he had not intended. He never described the “invisible hand” as a hidden divinity that would work all things for good. He had a much more realistic view of the benefits that free markets bring.

This utopian view of free markets is really just a “straw man” set up so it can be knocked down. The idea that free markets work everything for good is totally unrealistic, but that does not mean that free markets are evil. Free markets cannot create perfection, but they provide considerable benefits. Those who are switching to faith in the government should understand these benefits before changing religion. The benefits of free markets will be described in the next three posts.

A perfect utopia cannot be created on this earth. Governments cannot create perfection. Markets cannot create perfection. The score is nil each.

1 comment:

Gene said...

You are in full flush here. Good stuff.

I agree with this. Your assessment that we believe in Free Markets as almost a religion is true.

True free markets are hard to find.