Tuesday, 2 February 2016

The Market Doesn't Solve Problems; People Do

Many free market advocates often mistakenly speak of ‘the market’ as if the market itself had agency; as if markets by themselves somehow solve problems or provide incentives. Only people can do these things, explains Louis Rouanet in this guest post, and markets temselves are just a means to that end...

It is wrongly claimed by many classical liberals, libertarians and libertarian-leaners that most, if not all, social problems can be ‘solved by the market.’ But as many critics of the market point out, the ‘market’ itself cannot magically solve our problems—and to claim that they do is a kind of “magical thinking.”

Let it be clear that there is no doubt that the best way to have social progress is to have markets, and to enjoy a free-market economy. However, free markets per se are not solutions to problems but are rather what allows the opportunity to find our own solutions to our own problems by finding the most valuable way to serve one another.

By speaking about the virtues of the market, we tend to forget that markets themselves do not have virtues, only people do. As Murray Rothbard once pointed out, “It is overlooked that the ‘market’ is not some sort of living entity making good or bad decisions, but is simply a label for individual persons and their voluntary interactions. … The ‘market’ is individuals acting.”

‘Market solutions’ therefore are simply solutions that encourage beneficial voluntary interactions to happen—‘the market’ being the process in which folk are left free to discover the most valuable interactions on offer. As Frédéric Bastiat famously wrote in The Law that: “At whatever point of the scientific horizon I start from, I invariably come to the same thing — the solution of the social problem is in liberty.”

The “What Should Government Do?” Bias

During each crisis, politicians and intellectuals systematically presume that ‘we should do something’—by “we” meaning the administrative state. Conversely then, when classical liberals emphasise the importance of not violently intervening in the free-market order because of the harmful, but yet unseen, consequences of state intervention, they are often accused of favouring inaction. This is a misconception of the classical liberal argument.

The free market is not superior because it offers solutions. It is superior because its basis is freedom: a freedom that is used by individuals to find new ways for them that are in harmony with the interests of their fellow men. Of course, there are many problems and abuses with the market, but entrepreneurs — if not prevented from entering the marketplace by governments — seek to solve these problems in the pursuit of profits. Through these entrepreneurs, the market is a process that tends to satisfy the most urgent not-yet-satisfied needs of the consumers.

To be clear, classical liberalism — used here to denote the philosophy of laissez-faire — should not be considered as being the utopian opposite of socialism. It is not a magic recipe that guarantees perfect solutions at all times and for all things. Socialists like to imagine that liberals believe the market can cure every ill. In other words, they think liberalism is a mirror reflection of socialism. It is not. True liberalism does not promise perfection, it does not even promise a solution. There will always be problems. Our goal should be to find the best way to improve the situation, not to achieve an ideal world of fantasy.

CaptureWhen a social problem arises and somebody asks a liberal what must be done, he instinctively argues that “we” should free the markets, that “we” should liberalise, or that “we” should commit to deregulation.

But those proposals are not in themselves solutions to our problems at all; they are simply a necessary step in the process of setting people free to solve problems.

By pretending that ‘the market’ is the solution that ‘we’ should adopt however, many liberals are victims of the top-down fallacy and deny the polycentric nature of markets. By calling ‘the market’ the solution, we create the illusion that the free market is just another kind of government policy where the rulers offer us a solution. But the real solutions are offered not by our ‘rulers’ but by free individuals, by the free innovator, the free worker, the free capitalist, and the free entrepreneur.

In other words, solutions to problems are not offered by the market, they are offered on the market. As development economist William Easterly brilliantly writes:

The “what should we do?” industry does not show any signs of going out of business soon. It gives us public intellectuals something to do and it gives politicians something to recommend… But the Sustainable Development Goals may be the best demonstration yet that action plans don’t necessarily lead to action, [that] “we” are not necessarily the right ones to act, and that there are alternative routes to progress. Global progress has a lot more to do with the advocacy of the ideal of human freedom than with action plans.

Thus, free markets are a sort of meta-solution. They are the solution to the problem of finding solutions. And it is striking therefore that liberalism might be unique in being the only political philosophy that does not in itself have a blueprint for an ideal society.

The “Market Provides Incentives” Myth

As the market is not a solution, neither does the market itself give incentives. Leading institutional economists Acemoglu and Robinson, in their celebrated 2012 book Why Nations Fail, focused mainly on “incentives.” Whereas they — moderately — praise capitalism as an “inclusive institution,” they criticise “extractive institutions” because they “fail to protect property rights or provide incentives for economic activity.” They also write:

As institutions influence behaviour and incentives in real life, they forge the success or failure of nations. … Bill Gates, like other legendary figures in the information technology industry … had immense talent and ambition. But ultimately responded to incentives.

There is no doubt that Why Nations Fails is, for the most part, a good book. However, Robinson and Acemoglu’s appraisal of incentives seems to be problematic. First of all, they assume that institutions should give “incentives.” But (to use Hayek’s concept) this is a constructivist fallacy. It implicitly supposes that some external force should direct human actions.

Furthermore, it gives too much importance to top-down approaches. Like many other economists, Acemoglu seems to think some entity — e.g., the government — should incentivise. But what does it mean to say that government, property rights, or institutions ‘give you an incentive’? In fact, when wrongly used, the term ‘incentive’ seems to invoke determinism. This is why Acemoglu writes that people “ultimately responded to incentives,” as if a mysterious force called incentives was influencing the choices each one of us make.

Incentives are not something that can be understood as being independent of individuals; they are purely subjective, i.e., a value (Or not) as judged by each individual for themselves. An incentive can only be understood as the correct discovery of an individual’s own subjective preferences in order to lead him to act as you wish. Therefore incentives are not something you can ‘give’; they something that must be discovered.

The free market does not ‘provide’ an incentive to work, it lets you work freely. The free market does not ‘provide’ an incentive to invest, it lets you use your savings in order to make a profit by serving the consumer. There is no such thing as a god called ‘market’ that will furnish you some incentive to be productive—that is in fact the claim on each of us that reality makes if we wish to survive, if we are left free to act on that discovery. The market, in which people are left free to produced and to discover the mutually beneficial preferences of others, is simply the best institutional framework in which harmony may be created between the plans of a vast number of individuals — hence the title of Frédéric Bastiat’s magnus opus Economic Harmonies.

Because they are free, different individuals can understand each other’s preferences, and exchange on this basis. Only in this way do people ‘offer incentives’ to each other in order to commit to exchange and to enhance their own situation. Therefore, institutions do not provide incentives, people do. The sentence ‘the market provides incentives’ contains the same problem as the sentence ‘the market is the solution.’ It is just not so. The market is merely an institutional framework in which people can make plans freely. As Hayek is paraphrased in a famous rap song:

The question I wonder is who plans for who,
Do I plan for myself, or I leave it to you?
I want plans by the many, not by the few.


The modern state can be defined as the institution that pretends to have the monopoly of solutions to social problems. But since the state operates like a monopoly, it therefore exploits the very people it is supposed to serve. In fact, proponents of government action imply that the members of the civil society are not able to find their own solutions nor able to identify what the problems are. But the most competent men do not need the state to answer our problems, they just need freedom.

When a problem arises, the right question is not ‘what can the government or the market do,’ the right question is ‘what can Ido.’

‘The market’ is simply shorthand for letting you get on and do it.

Louis RouanetLouis Rouanet is a student at Sciences Po Paris (Institute of Political Studies) where he studies economics and political science.
A version of this article appeared at the Mises Daily.

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