Tuesday, April 23, 2013

Friedman and the Invisible Hand


Milton and Rose Friedman "Free to Choose", New York: Harcourt Brace Jovanovich, pp 13-14”
"A free market [co-ordinates] the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off... Economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest."
Comment
Well, what is wrong with that statement?  Not much if we add a few words:
“A free market [co-ordinates] the activity of millions of people, each seeking his own interest, in such a way as to make everyone better or worse off than they would be if instead a government, irrespective of the individual brilliance of its members, tried to micro-manage the economy. Economic order or disorder can emerge as the unintended consequence of the net effect of the actions of many people, each seeking his own interest, which may or may not be to the public good.”
Omitting the inserted words makes a great deal of difference and enables the Friedmans and Company to assert that markets reconcile all self-interests – competitive and monopolistic and including morally questionable selfish motives and behaviours - into socially beneficial outcomes .  Smith called the latter a “licentious” theory.  I agree with Smith.

4 Comments:

Blogger Paul Walker said...

"A free market [co-ordinates] the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off..."

This has to be right, all that is being said is that people only trade if they think it will make them better off. Otherwise why would they trade?

12:56 am  
Blogger Gavin Kennedy said...


Paul
I think the error is in the assumption that everyone’s self interest is equal qualitatively and that all motives are benign. Self-interests are not morally neutral. A person entering a market to sell stolen, or defective, or fraudulent goods (today’s news of a man selling ‘bomb detectors’ that are useless, is a case in point) is not identical to a moral-minded person, whose self-interests may be of the kind envisaged in the statement.
Self-interested players cover all comers; protectionists who favour tariffs, etc., are self-interested players who don’t participate to make everyone better off. If the assertion is that Friedman’s statement applies only to “free markets” it may become a tautology: in markets wif every player had benign self-interested motives then everybody is “better off”. But how does a free market, or any market, ensure all players are benign? How did this utopian condition occur? What constraints are there to select only benign players to participate? How do free markets get started? Why has no such markets ever existed? How do we get from here to there?
I suggest it is a wishful idea that diverts attention from the reality of markets (or any other form of human organization) in human history, present or future.
Moreover, I do not believe from observation and history that such beliefs are credible. Monopolists are self-interested and we needs laws to tackle them, some of which may prove to be impotent.
People trade to make themselves better off. I agree. That is the intention behind all exchange behaviour, of which trade is a sub-set. But the outcome of any exchange (manifestly including trade) is not identical to the joint or separate intentions. Moreover, contrary to GE theory, there is no necessary way in which GE is a property in markets or a necessary condition for markets to function.
Friedman was romancing about markets here, quite unnecessarily because markets are the best way to be consistent with all known, or possible, alternatives.
Gsvin

7:13 am  
Blogger airth10 said...

I think Friedman deserves some 'slack' here. He recognized as a given that limited government was essential for the free market to do its thing of being socially beneficial. And as educated people we know that nothing is totally free - there is always strings attached and compromises to make.

When he talked of the fee market he also meant a limited government interference. He understood that this symbiotic relationship was necessary in order to maintain a free and fair market.

He put such emphasis on the 'free market' because at the time it was competing with a economic system, communism, that was closed, corrupt and a shameful alternative. He also pushed the idea of 'free' as a way of combating the urges and growth of government.

Free and open markets are the best way to combat the inevitability of tyranny.

3:52 pm  
Blogger airth10 said...

The tile of this post is sort of misleading, "Friedman and the Invisible Hand". There is no mention of Friedman saying anything about the invisible hand but about his thoughts on the free market. Therefore, are we to assume that the invisible hand is the free market.

Most assume that the invisible hand is the free market and that is what Adam Smith meant by it. But we are told it is just a metaphor. It sounds like the 'free market' is also just another metaphor.

4:57 pm  

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