No perfect rationality is needed to see that markets often don't work as advertised. But without perfect rationality, and other utopian conditions, the math of market theory doesn't work. Businesses often ignore such unrealistic theorizing. So should we.
“Free markets” are supposedly “efficient.” But by what stretch of reason, or misuse of words, can the following facts be considered efficient: “as much as 40% of food produced in America is thrown away,” while “18 million households” are “food insecure”? This is food for rethinking markets.
Economists use “efficient” usually to mean “Pareto efficiency,” a hypothetical situation whereby no change in allocation of goods can make “at least one individual better off without making any other individual worse off.” But wasting “1,400 calories per person per day” or “$400 per person per year” is neither Pareto, nor any other valid kind of efficient. Is the utility preference of some to buy more food than they eat more important than feeding the food insecure? To too many economists yes. To most untheorized humans, no.
Conventional explanations of such “market failures” include taxes, market barriers, and “externalities” (factors left out of prices) which supposedly distort otherwise optimal outcomes. But what these market failure excuses fail to see is the reality of imprudent consumers. Efficiency in markets requires prudent purchasing. But many businesses profit from promoting imprudent spending. Ignoring that we’re supposedly in theory rational, they trade on the maxim that “there’s one born every minute.”
Markets aren’t simple “mechanisms” that can balance supply and demand like a see-saw. They’re exceedingly complex social ecologies. The mechanistic market view arose in “The Marginal Revolution,” which Philip Mirowski says was a “wholesale appropriation of 19th century physics” metaphors along with the mathematical models of energy fields. Mirowski also notes that “the most important concept in physics,” the principle of energy conservation, was inspired by business accounting. Joule worked as a brewery accountant while conducting energy conservation experiments. And Leibniz asserted “God was like an architect that had to worry about his funds.”
Free market economics of the Chicago School variety borders on becoming a totalizing ideology, an all encompassing system of ideas, preached as the one true way. It is all the more dangerous because it is shielded in mathematics. But algebraic coherence guarantees no truth. Statements in any language can be grammatically correct without being useful. The same applies to algebra, especially if it uses unreal referents or unrealistic assumptions. Free-market models have become descriptions of unicorns. We should beware the elegant but unreal seeming certainties of mathematical revelation.
Free-market economics harbors the last unlaughed-at Utopian ideas. Utopia is a pun on good/perfect-place and no-place, and in no real place can free market assumptions apply. Messy markets worked long before The Marginal Revolution’s physicsy theorizing. They will long after the fad for modeling utility maximizing unicorns has faded. We leave markets unguided at our collective peril.
Illustration by Julia Suits, The New Yorker Cartoonist & author of The Extraordinary Catalog of Peculiar Inventions.
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