Vying for the truth – the free market versus socialism
- A lesson in philosophy of perspective and dynamic change
Robert Wutscher
The Shadow Economist
Jun 23, 2010
The concepts of the free market, socialism, absolute and relative truth can be symbolised by a cross. The free market is on the right, socialism on the left, absolute truth above and relative truth below.
To bring the cross into three dimensional relief, we introduce a set of transparencies (such as those you would use on an overhead slide projector). Any set would do. I will use the Union Jack. This flag is composed of a transposition of three separate flags, those of England (a red cross on white background), Scotland (a white diagonal cross on blue background) and Ireland (a red diagonal cross on white background). Imagine each of these flags as part of a set of three transparencies, place them on top of one another and you get the Union Jack.
Though there is little need to generally define what free market and socialism might mean, proponents of each side will disagree. Such disagreement, however, clears up once one realises that it is a matter of how purist (tending towards an absolute ideal) one wants to be.
Absolute truth should be seen as a perfect ideal, a form of “utopia” that is not attainable in reality. Relative truth then becomes a truth from a certain perspective of reality. For example, within a certain framework of argument. As soon as you change the framework, and you can bring yourself around to agreeing on a change in underlying assumptions, definitions or how you classify and categorise the data, a new relative truth from a different perspective may emerge.
Relative truth is “one” of the three transparencies. There is a history behind the Union Jack that proves illustrative. At first there was only the Union flag composed of England and Scotland. The English resented the fact that their white background had disappeared. The Scotts resented the English for superimposing their red cross over the Scottish white diagonal one. Thus arose an unofficial Scottish version of a white diagonal cross superimposed over the English red cross. Stretching this metaphor a little, each aspires towards their ideal of absolute truth, but in dealing with the others, stumbles over the rock of relativity.
So too it is with the proponents of the free market and those of socialism. The free market appeals more to the individualist and liberalist whereas socialism appeals more to the common worker and egalitarian. Perhaps you can do away with the English or the Scotts, but you cannot banish one of the sides that make the left/right divide or brainwash the one side to adopt the ways of the other. Both sides often make up the majority judging by political outcomes over time. The world needs the individualist as much as it needs the common worker, regardless of arguments to the contrary that the common worker can also be an individualist.
Two cardinal errors of perception committed by proponents on both sides of the cross are:
- to see only their transparency sheet projected onto reality as the only valid underlying blueprint for it.
- failing to distinguish between theory (which always presumes a set of “limiting” underlying assumptions) and practical reality (where there is always a devil lurking in the finer details surrounding those theoretical assumptions).
Error (1) can turn both a free marketer and a socialist into a cold-hearted being (Mr Scrooge and Stalin). Error (2) is committed by many free market purists and communists who would have nothing less than their theory applied to the letter. Lessons are often drawn from anecdotal examples of history. The weakness of their arguments can be detected by their inability to adequately explain why the “good” episodes supporting their cause have never been sustained. (1)
This author considers himself more of a free marketer than a socialist. So to illustrate with a practical example, I shall turn upon myself to dethrone a free market “ideal”.
I do so because I believe that in order to forge something of practical value, one has to learn how to temper faith with scepticism. Faith (such as following your intuition) is necessary for drive whereas scepticism (or critical appraisal) is necessary for change. Implicit in change is progress (or degeneration). Without scepticism, we would be left with dogma and without faith, stagnation or degeneration.
I think this is the basis of the scientific method and its antagonism towards religion. Perhaps this is part of the rationale why the philosopher, Karl Popper, said that only hypotheses that are falsifiable can be considered scientific. Applied personally, instead of always looking for the truth, it is often fruitful to look for the errors (where one can be wrong) and through finding them one is inadvertently deflected closer to a truth (a better hypothesis because resolving errors often involves a reorganisation of the data – definitions, classifications, assumptions – if one has the humility to do so).
The example I have chosen is that of a public good: Central Park, New York.
Free market purists will insist that all land should be private and left to the free market to determine its optimal use. According to them:
a) Central Park should charge entrance fees that sufficiently pays for its use value relative to all other surrounding property values. If people sufficiently value such a “good”, they will pay for it relative to other goods (in this case the use of the land).
b) There will be sufficient donations from private individuals who value a park for their children or simply a good cause; the proceeds of which can be combined with (a).
c) Proceeds from honorary benches can be diverted from the public to the private purse.
d) There is a rich philanthropist or group of individuals who willingly buy the land in their own private capacities and make it available to the public for free (subject perhaps to a notional fee for working adults and enforced “rules of the park” to at least cover some of the running costs).
In their defense, free marketers will point out many examples of parks where entrance fees are charged. For example, there are the very beautiful Japanese gardens in San Francisco that charges an entrance fee and many other natural parks.
Based on these examples and on theory it is indeed possible. But in the specific case of Central Park, will the entrance fees collected at Central Park prove economical to keep the land open as a park (stated mathematically: enough willing customers times ticket price equal to market rent of land, where ticket price is optimised to maximise revenue)? Implicit in such an assumption is that only those that can produce sufficient economic value be entitled with a choice to enjoy the park; and that children and dependents be slaves to their economically productive guardians' preferences for them.
Or will higher economic utility be derived from additional office space or parking lots in New York (at least when economic times are good)?
After the land has been built up and it becomes economical to have a park at a later time (due to a change in consumer preferences), what are the chances, given now the increased costs of restoring it to its natural state? Are there examples of productive buildings being torn down in city centres to restore historic parks?
Do we consider Central Park a waste because it does not fall under the free market? I know some people who would, so I do not imply this question to be rhetorical. But in that case, what do the values of those who think it is not, mean?
In theory the free marketers are right if one adopts the perspective that all values are to be derived from economic cost benefit considerations. Does that necessarily throw out the socialist perspective of ring-fencing land from private choice?
The free market hangs on a chain of economic value creation from start to finish. Along its length there is always that “marginal” cut-off point, where value producers are constrained in their value enjoyments. This is also what holds the chain together. (2) Tamper with the links by applying a bit of centralised control and social diversion, and you weaken the chain. This is a valuable chain that should be exploited to the full in value creation, for the upliftment of material needs.
But one needs to be careful in defining what values we are referring to. Do we also value things that go beyond what we put up for exchange? Do we also value the needs or choices of the less or non-productive elements of society? Are there values that free market purists suppress, that feeds a shadow side of society? Are there consumer preferences for common goods and values (e.g. municipal bylaws on building regulations) that fall outside the ambit of the law of marginal utility? If so, there may be a limit to the length of the free market chain. No-one would be complaining if there were always a rich philanthropist who gave expression to non-economic values (where, for example, the park above would simply be treated as a consumption good - as desired by that philanthropist - under the free market model). But despite many examples of such philanthropy and donations provided by the free market, there is no guarantee within the free market system that the heart-felt needs of the majority will always be met (regardless of questions of fairness or justifiability) .
Socialism, on the other hand, hangs in the scales of redistribution. Its mythic hero is Robin Hood, who takes from the rich to give to the poor. Originally a common brigand according to medieval ballads, he is today portrayed as an unfairly dispossessed aristocrat and supporter of King Richard the Lion-hearted.
Socialism implicitly concerns itself with the question of fairness. But how is it defined, how do we distinguish it from envy and how can we reconcile it with incentives? What about fairness to future generations? These are some of the foundational questions that were perhaps not adequately addressed by the architects of socialism. According to their transparencies, people should be good-hearted, but if they are not, then they should be forced to act (conform) as if they were.
Communism, the radical brother of socialism, failed because of the free market. It tried to suppress the free market by denying the existence of invisible hand economic laws. Such laws are one of those transparency sheets that form the basis of our reality in optimising scarce resources and in incentivizing individuals towards economic value creation.
Could it be that the free markets and socialism are both at risk today because of an attempted marriage between the two? Where basic economic laws, which were always meant to operate de-centrally, are being flouted by institutions designed upon centralised control? Government institutions built upon socialist ideals may be failing because their designers have not given adequate consideration to free market laws. Laws which continue to operate de-centrally and independently from those envisioned by the institutions' architects. Laws which remain invisible just as Adam Smith had hypothesised, whether we consciously recognise them or not. Laws which may not necessarily be the ones found in economics textbooks. These books were often written from a perspective of centralised control, the “aggregate” or the philosophy of utilitarianism (which holds best that which maximises the public utility in some-“one's” mind, though often clothed as the majority's).
I do not believe that there is a middle way between the free market and socialism as this implies a two dimensional view of reality and the two will always be in conflict. (3) It is the tension arising out of such conflict that acts as a motor for change and ultimately allows for the progress of society despite the inherent flaws that constitute human nature, which never seems to change. Isn't it a miracle that society can still progress without any perceived improvement in the general morals of it? Could this also be the reason why, along with such progress, we can see an increasing ability of its self-destruction?
A three dimensional or dynamic view requires a distinction between the various transparencies which, when superimposed over each other, form the reality that is projected through our actions and interactions.
The difficulty is that we only ever see the projected image and can never see the separate transparencies. From a theoretical perspective, there are many ways that data can be classified and these classifications themselves should be the subject of hypotheses.
Today the image being projected is particularly blurred. There used to be a time when free market proponents could easily translate Robin Hood's mythic action as “stealing” from the “productive” to give to the “unproductive”. Now they cannot be too convinced of the productivity of the rich. Likewise the socialists cannot be sure that their policies are redistributing from the rich to the poor. We appear to be in a shake-up, where everything gets blurred before things can somewhat settle again. Everyone is just trying to place their transparency over the others (as the Scotts and the English were doing), instead of letting some light shine through each of them.
From a practical perspective, the answer, I think, lies in a continually optimising alignment between transparencies. (4) Between the free market principle and the socialist prerogative. A historical example is that of the English common law. The flexibility/adaptability of common law was congruent with the need to reorganise society. From a predominantly caste system to an upward/downward mobile society to serve the needs of industrial progress, on the basis of the then emerging and maturing mechanical technologies. This can be seen to have facilitated the Industrial Revolution in Britain to a greater extent than was possible under the more rigid codified legal systems of Continental European countries. Monarchies across the world eventually succumbed to the Industrial age.
Today the optimal alignment may be found in a redesign of our institutional arrangements along decentralised network patterns congruent with the Information age. Some of this can already be seen in organisations that are finding reorganisation along decentralised lines - made possible by information technology - more economical. We are probably yet to see this in government institutions, where resistance to the necessary change may still prove formidable. The economic dislocations we are experiencing today may be there to erode that resistance and to eventually force down the centralised and hierarchical institutional structures which are no longer congruent with our Information age. New institutional structures that are made possible because of the maturing information technologies available to us today.
The dislocations themselves may be the result of an inappropriate application of information technology, such as under our centrally controlled banking system (controlling money centrally in non-alignment with the free market principle, which intrinsically operates along decentralised patterns). The current extent of our debt based monetary system would not have been imaginable were it not for information technology - electronic and credit card banking, instantaneousness of transactions, speed of cross-border flows, ETFs for just about any instrument imaginable, etc. I am not arguing against these innovations, but hypothesising that the basis of centralised control and lack of de-central anchor of our fiat monetary regime is out of sync with the requirements for these innovations (5). In much the same way that the caste structure of society was out of sync with the needs of dynamic industrial reorganisation.
This comparison between our Information age and the Industrial age may be hard to see because all the concrete forms of manifestation of what these decentralised institutions and structures will look like have not yet materialised. I believe that glimpses of it can be seen/imagined, probably most easily by those closest to the information technology sectors. Just imagine how hard it must have been to foresee a society of upward/downward mobility just before or even during the early stages of the Industrial Revolution. I would conjecture that the establishment of the new institutional structures of the Industrial age and the fall of monarchies lagged the scientific inventions and urbanisation. To a large extent the Information Revolution and “virtual” changes to our lives today have already occurred and are maturing. The change in institutional arrangements, however, is yet to commence.
Notes:
1) One sees this better if one regards blame projection or scapegoating as scientifically invalid. By “adequate” I mean in the minds of non-purists. Human beings generally are imperfect and purists should try to account for this fact in the application of their theories instead of using it as an excuse for their failure.
2) I.e., the “economic value creation” or the theory of the free market which incorporates marginal utility, consumer preferences, productivity, etc.
3) A reader and subscriber to the metaphysics of Robert Pirsig kindly pointed out to me: “this conflict is a natural occurrence and expresses the health of society.”
4) I have emphasised “continually optimising” in order to convey the meaning of a dynamic process. I believe there is no lasting static resolution to the eternal philosophical questions of dualism. A static resolution can only be achieved in the minds of purists who believe their ideals. A static resolution would ultimately lead to stagnation or, on its attainment, one would have to assume that we have reached the end of progress.
5) This must seem counter-intuitive to many who would argue for the opposite along traditional lines: that more centralised control (for example the call for a world central bank) and more government control is required. The test of appropriateness of centralisation or not, may lie in the extent to which proponents make use of scapegoating in support of their claims, as opposed to true scientific understanding.
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Jun 21, 2010
Robert Wutscher
The Shadow Economist
email: rwutscher@telkomsa.net
The shadow
economist, Robert Wutscher, is a retired financial due diligence
specialist who has taken up the study of economics. His study
has turned to the shadow side of economics: what most economists
ignore, suppress or fail to account for in their models under
the light of mainstream economic consensus methodology. A rich
resource exists in many old economists who have passed away with
insights that do not sit comfortably in today's quantitative
models and with warnings/lessons of the past going unheeded.
The modern consensus methodology is primarily based on quantitative
methods and generally considers only economic aspects and assumptions
that are amenable to quantitative analysis, even if this can
only be done with abstraction of reality or of the mathematics
itself. It ignores other concepts essential to human decision
making, that may be too hard to quantify and that may be hidden
in the shadows of the aggregates and averages that form the edifice
of macroeconomics and econometrics.
He welcomes
constructive criticism. He can be reached at rwutscher@telkomsa.net
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