Economic Bigotry: the Affirmation of the Free Market
as the IdealGODFREY HODGSON*
an excerpt from How Economics forgot History
In the history of economics since Adam Smith, many economists have attempted to use alleged 'economic laws' to attempt to justify free market policies. Those who advocate free and unfettered markets typically hold them up as a pure and ideal standard by which to judge reality. Of course, they observe many cases of inflexible, regulated or even missing markets in the real world. These are denounced as deviations from the pure and perfect norm.
It has been said that economic theory demonstrates that free markets are optimal. But any competent economic theorist knows that this claim is based on restrictive and challengeable assumptions. Nevertheless, the belief in optimality persists. Believing that markets are the solution, and that markets will work well if only they are free and unfettered, the cases of imperfect or missing markets are then ignored. If the theory does not fit the reality, then reality must be made to fit the theory. Imperfections and restraints in existing markets must be removed, and new markets must be set up in places where they are missing.
Leaving the ideological issues on one side, there are important theoretical implications of this commonplace gambit. In short, economics becomes the study of one ideal, pure market system. It is held that no other system, past or present, needs to be studied because it is deemed to be an aberration from the ideal norm. Economic history becomes the story of the development of all economies towards this ideal. Any impurities or 'imperfections' in existing market systems are regarded as unfortunate hangovers from the past. The theoretical discourse focuses on a single model of an allegedly pure market system.
Of course, not all mainstream economists take this extreme view. Many find good reasons for the survival of market imperfections in the system - such as public goods, externalities, and transaction costs - and advocate some government interference and some non-market forms of organisation. However, the view previously described is sufficiently powerful to constrain the analysis of non-market forms of allocation. Deviations from the pure market ideal are often addressed largely in terms of the central concepts (exchange, prices, costs, supply, demand) of the market system. They are not treated as separate entities requiring additional theoretical and conceptual frameworks.
A particular version of this free-market ideology is to assume that the ensemble of institutions in American capitalism is the ideal. When economies elsewhere experience recession, such as in Japan and East Asia, it is then exclaimed that the reason for this suboptimal performance is that the free and competitive economic institutions of American capitalism are not adequately replicated. Again this gives an excuse for ignoring the specific institutions and structures involved. The possibility that their development may be path-dependent, or that they may be capable of consistently outperfoming American capitalism in other circumstances, does not appear on the agenda.
A theory of the ideal economy is likely to emerge in periods dominated by a single, successful type of system. Opposition to this ideal is most likely to emerge in contexts where it is deemed imperfect or inappropriate. In the nineteenth century, when British capitalism was the engine of its global power, recognition of the problem of historical specificity (1) was notable in Germany and Ireland. German and Irish economists opposed British economic policies, seeing them as a brake on their own national development. They also developed a distinctive theoretical outlook. These dissenting ideas were imported into the United States and influenced American institutionalism. However, by 1945 Britain was no longer the leading world power, and America saw itself as the model for the world. America had emerged from its isolationism and saw its own institutions and structures as models for others to follow. This American intellectual domination endured for the remainder of the twentieth century, except for a brief period in the 1980s when Japan was seen as a rival model in terms of economic growth. Accordingly, the notion of a single, ideal system persists.
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References
* Geoffrey M Hodgson is Professor of Business Studies at the University of Hertfordshire (England). This extract comes from his book How Economics Forgot History: the problem of Historical Specificity in Social Science (Routledge, London, 2001), pp 31-32 (ISBN 0-415-25717-4)
Emphases in red type added by the webmaster.
1 By historical specificity Prof. Hodgson means the idea that economic policymakers should take account of the specific history and circumstances of the economy and society under consideration. In other words, they should not assume that one universal economic theory is appropriate to every real-life situation.