Individuals and the Free Market

By R.M.B. Senanayake-2017-09-29

The Free Market System promotes the welfare of the people ensuring individual freedom, although it is unconcerned with moral humanitarian issues.

The original proponents of Economics were concerned with moral and egalitarian issues, such as how to promote moral values and equality in the economy. But the modern understanding of technical economics has displaced such humanitarian aspects and the subject has become more technically oriented and focused on individual choice.

The deeper moral philosophy of Adam Smith and others is no longer considered. Such a basic common concern of the Scottish Philosophers as that of creating the institutional conditions for a civil and compassionate society is lost in its modern rendering and is confined to socialists and communists. Now, Economics is purely a technical study of choice under given circumstances of scarce resources to meet endless needs and desires.

Hume's focus on private property, the need for free transference of property by consent, and the keeping of promises through contract are taken for granted. They are, however, invaluable supports of modern society.

They are not rules that only benefit one segment of society at the expense of others, but instead form the general foundation for civil society and peaceful social cooperation. Smith's analysis of the wealth of nations is measured by a rising standard of living that is shared by more and more of the general population. This same concern is still valid today and is the concern of liberal humanitarian persons and organizations. It is an empirical matter as to which set of institutions best achieves that task. But the concern with raising

the living standards of the least advantaged in society is never far from view and is still validly held.
However, the emphasis of modern economics has changed. The atomistic neoclassical model has come to be accepted for its merits of ensuring individual freedom and private enterprise, instead of common ownership or socialism. It has come to be accepted that political liberalism cannot exist without economic liberalism in a free enterprise economy where the private individuals are allowed to own and dispose of property.

Adam Smith

Classical economists like Adam Smith were concerned with determining the conditions that a society must have to ensure freedom of thought and action for the individual. Adam Smith thought that the essential condition for the existence of such individual freedom is the right to own and transfer private property and the right to expect government protection for such private property rights. So the government was expected to provide such protection for private property rights. Classical economics accepted the right to own and freely dispose of private property as the essential indispensable feature of a free society.

But everybody did not own private property. It was owned only by the aristocracy who inherited the lands under feudal title.

Workers had no ownership of the land but were tenant farmers or agricultural labourers if they worked on the land. With the Industrial Revolution there emerged a class of owners of machinery, who produced goods in factories using machines and people to work in a central place of work called the factory, where they could be adequately supervised for quality.

There were also landless labourers who had been displaced due to the Enclosure Movement, where landlords evicted them and consolidated their property for better supervision and management.
They now took a greater interest in ownership because there was surplus produce due to new inventions and innovations, unlike earlier where production was only for sustenance.

Also, landless persons had to work to make a living. Money had displaced barter in exchange and money could be used as a general medium of exchange to buy any goods and services in the market place. Therefore, landowners began to take an interest in the commercial farming of their lands. But some political thinkers, who emerged, stated that the system was unfair since property was owned and transferred to the progeny through inheritance. They advocated Socialism.

Within the environment of such protection for property rights, the economists were interested in studying how the individual made rational decisions when he had to use scarce resources. If he used
such scarce resources for one need or purpose they were not available for another of his needs and purposes. So how will the rational individual decide between different uses of scarce resources? How will he value them and how will he choose between them since he can't buy all that he wants?

So Economists went on to study these questions of individual choice -how the individual makes rational choices particularly in situations where resources available are scarce, relative to the demand for them. In such a situation there must be rational decisions to enhance the welfare of the individual or the community.

Human behaviour & choice

The mainline of economic thought from Smith to Hayek were concerned with this issue and devised a rational choice analytical structure to the questions of the logic of choice. But it is rational choice for fallible human beings with their inconsistencies and quirks of behaviour.

They are mortals, not robots. Yet, despite their fallible nature, there are 'invisible hand' processes, which have emerged through this exercise of human freedom. But they depend on an institutional context to provide the filtering processes which dictate the equilibrating tendencies and the equilibrium, or stable situations which will prevail for a longer period.

In short, the mainline of political economy or economics from Adam Smith to F.A. Hayek is one that analyses and reaches conclusions for stable prices given the rational choice of individuals if the choosers are human, and act within institutional backgrounds. Despite the exercise of such varying individual decisions there are tendencies for stability in
prices and quantities which prevail at least for a short time.

This is what struck these economists as important and hence they proceeded to study the conditions for such stable situations.

The individual needs to buy goods and services to fulfil his needs and desires. But he has a limit of how much of such goods he can buy and store, since his resources in the form of money are limited and he needs to spread his consumption over time.

"This mainline of political economy, rejects the claims to egalitarianism, It is however, firmly grounded in market egalitarianism where all persons who buy or sell in the market are treated equally with no favouritism to any buyer or seller.

Anyone, who challenges the analytical egalitarian perspective is subject to scorn by Smith – e.g., his proposition that the only difference between the philosopher and the street porter is in the eyes of the philosopher, or his warning that the statesman who attempts to outguess the market would assume a level of responsibility he is incapable of judiciously exercising, Hume and Smith presented a structural argument in political economy; an argument intended to discover a set of institutions where bad men could do least harm if they were to assume positions of power.

As Hume put it, when we design institutions of governance, we must presume that all men are knaves. This is something our goodhearted politicians must bear in mind when drawing up fancy schemes for equality. And in a move, that anticipated the modern political economy of both Hayek and Buchanan, Smith basically argued that our knavish behaviour manifests itself in either arrogance or opportunism. We see both in our free society".

The classical liberal political economists treat the individual not as atomistic, but as embedded withinsocial settings – in families, in communities, in history. Yes, there is both the self-interest
postulate and the invisible-hand postulate.

But the emphasis classical economists provided restraints they hoped to establish on the abuse of power by political elites.

However, it is just as important to stress the emancipatory or freedom enhancing aspect of the doctrine as well. As Hayek writes in his essay 'Individualism: True and False' Smith and other classical liberal political economists were concerned "not so much with what man might occasionally achieve when he was at his best, but that he should have as little opportunity as possible to do harm when he was at his worst."

Hayek continues: "It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated, is that it is a system under which bad men can do least harm.

The free market system is a social system which does not depend on its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men as they are, in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid."

Classical philosophers like Plato thought of how to get good men in society to entrust leadership. But the free market system eliminated this need for human leadership. It also provided for individual
freedom. And Hayek concludes, "Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it as their French contemporaries wished, to the good and the wise"(emphasis added), the same thought once championed by ancient Greek philosophers like Plato.