Does a free market require a certain amount of intelligence in the populace in order to function?
Does it require a certain amount of education in the populace?
If so for either of these, what’s the lower boundary?
If not for either of these, do other species have free markets?
Basically the free market allows hierarchical groups to form lead by people who have ideas and know how to get stuff done with what they have (since, if they don’t, the organization will lose out to another group which has someone more capable at the top). If there is no such people, regardless of the system, you’re fracked. If you went out and killed everyone on the planet who can lead and lead in a generally positive manner, there’s not going to be a good outcome.
it’ll work to the best of it’s ability but more importantly it’ll work better than a planned economy. all economic policies are flawed because of:
1 - perfect information. you don’t have that.
2 - perfectly rational decision making. you don’t have that.
3 - “externalities”. you can’t measure that
but in letting the invisible hand dealing with prices, it works a lot better than letting a government deal with it.
Under the scenario presented, thin as it is, there’s no way to organize a perfect economy. In fact, perfect economies are impossible in as far as we know. Although it may sound odd to say it, such an economic system (I know, we’ll call it Idiocracy!) would more or less work relative to other options as well as we have now relative to our options.
The reason is that free-market economics* works to aggregate information. Fundamentally, the free market does not make anyone work more efficiently (though that too can be a consequence of individuals able to better their lot). Rather, it lets individuals pool their information in a huge variety of ways.
I would like to $0.00 for a rake, but I will pay up to $40.00. The rake maker would like $OO (infinity) but will take as low as $10.00. Depending on how badly I need a rake or they need to selel rakes, and how many other rake-makers there are, and how many rake-buyers there are, a market clearing price emerges. When people “The Market” sets a price, that’s not literally true. Rather, Everyone participating sets a price and constantly puts information in the system in an extremely limited way but on a massive scale.
As such, it’s not really relevant how intelligent the people working on it are, except to the degree their personal price limits accurately reflect their desires. The intelligence fo the rake-maker is a little more important, since he needs to know how much making a rake costs before choosing a lower price limit.
*I have decided to forego the term Capitalism. The term is really perjorative and Marxist, in that it supposes an organized system of capital and Capitalists. The beauty fo the free-market is that there need be no such system (or, as we do have, a huge plethora of them) and that we all eventually become capitalists.
If everyone’s an idiot, can anything work?
That’s what I was going to say. If nobody is smart enough to reliably make good decisions for themselves they’re not going to be smart enough to reliably decide who would make good decisions for them, and there isn’t going to be anyone smart enough to make good decisions for everyone for them to trust in the first place.
Exactly. The most perfect system in the world can’t overcome the quality of its materials.
The answers so far do not entirely answer your question, and in the case of pancakes3, are misleading and quite wrong.
I’m going to do a little bit of bait and switch and change the wording of your question to “competitive market” instead of “free market”. The former has a formal definition in economics while the definition of the latter is highly political and not at all rigorous. Sometimes it refers to exchange only, but commonly it also can refer to private ownership and a host of other things. I like to start simple.
The idea of a competitive market is straightforward. The following (more or less) all hold up in a competitive market: no barriers to entry, the goods sold can be mutually substituted for each other, there are lots of producers and none with market power, transactions are costless, and the quality of goods and prices are well known to everyone. These are the characteristics of our marketplace that we should be trying to shoot for, more or less. Our own “free market” is a mongrelized and frequently non-competitive “competitive market”.
For competitive markets to function optimally, people do not have to be particularly educated. All they need is to act in a non-random and goal-oriented way and they need to be able to order their preferences over things according to some very basic logic. For example, suppose your set of choices of ice cream includes vanilla, chocolate, and strawberry. You prefer chocolate to vanilla, and vanilla to strawberry. By extension, you must also prefer chocolate to strawberry. This seems obvious and true enough, but this and the other assumptions about preferences that make competitive markets optimal are quite serious and have been very convincingly challenged.
But your original question was about the “free market”, which I presume to be the “market” in general in the United States. For reasons that do not require a lot of enumeration, in many respects it is not competitive at all. It is characterized by private information, market power, transaction costs (hidden or otherwise), and frequently high barriers to entry. To do well in this sort of environment requires a great deal of savvy if not necessarily a lot of formal education. This is required precisely because our market is so imperfectly competitive, by a very long shot. The fact that it takes a lot of know-how to do anything serious is a shortcoming of the market, not a positive. If our markets really were wonderfully competitive, they would also be somewhat idiot-proof.
Much of the literature of formal economics explores just why we get such bad, bad outcomes despite having “free” markets when the theory of competitive markets would ordinarily predict otherwise.
What do you mean by “work”?
In that sense, it’ll exist as long as you can have 2 people that can agree on a price / barter. There isn’t any guarantee that any free market will be “efficient” or “good” or will produce “wealth”.
Yes, human level intelligence, although pre-Modern Human shows signs of being able to trade values.
Nope.
None. However, in cases of extreme inequality in societies, the most powerful members often - usually perhaps - completely subvert markets by either disguised or direct means - ranging from populist protective measures to outright cartels or monopolies.
Humans are the only species with formal markets, but birds, chimps, etc. show primitive trading behaviours.
OK, there is technically another principle in that: it assumes people are trading in order to maximize or at least increase their wealth (that is, getting what they want) and that they have some half-decent idea of what it is that they want. If people are so stupid they can’t figure that out, or are deliberately trying to destroy wealth, then a free market doesn’t win. Of course, people that stupid will soon die from being too dumb to eat.
It will work to maximize production of what people value most. Of course it raised the age old question of whether an economy can survive producing nothing but reality shows, Pabst Blue Ribbon beer and Ed Hardy T-shirts.
I mean a lot of it depends on what you mean by “everyone is an idiot”. If people are too stupid to create anything of value, the potential to create any form of wealth is obviously limited. Of course if everyone is an idiot I wouldn’t trust any sort of centralized planned economy either.
I think a more important factor is whether people have the intelligence to trade for what they want. Or do they simply take what they want from whoever they can like an amoral retarded child?
What makes you think everyone is an idiot, anyway? I know it’s common and cool to complain about how stupid everyone is, (especially those who don’t agree with you or live your kind of lifestyle), but the fact is that the people in just about every second and first world country are plenty smart. They’re no dumber than the people who went to the moon or fought WWII or created powerful economies in the first place.
People today also have access to far more information than they ever did, and have access to more tools to increase their personal influence and brainpower than they ever have.
The people attracted to government, however, seem demonstrably worse than they were fifty years ago. But that’s probably what every generation says.
I suppose arguably it’s never been that all the people were smart, or that the society needed them to be. Some small percentage of very intelligent and energetic people discover and implement the technologies the rest of use in our less-grand goals of making ourselves and our families comfortable.
If anything, I’d say the percentage of smart people has gone up significantly since WW2, from maybe 2% to 5% and that 5% does indeed have access to far better tools and information meaning they use their smartness more efficiently, with the attendant increase in science and technology.
That doesn’t mean the remaining 95% are idiots and I’m also tired of arguments that assume such. If we define “idiot” as someone who behaves in a thoughtlessly self-destructive or self-defeating manner, then quite obviously someone whose goals including working to pay off a mortgage doesn’t qualify, banal though it may seem to some sneering wannabe elitist.
Someone show me where I assumed any such thing.
Is that a free market or a plutocracy you’re describing? I think the whole question depends on how seriously one takes the free part in free market.
Free markets may allow plutocracies, but can never protect them. If some people are smart enough and rich enough to affect the economy in some way, this does not change the principles, and they can be knocked off the top at anytime.
There is no invisible hand. There can be no free market. These are handy little icons devoid of reality. Corporations will do their best to eliminate competition. They always have and always will. The government has a useful function …They have to protect the consumer from being harmed by bad products. They have to keep corporations from collusion. Corporations will always do their best to eliminate competition. The government has to prevent that from happening. If they can not, business becomes the government.
The idea that business is self correcting is stupid on the most basic level. How Greenspan can be allowed to speak in public after espousing something that unrealistic is scary. Lets face it Libertarianism=retarded.
But isn’t there a contradiction in what you’ve just said? If the rich can, as you say, have the power to affect the economy, then they can use their advantages in the market to protect themselves. Although I don’t want to get into a debate about Microsoft, this is exactly what they are trying to do when they make it difficult for other companies to compete by using their market power to close out other players. In this case the free market so-called helps Microsoft to achieve and manipulate something very like monopoly power.
More to the point of the OP, something I think no one has raised as yet is that in it’s original conception, in Adam Smith’s description of the invisible hand, the idea is that people work towards the social good without knowing. (I mention this not because I think Smith was right on this point, but only because this particular idea of his remains popular enough that one still hears it rehearsed today–almost as though it were an empirical fact.)
They can only do exactly what they previously did. Unless they can somehow change the rules of the game (i.e., influence the political system to protect themselves) they are always and everywhere at the mercy of the economic system. They can affect it through their vast resources, but it can never be anything more than wrestling with a serpent: at any moment it could slip away and bite you.
This is because influence != control. Everyone influences the market, and the mroe resources you have the greater the level of power you have to affect it. But that power, in a free market, can always be destroyed. In fact, it can vanish very quickly and easily.
Microsoft tries to close out other players, but it does not succeed. It is a company constantly moving into new markets and products because they have already determined that they can not protect their near-monopoly forever. They can only make their product more attractive somehow (cost, features, performance). Microsoft usually has a 2nd-tier product, but which is very accessible and often free with the computer. That’s no trivial point, and it’s why they so often succeed. However, they know they can’t keep out other players in their pond forever, and so have elected to invest their new money in other areas and markets.
Basically, Microsoft is running the Red Queen’s Race. Right now it’s keep well ahead of the axeman, but that could change very quickly. GM didn’t think they were going to spiral down the tubes and be made into a government-funded unions-vote-for-Democrats cesspool back in the 80’s, either.