Free Market and Capitalism?

Do you really know what “free market” is? How about “capitalism”? Think again.

During the initial stage of my study of Austrian economists, I was repeatedly warned by several article writers in the use of terms.  They keep on saying the need for distinction to avoid confusion. One example is the association between “Austrian thinkers” and “libertarians.” I commonly used these two terms interchangeably though I am aware that the former is originally a description referring to a group of thinkers whose primary concern is to establish a sound economic theory and the latter is more appropriate as a political description. Another example for need of distinction is between freedom and liberty. Someone said that liberty is inherent, while freedom is earned in the battlefield. This is somehow related to John Stuart Mill’s distinction claiming that liberty is “the freedom to act,” while liberty is “the absence of coercion.”At least in these examples, we have two separate terms. Personally, I have no problem using them synonymously provided that the distinct use of them is remembered especially when used in a specific context.

The task in clarifying terms turns difficult when similar terms are used, but with different meanings. An example of this that I recently encountered is the use of the words “bourgeois” and “proletariat.” The way Karl Marx employs these terms is different from the way an Austrian economist like Wilhelm Ropke uses the terms. But again, at least we have a clue to clarify the confusion for most people obviously know that the two men are coming from two separate intellectual camps.  We cannot say this in the use of the terms “free market” and “capitalism.”

I happened to have an opportunity to exchange ideas with a proud Marxist in Facebook. The thread is about the evil of capitalism. And of course, associated with it, is the idea of free market. The Marxist dominates the discussion and it appears that no one could refute his argument. And then, I added my comment saying that as far as Wikipedia is concerned, there at least 15 variations of capitalism, and I made an argument that the kind of capitalism that Marx attacked was not the capitalism of the Austrian school. He replied and gave me an overview lecture of what Marxism is and mentioned a little bit about the Austrian school as a group who protests against central banking, but I think, he still maintains the idea that capitalism (and free market) is just one. And then I happened to read one “tweet” from Mises Institute about George Reisman’s open letter to Warren Buffet. I posted the link on the thread and made a comment that here is one example of a believer in capitalism rebuking a wayward capitalist.

Doesn’t Adam Smith believe in free market system and capitalism? How about John Maynard Keynes? How about Milton Friedman and the Chicago School of Economics? And finally, how about the Austrian school? Here the task of clarifying terms is not easy for the economists using them seem to be coming from one camp.

In Gary North’s The Monetization of Everything posted last July 28, 2012, he mentioned about the influence of Milton Friedman as the primary thinker that established the theoretical framework to justify the existence and operation of central banking. In this sense, we can say that his influence in the field of economics is either almost equal or perhaps surpassed the influence of John Maynard Keynes. To me, what is surprising about Friedman’s influence is that while he paved the way for the US government to gain advantage of central banking, he at the same time, opposed the expansion of government’s power. Richard M. Ebeling made this clear in his article, Milton Friedman and the Chicago School of Economics.

While searching for data about Friedman and the Chicago School of Economics, I am anticipating that I will encounter information about them identifying them as belonging to the Keynesian camp. But to my surprise, Friedman and CSE opposed Keynesian economics. So I do not know what to do with North’s analysis. Not until I found Robert Murphy’s article posted last June 20, 2011, The Chicago School versus the Austrian School.

I did not carefully read Ebeling’s article at first. But when I reread it again, I understand that he too made a clear distinction between the Chicago School and the Austrian School, and at the same time, he mentioned few commonalities. However, it is Robert Murphy who made it crystal clear the distinction between the two schools.  Yes, in terms of opposition to Keynesian economics and basic free market ideas, the Chicago School shares them with the Austrian School. Moreover, the differences are too great that one wonders how these differences influence the actual economic practice. And the Chicago School is doing this in the name of free market and capitalism.

Reading Murphy’s article, he identifies that the areas of discrepancy between these two schools are in epistemology, methodology, interpretation of business cycle, application of Coase theorem, and above all,  in policy about the supply of money. I will not elaborate on all these differences. I will just mention two.

Following Mises, the Austrian school in general (except Hayek and Kirzner), claims that a sound economic theory should not attempt to be scientific due to the absence of necessary empirical evidence and its very nature that can only be verified by reason alone. This unsound move to make economics a scientific enterprise that afflicts all schools of economics including the Chicago School is the bane of economics since the time of Leon Walras (1834-1910), the so-called “mathematical economist.” Erick D. Beinhocker (The Origin of Wealth, 2006) claims that the bringing of mathematics to economics is an attempt to create a scientific theory of economics to make the system predictable. Beinhocker further claims that many experts these days from various academic disciplines acknowledge that Walras’ importation of the concept of equilibrium from physics is a critical scientific misstep that resulted to serious consequences that plagued economics since early 19th century.

Finally, the difference in idea and policy surrounding money supply further results into different understanding about the role of the Fed, the nature of monetary crisis, and the proposed solution to it. This is the greatest discrepancy between Chicago School and the Austrian School, two schools of economics that advocate both free market economy and capitalism.

1 Comment

  1. Pingback: Savior of Capitalism and Champion of Free Market « Studies in Economics

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