Why the Free Market Can’t Be Planned by You, Me, Economists, or the Government

William Goldman, not to be confused with William Golding, author of Lord of the Flies, sums up the problem that studios have of attempting to be certain about the success of a film — “Nobody knows anything.”1 Goldman should know. He is a successful novelist and screenwriter with several Academy Awards and big screen blockbusters to his credit.2 Goldman was not saying that studio executives are generally ignorant or stupid; he was only pointing out that they are not omniscient. They don’t have enough knowledge about people and their tastes to know whether a film will be a success. It’s always been that way, and it will always be that way.

For example, Disney executives sold off much of the investment rights to The Sixth Sense (1999) to Spyglass because they did not believe the film had commercial viability.3 After finishing the filming of Jaws, nicknamed “Flaws” by the crew, Richard Dreyfus commented on a talk show that the movie was going to flop at the box office. The star of the show, a 40-foot mechanical shark, was beset with problems and hardly appeared in the movie. Both movies exceeded the expectations of the studio executives. The Sixth Sense, costing just $35 million to make, has earned more than $678 million in gross box office receipts worldwide. “It would go on to become the top-selling DVD of 2000, with more than 2.5 million units shipped, as well as the top video rental title of all-time.”

Jaws brought in $470 million at the box office in 1975. “Adjusted for inflation, Jaws has earned almost $2 billion worldwide at 2011 prices and is the second most successful franchise film after Star Wars. In North America, it is the seventh-highest-grossing movie of all time, with a total of $1.017 billion at current prices, based on an estimated 128,078,800 tickets sold.”

We can apply Goldman’s film observations to economics. Nobody knows for sure whether a new product enters the marketplace will be successful. Pet rocks made someone a ton of money, while the superior Betamax tape format sank almost without a trace. Chris Anderson, editor of Wired magazine and author of the book The Long Tail: Why the Future of Business is Selling Less of More (2006), describes how “at the beginning of every season, retailers always try to guess what the popular color is going to be [for KitchenAid products]. And there’s always one they miss. Last year [2005] it was tangerine. Nobody knows why, but it was tangerine.”4

Henry Ford didn’t have this problem since between 1913 and 1926 the Model-T was only available in black.

There is a simple answer to the question why the retailers didn’t know what color will be popular. They’re not God. Like the rest of us, they are finite, fallible, and fallen creatures who don’t know everything. “We live in an imperfect universe. We are not perfect creatures, possessing omniscience, omnipotence, and perfect moral natures.”5 What’s true of individuals is also true of groups of individuals who attempt to plan the economy based on what they think they know about what people need, want, and should have.

So, while “nobody knows anything” in terms of what will succeed in the marketplace, there are certain fundamental first principles that we can know that tell us why economies work the way they do. The most fundamental question is, How do we account for these fundamental first principles about what we say we “know” about the moral aspects of economics? Are they derived from reason? But all economists claim they are using reason in the formulation of their paradigm. As Thomas Sowell writes, “There are basic propositions and procedures in economics on which a Marxist economist like Oskar Lange did not differ in any fundamental way from a conservative economist like Milton Friedman.”6 So why did they come to different economic conclusions? Then there’s the question of whose definition of reason is most reasonable in determining the moral basis of the marketplace? The French elevated reason to the status of a god with bloody results. We all assume the reality of morality, but what is its origin?

What is Economics?

Thomas Sowell defines economics as “the study of the use of scarce resources which have alternative uses.”7 While this is a good textbook definition, it assumes too much. It doesn’t explain the source of resources, why they are scarce, and why we should care at the moral level. We need a more basic definition going back to fundamentals.

Almost all modern definitions of economics, like contemporary definitions of “government,” assume that the State, civil government, is the starting point in understanding economic theory and practice. To grasp these, so the argument goes, the State must play a major roll in economic decision making by allocating scarce resources. For many, this is a reasonable and moral starting point when resources are scarce and people have needs.

On the other side of the economic spectrum, classical liberals, libertarians, anarcho-capitalists, and even some constitutionalists contend that the means of production should be privately owned, economic decisions also should be made privately with goods and services exchanged in a free market with little or no positive state intervention. The role of civil government in economic matters should be minimal, being limited to the protection of individual rights and property.

Modern economic theory presupposes that markets need to be regulated so that there will be a “just” accounting for everyone. If there is inflation (an increase in the money supply), interest rates are raised. If the economy is sluggish, governments will increase the supply of money to stimulate growth. If one segment of society is being left behind economically, taxes will be raised and income redistributed to smooth out the inequities in the name of “social justice.”8 Such an approach, as R. J. Rushdoony shows, assumes the divine attribute of omniscience for the State.

It presupposes a sovereign political state with a monopoly of money creation. It presupposes an omniscience on the part of the state and its functionaries that is utopian. It has awarded to the state, by default, the right to control the central mechanism of all modern market transactions, the money supply. It has led to the nightmare of inflation that has plagued the modern world, just as this same sovereignty plagued Rome in its declining years. In the case of ancient Rome, it was a reasonable claim, given the theological presupposition of the ancient world (excluding the Hebrews and the Christians) that the state is divine, either in and of itself or as a function of the divinity of the ruler. Rulers were theoretically omniscient in those days. Even with their supposed omniscience, their monetary systems were subject to ruinous collapse. Odd that men today would expect a better showing from an officially secular state that recognizes no divinity over it or under it. Then again, perhaps a state like this assumes the function of the older, theocratic state. It recognizes no sovereignty apart from itself. And like the ancient kingdoms, the sign of sovereignty is exhibited in the monopoly over money.9

The advocates of a free market and those who declare for a managed market claim to promote justice with their policies. Again, there is little argument over wanting to establish a just market place, the question is, how do we account for justice? What is its source? Mutual consent? Public opinion? Enlightened self-interest? Those involved in economic transactions believe and hope for an agreed upon set of rules (laws) that apply to all equally, especially since “we live in an imperfect universe.” Like reason and justice, how do we account for the validity of these rules?

Borrowed Capital

With some variations, those who hold to a biblical economic model share many fundamental principles with advocates of an unregulated free market, or, as I hope to demonstrate, free marketers share many fundamental economic principles with advocates of a biblical worldview. John W. Robbins writes, in his critique of Ayn Rand’s Objectivist philosophy, “That the structure of knowledge that she erected, in which metaphysics depends on epistemology, ethics on both, and politics on all three . . . eliminated the possibility of both limited government and the laws of logic. She smuggled those ideas in from Christianity, whose structure, whose systematic philosophy, she rejected.”10 Of course, she was not alone. Rushdoony makes a similar point in his critique of naturalistic philosophies in general:

Thus natural man does have knowledge, but it is borrowed knowledge, stolen from the Christian-theistic pasture or range, yet natural man has no knowledge, because in terms of his principle—the ultimacy of his thinking—he can have none, and the knowledge he possesses is not truly his own. . . . The natural man has valid knowledge only as a thief possesses goods.11

Rushdoony is not saying that non-Christians don’t have knowledge of things, reason reasonably, or act justly. He contends that these supposed “self-evident truths” presuppose a transcendental starting point. Outside the biblical framework, if a person is consistent with his naturalistic presuppositions, knowledge (certainty) is impossible, not just about economics but about everything. Facts do not speak for themselves. If they did, then there would be no debate over economic philosophies and practice. Like those who hold to a managed economy, proponents of an economic free market “are unaware that their theory rests on certain God-given external conditions. They simply accept these limitations of nature as ‘given,’ and they do not bother to inquire as to the source of them. Such investigations, every secular economist would tell us, are not relevant, are not scientific, cannot be demonstrated by ethically neutral, rationalistic presuppositions.”12

How does the naturalist/materialist account for the fixed nature of economic self-evident laws and results and the moral basis for the free market when, as Lester Frank Ward argues, “nature has neither feeling nor will, neither consciousness nor intelligence”13 or, to use Carl Sagan’s opening lime in Cosmos, “the universe is all that is or ever was or ever will be”?14 How can cosmic purposelessness bring about cosmic purpose? Materialists can’t tell us within the parameters of their naturalistic worldview.

The Starting Point

The Bible begins with two uncontested presuppositions: First, God exists, and, second, He is the Creator of “the heavens and the earth” (Gen. 1:1). A third presupposition logically follows from the first two: “The earth is the LORD’s and all it contains” (Ps. 24:1; see 1 Cor. 10:26). This is true in the macro and the micro: “For every beast of the forest is Mine, the cattle on a thousand hills” (Ps. 50:10).

Private (personal) property rights are based on the fact that God is the prior owner who delegates a derivative ownership to His creation. The creator/creature-ownership paradigm is the model for how we establish the principle of private property and the laws that go with it. If I own a piece of property and decide to sell it or give it away, the transaction has legitimacy because I had legal title to the property, and I voluntarily decided to part with it. In the same way, God’s original ownership makes subsequent ownership possible and meaningful. Without the reality of prior ownership, the idea of private property is little more than a social construct. If we subscribe to the evolutionary model, then how is private property a defensible right?

Unlike so many esoteric religions, the biblical worldview embraces the material world without either deifying or secularizing it. Genesis 1:31 gives us God’s own evaluation of His creation: “And God saw all that He had made, and behold it was very good.” Even the fall did not erase this evaluation. In the New Testament we read, “For everything created by God is good, and nothing is to be rejected, if it is received with gratitude; for it is sanctified by means of the word of God and prayer” (1 Tim. 4:4–5). The Bible rejects the false spirituality of the Gnostics who relegate material things to a low plane of being. “Paul was referring in Colossians to the terms used by Gnostic teachers: ‘Touch not!’ ‘Taste not!’ ‘Handle not!’ (Colossians 2:21, 23).”15 The Bible is a very material book, and matter matters to God, including economic matters. We know this by the way the Bible presents economic issues within a specific creational and moral framework.

  1. William Goldman, Adventures in the Screen Trade (New York: Warner Books, [1983] 1989), 39. []
  2. Goldsman’s filmography is long and impressive: Butch Cassidy and the Sundance Kid (1969); The Stepford Wives (1975); Marathon Man (1976); The Princess Bride (1987). []
  3. James B. Stewart, DisneyWar (New York: Simon & Schuster, 2005), 334. []
  4. Chris Anderson interviewed by Rick Newman, “Inside the ‘New Economy,’” U.S. News & World Report (July 24, 2006), 19. []
  5. Gary North, “Gold’s Dust,” in An Introduction to Christian Economics (Nutley, NJ: The Craig Press, 1973), 46. []
  6. Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy, rev. ed. (New York: Basic Books, 2004), 4. []
  7. Sowell, Basic Economics, 1. []
  8. See Gary DeMar, “Is Social Justice Just?,” in Liberty at Risk: Exposing the Politics of Plunder (Powder Springs, GA: American Vision, 2003), chap. 11. []
  9. Gary North, “The Myth of Insufficient Gold” (October 3, 2003): www.lewrockwell.com/north/north213.html []
  10. John W. Robbins, Without a Prayer: Ayn Rand and the Close of Her System (Hobbs, New Mexico: The Trinity Foundation, 1997), 19. []
  11. Rousas J. Rushdoony, By What Standard? An Analysis of the Philosophy of Cornelius Van Til (Philadelphia, PA: Presbyterian and Reformed, 1958), 24. []
  12. Gary North, An Introduction to Christian Economics (Nutley, NJ: The Craig Press, 1973), vii. []
  13. Lester Frank Ward, Dynamic Sociology; or Applied Social Science, as Based Upon Statistical and the Less Complex Sciences, 2 vols. (New York: Appleton, [1883] 1907, 2:12. Quoted in Gary North, The Dominion Covenant: Genesis, rev. ed. (Tyler, TX: Institute for Christian Economics, 1987), 298. []
  14. Carl Sagan, Cosmos (New York: Random House, 1980), 4. Notice his metaphysical assumption that the future will be like the past so he can claim the Universe is all there ever will be. How does he know this? []
  15. Joel Richardson, Christian Economics: The Christian Message to the Market Place (Houston: St. Thomas Press, 1966). []
Previous post

The World Is Playing With Monopoly Money

Next post

It’s Time to Put the Late Ted Kennedy, Bill Clinton, and the Democrat Party on Trial