In Defence of Liberty

Driven by data; ridden with liberty.

Murphy’s Flaw II

Richard Murphy believes that free markets are very unlikely to exist, or to even approximate reality. (Edited: John-Morgan)

Richard Murphy believes that free markets are very unlikely to exist, or to even approximate reality. (Edited: John-Morgan)

Richard Murphy of Tax Research UK writes that free market advocates reveal their “Hayekian bias”, listing ten assumptions supposedly made by market economists. Mr Murphy argues the probability of these conditions holding is very small:

Let’s be generous and suggest that each of these conditions has a more than evens chance of existing – call it 55%. But remember, they all must. In that case them all existing is 0.55 to the power 10. That is about 0.25%. But that’s incredibly generous: ludicrously so when the assumptions made are looked at by any sane person. Apply a more likely probability of these things existing of 5% (which I still think absurdly high) and the chance that free market exists falls to 0.00000000001%. Let’s call that a cat’s chance in hell.

This is why I find free marketeers so absurd. They demand that markets be given freedom to deliver when there is quite simply no chance at all that they can deliver because the requirements that must exist for them to do so not only do not exist, but cannot do so.

Firstly, Mr Murphy’s argument mistakes an economic model’s simplifying assumption with an existential presumption. All models – including using probability spaces to study reality – necessitate making the world calculable. For simplicity, societies and economies are too complex to completely predict.

Secondly, Mr Murphy’s calculations are based upon an implicit assumption that the requisite properties of ‘free markets’ are independent. Even Mr Murphy concedes the listed properties “overlap”, so statistical independence is violated. This is taught in GCSE Statistics: the probability of multiple events occurring simultaneously equals the product of the separate probabilities is the definition of independent events. Mr Murphy dismisses these concerns as “angels on pinheads”, as if highlighting factual errors in the article’s central premise is time-wasting.

Thirdly, the argument that a severely wrong postulation should lead to contempt can be directed at the article itself, which is similarly flawed.

Fourthly, the idea that economic models are defective, and hence cannot direct public policies, is not new. One economist put it:

But the effects on policy of the more ambitious constructions have not been very fortunate and I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false.

Mr Murphy lambasts against “Hayekian bias”; the quoted economist is F. A. Hayek.

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This entry was posted on September 17, 2014 by in Economics and tagged , .
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