Two Gaping Holes in the ‘Free Market Theory’
does not take into account government or money
The free market theory in economics is not intended to reflect reality. It is meant to paint an idealized picture of how an economy would function in a world of perfect information (all pertinent information known to all who need it to make any decision when acting within the economy) and in which all transactions occur immediately and flawlessly — and all information is then updated immediately. It is understood by all who understand the theory that such an economy cannot possibly exist in the real world.
Why, then, do people tout a ‘free-market’ economy? That, folks, is nothing but ideological posturing. They blame the existence of government for the fact that such an economy cannot exist in reality. They completely ignore the unreal suppositions that underlie the theory to claim that the ‘smaller’ government is, the ‘less’ government there is, the closer to the free-market ideal the economy can get.
That is of course complete nonsense. In reality, no economy can ever come close to functioning the way the economy does in that theory. Those suppositions are what make the theoretical free-market economy function in a ‘perfect’ way. That the theory leaves government out of that idealized portrait of an economy merely adds to the unreality of it.
There can be no economy (of the kind that theory illustrates) without a society, and a society cannot exist without government of some kind — the existence of which will inevitably affect the functioning of the economy, even in the unimaginable event that it had no say in how the economy would be structured. Indeed, ideological ‘free-marketeers’ are correct that the very existence of government makes the economy something entirely different than it would be without government; it is the inevitability of government — and its inevitable size in large, complex nation-states — that they irrationally insist on ignoring.
The unreality of the theory is further illustrated by the absence of any mention of money in it. Here the supposition — usually not even stated — is that a sufficient amount of money will always be available for all transactions to transpire. The theory completely ignores where money comes from. It also ignores the simple fact that the distribution of money determines what transactions can be undertaken: to make any purchase or investment requires having a sufficient amount of money; a lack of money for any person or business precludes making a purchase or investment that would otherwise be made. So the pattern of purchases/investment reflects the distribution of income.
It is also the case that the amount of money can in itself have an economic affect. The mere existence of money does not make anything happen in the economy, but money is necessary for the functioning of the economy as we know it (and as it was known to exist when that theory was developed back in the 1800's). Also, it is inaccurate to say that ‘inflation is too much money chasing too few goods’. Inflation occurs when demand exceeds supply. [It is usually instigated by a sudden fall in supply, as happened in the 1970’s when OPEC nations cut the supply of oil in order to raise the price of it and in the Covid crisis when supply chains got disrupted then, immediately after the health crisis had passed, demand resumed before supply could recover.] Still, the amount of money in the economy does have an affect on demand and investment (thus affecting supply), mostly through interest rates, and there can be such a thing as too much of it in the economy.
The point is that to leave money out of any theory concerning even how an economy might possibly function is to make it wholly irrelevant to the real world. Add to that ignoring the inevitability of government and the unreal suppositions of the free market theory and you have something worse than useless: you have a dangerous conceptual implement lying about such that any fool can lay hands on it and use it to do political harm.