Free markets and dumb luck

The greatest mistake made by conservatism was its overly close relationship with neo-classical economics. This was a marriage of convenience: finding themselves Johnny-no-mates in the academic world, the conservative establishment hastily bunked up with the only group of social scientists who were prepared to talk to them.

This cohabitation was not only unhealthy but boring. Economics is obsessed with a very narrow definition of efficiency, beyond which it can see no other virtues. It hence turns political rhetoric into a slightly Aspergic narrative about efficiency and growth — as though Churchill had urged us to fight the second world war ‘to regain access to key export markets’.

But this efficiency obsession also leads conservatives to defend free market capitalism on fallacious grounds. In truth free markets are not really efficient at all. Admiring capitalism for its efficiency is like admiring Bob Dylan for his mellifluous singing voice: it is to hold a healthy opinion for an entirely ridiculous reason.

The market mechanism is loosely efficient. But the idea that efficiency is the main virtue of free markets is wrong. Competition itself is highly inefficient. In my home town, I can buy food from about eight different places; I’m sure this system could be much more ‘efficient’ if Waitrose, M&S and Lidl were forcibly merged into one huge ‘Great Grocery Hall of The People No. 1306’. I am equally confident that after a few initial years of success, the shop would be terrible.

The missing metric here is semi-random variation. Truly free markets trade efficiency for a costly process of market-tested innovation heavily reliant on dumb luck. The reason this inefficient process is necessary is that, though we pretend otherwise, no one knows anything about anything: most of the achievements of consumer capitalism were never planned; they are explicable only in retrospect, if at all.