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Rethinking Free-Market Theory

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Posted on 04 June 2021 Written by Blair Fix Economic Development and the Death of the Free Market, Part 4To interpret the inferred growth of hierarchy with economic development, let’s return to the competing perspectives of multilevel selection theory and the neoclassical theory of free markets. Which theory is consistent with the evidence?Please share this article - Go to very top of page, right hand side, for social media buttons.I will start with multilevel selection theory, which argues that successful groups must suppress the self-interest of individuals. The theory does not stipulate how this suppression occurs, but evidence from evolutionary biology suggests that hierarchy is a common tool. The idea is that the control structure of hierarchy suppresses the fitness-seeking

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posted on 04 June 2021

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Economic Development and the Death of the Free Market, Part 4

To interpret the inferred growth of hierarchy with economic development, let’s return to the competing perspectives of multilevel selection theory and the neoclassical theory of free markets. Which theory is consistent with the evidence?

Rethinking Free-Market Theory


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I will start with multilevel selection theory, which argues that successful groups must suppress the self-interest of individuals. The theory does not stipulate how this suppression occurs, but evidence from evolutionary biology suggests that hierarchy is a common tool. The idea is that the control structure of hierarchy suppresses the fitness-seeking behavior of subunits, thus increasing the fitness of the group. Perhaps something similar happens in human societies as they develop?

If so, we can treat economic development as a type of group selection in which larger (hierarchical) groups beat out smaller (less-hierarchical) groups. How and why this happens is an open question (Bichler and Nitzan, 2020). Still, the (inferred) fact that economic development involves the growth of hierarchy is consistent with the theory of multi-level selection.

The same evidence, however, is difficult to interpret using the neoclassical theory of free markets. According to this theory, small-scale competition is the optimal form of social organization. The idea is that by stoking self-interest, free markets maximize the welfare of society. But if this is true, why do societies turn to hierarchy to develop?

We can rescue neoclassical theory by supposing that societies would be better off if they reduced hierarchy. The problem is that this scenario requires a remarkable degree of collusion. Most developed countries seem to organize in a way that neoclassical theory says is ‘non-optimal’. But why would they do that? It could be that politics ‘distort’ the free-market. Yet we saw in Figure 5 that political regimes have no effect on the relative number of managers. That leaves free-market theory in an uncomfortable situation. For unknown reasons, countries of the world are pursuing a path to development that neoclassical theory says is ‘inefficient’.

We can always appeal to ‘distortions’ to rescue neoclassical theory. But this is what philosophers of science call an auxiliary hypothesis - an idea that is used solely to rescue a theory from falsification (Lakatos, 1976; Popper, 1959). Worse still, the concept of ‘distortion’ is almost impossible to test. What evidence would show that developed economies are not distorted?

According to neoclassical theory, finding a perfectly competitive market would suffice. But that leads to tortuous logic. Either free-market theory is both true and consistent with the evidence, in which case we find perfect competition. Or free-market theory is still true but inconsistent with the evidence, in which case we infer that the economy is distorted. Either way, the theory wins.

A less tortuous alternative is to conclude that the evidence is inconsistent with neoclassical theory. Rather than develop via the free market, societies turn to hierarchy

4.1 The two sides of a social-science theory

Were we studying non-human animals, we could leave the discussion at that. The evidence favors multilevel selection theory over the neoclassical theory of free markets. The problem, though, is that we are studying humans - an animal whose behavior is shaped not just by instinct, by also by beliefs.

This entangling of beliefs and behavior means that doing social science is more complicated than doing natural science. When we evaluate a social-science theory, not only must we study its factual merit, we must also study the theory’s effect on behavior. Importantly, the two components of the theory need not be consistent.

Put simply, a social-scientific theory can be factually incorrect and yet ideologically potent. Take, as an example, Karl Marx’s theory of capitalism (Marx, 1867). Many critics think the theory has gaping flaws (Keen, 2001; Nitzan and Bichler, 2009; Robinson, 1962; Samuelson, 1971). And yet virtually no one disputes Marx’s impact on history. Without Marx’s ideas, there may have been no communist revolutions. So regardless of its scientific merit, Marx’s theory had a strong influence on human behavior.

When social-science theories are obscure, of course, we need not worry about their ideological effect. But when a theory becomes popular - as in the case of Marxism - we must pay attention to its effect on behavior. In the case of Marxism, the effect was straightforward. Marx claimed that the injustices of capitalism could be solved only by communist revolution (Marx and Engels, 1967). Inspired by Marx’s ideas, revolutionaries like Lenin and Mao did precisely what Marx proposed - they led communist revolutions to overthrow capitalism.

When it comes to free-market theory, however, the ideological component is less easily understood. On the face of it, free-market theory advocates atomistic competition. Yet the theory became popular at precisely the time when smallscale competition was being replaced by large-scale hierarchy.

Figure 12 shows this trend in the United States. Here I plot the relative word frequency (in American written English) of four free-market terms: ‘small business’, ‘free market’, ‘competitive market’ and ‘perfect competition’. I take this word frequency as a measure of the prevalence of free-market ideas. Against this word frequency, I plot our two proxies for hierarchy: the government share of employment and the management share of employment.

Rethinking Free-Market TheoryFigure 12: Frequency of free-market terminology in American English vs. trends in hierarchy This figure shows the relative frequency in American English of four free-market terms. Panel A compares this word frequency to the government share of US employment. Panel B compares it to the management share of employment. For sources and methods, see Part 6.


Over the last century, it seems that at the same time that hierarchy grew, free-market jargon became more common.

How should we interpret this trend? One possibility is that the spread of free-market language was a reaction to the growth of hierarchy. After witnessing the growth of government and large firms, free-market proponents reacted by writing more frequently about the merits of small-scale competition.

But despite the increasing prevalence of their ideas, free-market thinkers were unable to stop the growth of government and large firms. If this interpretation is correct, then free-market ideas do have an atomistic effect. It is just that this thinking failed to catch hold.

There is, however, another interpretation of the evidence. When we separate a theory into a scientific and ideological component, there is no reason that the two sides must connect. In other words, the ideological effect of a theory (its effect on human behavior) can be different from the theory’s factual claims.

Free-market theory argues that small-scale competition is the most effective form of social organization. But when put into action, perhaps free-market ideas do the opposite of what they claim. Might free-market thinking foster the growth of hierarchy? The evidence in Figure 12 suggests that this possibility is worth exploring.

4.2 Belief systems as ‘massive fictions’

According to multilevel selection theory, social animals face a fundamental dilemma. To be successful, social groups must suppress the selfish behavior of individuals. The problem is that within the group, selfish behavior is advantageous. David Sloan Wilson and E.O. Wilson call this dilemma the ‘fundamental problem of social life’ (Wilson and Wilson, 2007). The existence of sociality, they argue, is predicated on solving this problem.

Humans, it seems, have developed a way to motivate altruism that is unique. We rely, at least in part, on the power of beliefs. Successful groups adopt belief systems that motivate group cohesion (Turchin, 2016). Importantly, these beliefs need not be scientifically true. As long as they motivate pro-social actions, beliefs can be factually inaccurate - sometimes wildly so. For this reason, David Sloan Wilson argues that belief systems are often ‘massively fictional’:

Groups governed by belief systems that internalize social control can be much more successful than groups that must rely on external forms of social control. For all of these (and probably other) reasons, we can expect many belief systems to be massively fictional in their portrayal of the world.

(Wilson, 2010, emphasis added)

To solve the fundamental problem of social life, Wilson argues that belief systems contain a (possibly universal) untruth. They portray altruistic behavior as beneficial to the individual. In so doing, these belief-systems promote altruism by denying the sacrifice that it necessarily (according to multilevel selection theory) involves.

As an example of such a ‘massively fictional’ belief system, Wilson studies the worldview of the Hutterites (a communal sect of Protestants living in northwestern North America). The Hutterite worldview, Wilson finds, contains no grey areas (Wilson, 2015). Actions are portrayed as either good for both individuals and groups, or bad for both individuals and groups. By masking the costs of altruism, this belief system may help Hutterites motivate communal behavior.

Interestingly, Wilson finds a striking parallel between the communal beliefs of the Hutterites and the libertarian (i.e. free-market) beliefs of Ayn Rand (Wilson, 2015). Like the Hutterites, Rand’s worldview seems to have no grey areas. Actions are portrayed as either good for both individuals and the group, or bad for both individuals and the group. There is, however, an important distinction between the Hutterites’ beliefs and Rand’s libertarianism. The Hutterites portray prosocial behavior (traits like ‘brotherliness’ and ‘mutual help’) as good for both the individual and the group. Rand, in contrast, portrays antisocial behavior (traits like ‘egoism’ and ‘selfishness’) as good for both the individual and the group.

Noting this fact, Wilson argues that Rand’s worldview - and free-market thinking in general - may be detrimental to group cohesion. This conclusion is reasonable. But it presumes that free-market ideas (which are avowedly antisocial) lead to antisocial behavior. It is possible, however, that the reverse might be true.

Free-market ideas might actually promote prosocial behavior by motivating the formation of hierarchy.


This article is part of a new research paper draft ("Economic Development and the Death of the Free Market ") being presented serially. Here are the parts:

  1. Evolution of Free Markets and Hierarchy
  2. The Growth of Hierarchy with Economic Development
  3. Energy and Hierarchy
  4. Rethinking Free-Market Theory
  5. Does Free-Market Thinking Motivate Hierarchy?
  6. Conclusions and Methods
  7. References

Caption graphic credit: Walking across a market, Didier Provost, Unsplash. Full image:

Rethinking Free-Market Theory

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