Especially in the 2010s and 2020s, following the great financial crisis of 2008, the role and function of free markets in a free society are deeply misunderstood. The system we live in today is actually more like socialism for the wealthy than it is capitalism for all. This is not a mistake of history but an eventual conclusion resulting from our centralized monetary and banking systems.
Free markets are in fact a fair and sustainable way to increase living standards and ensure freedom for more people.
The following are my recommendations on the best resources for understanding how markets work and what results they have in the real world.
I made a short, numbered list because your time is valuable, and I want to give you a clear prioritized list of what to read. Many great thinkers and doers have contributed to this field and related fields of complexity theory, political economy, localism and more – I may add a laundry list at the bottom of the post at a later date. Please comment with any reads on markets that you’ve found particularly helpful.
1. The Use of Knowledge in Society by Friedrich Hayek
Probably the single best writing in the field of economics, this short essay by Hayek clearly shows how markets work and why freely floating prices are so important to efficient production that raises the living standards of all. I won’t add any more summary – it’s only a few pages, so just read from Hayek himself.
2. The Information Theory of Money by Dan Held
A far more modern piece than the others I often mention as resources for understanding markets and money, Dan has a clear way of writing that still manages to pack in a ton of insight. In this piece, Dan summarizes the argument that prices are information in an economy, and given the complexity of an economy, we cannot know how the price for anything was formed. This is an everyday fallacy many of us employ almost unconsciously.
“Why did X stock go up?”
“Well, earnings were good.”
We are constantly looking for reasons, some logical answer to how a price is formed. Instead, Dan shows how we must let go of this need to know, as it causes more problems than it solves. Instead, we must work with what we have – the price measurements that the free market gives us.
Dan also covers the importance of sound money to the measurement of prices, and the potential of Bitcoin to be such a predictable and sound monetary system.
3. The Pretense of Knowledge by Friedrich Hayek
Given by Hayek upon receiving a Nobel Prize for economics in 1974, this short speech covers the fundamental issues in economic theory that damage policy decisions and outcomes for everyone. Instead of understanding markets as they are, economists use the same patterns of thinking of the hard sciences such as physics to create a false “scientific method” that misleads and distorts the lessons we learn from economic data.
4. Economics in One Lesson by Henry Hazlitt
Hazlitt deftly explains the trouble with modern economic theories and the motivation for them – that economics is unique in the fact that its application can materially benefit certain groups at the expense of others. Given this, economics is often weaponized under the guise of ‘science’ to benefit those in power – if an economist can claim that their theory is scientifically correct through long mathematical formulas and dry academic papers, they can dupe us in to trusting them and letting them manage our economic affairs. This is the story of central banking.
While this piece is a long read, it’s divided well for the reader to dive in to any specific section – which is often 1 or 2 pages. If you’re short on time, I recommend reading these 3 sections:
15. How the Price System Works
22. The Mirage of Inflation – this section runs longer, but is absolutely critical to see through today’s orthodoxy of “inflation is good and necessary”
23. The Assault on Saving – this is also a long section, but very important when today’s economic theory praises spending so highly.
There you have it, my top 4 recommendations for understanding free markets. Many misconceptions still pervade about free markets – that they drive inequality, encourage manipulation and require perfectly rational actors with complete knowledge to work – however, these are actually problems with centrally controlled economies.
The reason we see many of these problems today is because central banks control the most important market in the world – the market for money. If central banks had perfect and complete knowledge, we might be okay – but of course, they don’t. The good thing is that a free market for money does not require perfect knowledge or rationality from all participants to be efficient.
Free markets may seem chaotic and confusing in the short run – but to truly see their magic we must acknowledge that we as individuals are unable to understand the full workings of the economy – and we shouldn’t try to intervene as a result. In the long run, a free market creates better outcomes for everyone than any centrally controlled system can.
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