A free market is a market that is free of government intervention and regulation, besides the minimal function of maintaining the legal system and protecting property rights[1], and is also free of private force and fraud. In a free market property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property without the use of physical force, threat of physical force, or fraud, nor is the coerced by a third party (such as by government via transfer payments).[2] In addition, in a free market, force is not used to prevent competition among buyers or among sellers (called free competition). Therefore, force is not a determinant of price, but rather price is the effect of buying and selling decisions en masse as described by the law of supply and demand.
Wikipedia - Free market (emphasis added by me)
I have heard a lot of criticism of “Capitalism” and “Free Markets”, during this economic downturn. Every time I encounter the criticism, an intense anger builds inside me. We DO NOT have Free Markets in America! We have some markets that are free-er than others, but no free markets. From the definition above, a free market must be free from government intervention and regulation. I would love to hear about a market in America (or the world) that is free of government regulation and intervention.
By definition, the following factors are NOT free market compatible:
- Taxes
- Government Licensing
- Government Regulations
- Subsidies
- Bankruptcies
- Prohibitions/Quotas
- Fiat Money
These factors are so ubiquitous in the American economy that it is impossible to find an example of a pure free market.
Critics of free markets will point to certain aspects of market liberalization such as lower taxes or fewer regulations and blame those factors for economic turmoil, but neglect to look at other market interventions.
For instance, it is certainly true that some bank regulations were lifted and some taxes were lowered in the past 10 years. These moves toward market liberalization, however, are offset by other market interventions. Fannie Mae and Freddie Mac, ultra-low interest rates, and Sarbanse Oxley are a few examples of massive market interventions.
In addition, it must be noted that in some instances market distortions can be exacerbated by ostensible market “deregulation”.
As an example, look at the licensing and regulations surrounding cable and telecommunications companies. A select few companies are “granted” the privileges to use communication lines and airwaves. This is a huge market barrier and prevents free competition. It is essentially impossible for a fledgling entrepreneur to gain access to the communication lines to allow competition.
Since these companies have been given near monopoly privileges, hypothetically, the government can pass regulations to enforce “equality”. For instance, there could be a regulation requiring the company to charge the same amount to all users regardless of usage. Or a regulation could require the company to offer content that appeals to a broad spectrum of viewers (like if they have a Jewish channel, they must have a Christian channel, and a Muslim channel….).
There are two market interventions in this scenario: First the licensing that prevents free competition, and second the regulations that prevent free expression or free commerce.
Now, if the government removes the regulations on the pricing allowing the companies to charge more based on usage, many consumers will have to pay more.
Or if the government no longer requires content to span differing viewpoints, a company owner can then effectively force its users to pay for programs they oppose (pretend the owner is a Christian, and he removes the Muslim programming).
In these cases, removing the regulations may have made the situation worse. Critics of free markets might point to this as an example of free market failure. The “deregulation” caused higher prices or restricted content.
However, it is the other market intervention, licensing, that is the real culprit. Without the licensing consumers can freely choose which company they like best. With more competition, prices will go lower, and more choices in content will be available.
Now an anti-free market apologist, could easily reverse the argument made above. Since I have demonstrated that a move toward free market principles resulted in a worse situation, the argument can be made that regulations are beneficial.
This speaks to the core argument of Laissez-faire capitalism versus central economic planning.
Nobel Prize winning economist Friedrich Hayek demonstrates the failure of central economic planning using the Economic calculation problem. Simply put, it is physically impossible for a group of central economic planners to properly allocate resources. Only a market-based price mechanism can effectively allocate resources in an economy.
Aside from the pragmatic argument , I endorse the ethos of free markets over collectivism. I believe in voluntary, non-violent interactions between consenting people.
I think history has proven the triumph of free markets (despite interventions). Unfortunately it seems to be a small minority of people that feel this way.
