Free market

The dismal science Economics

Economic systems

$  Free market   €  Social democracy   ☭ Socialist economy

Major concepts

Consumerism Labor theory of value Net domestic product Socialism Capitalism

The worldly philosophers

Timothy Geithner Thomas Sowell Gary North Friedrich Engels v - t - e

In a global context: Liberalism

Ideological roots

Age of Enlightenment Free trade Republic Rights (Human rights) Freedom of speech Freedom of religion Liberty and Equality Free market Democracy

Types

Classical liberalism Radicalism Libertarianism‎ Neoliberalism Conservative liberalism Fiscal conservatism Social liberalism Modern liberalism Liberal feminism Civic nationalism

Political parties

Liberal party Conservative Party of Canada The New Liberals

Adjacent ideologies

Liberal conservatism Liberal socialism Centrism (In Europe) v - t - e

This page contains too many unsourced statements and needs to be improved. Free market could use some help. Please research the article's assertions. Whatever is credible should be sourced, and what is not should be removed.

A free market is a type of market where the prices of goods are determined only by the interaction of consumers and producers, without the intervention of third parties, like the government. The opposite of a free market is a regulated market, where a third party, usually the government, intervenes through various methods, such as tariffs, taxes, and inflation, to restrict trade and regulate the prices.

The ideology advocating for absolute free market is called Laissez-faire, from the French "let them do". In Europe and other global contexts, "liberals" tend to pursue free markets economically.

History

“”The labour and time of the poor is in civilized countries sacrificed to the maintaining of the rich in ease and luxury. The landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his exactions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full enjoyment of the fruits of his own labours; there are no landlords, no usurers, no tax gatherers.

—Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 5 Lectures On Jurisprudence 1762

The misuse of the word "free" is paralleled by that of its English synonym, liberty, which is derived from Latin rather than proto-German. The Roman direct equivalent of the proto-Germanic verb frijaz (lit. 'be a friend' and 'not be a slave'), libertas (lit. 'not be a slave'), changed in meaning as the Empire polarised between powerful creditor and weak debtor classes following the abolition of Debt Jubilees in the Second Century A.D.. Rather than meaning "not to be a slave", the word legally and in its scholarly usage came to mean the freedom of all men including slaves "to do absolutely anything they're actually permitted to do". All slaves, debtors, and creditors were therefore equally libertas before the gods. Hence, libertas was considered the freedom of the powerful to exercise power over the weak, unrestrained by other powerful people. Thus there was no incongruity in medieval lords possessing the "liberty of the gallows" - the right to maintain their own private armies, laws, and places of execution within their domains free from the "tyranny" of any other lord who believed that "eating aquatic creatures lacking fins or scales" e.g. mussels was not a valid grounds for execution just because it's in the bible.

Likewise, Spencer's redefinition of a "free" market differed radically from the original definition. This original definition was one of a market "free" from the economic rents imposed by rentier-landlords and rentier-monopolists. The French Physiocrats and English Classical Economists were the first economists, and their chief preoccupation was with the physical and social limits which made wages and the prices of goods and services different in different places and times. They conceived of the Malthusian analysis of the productive capacity of the land and sea to support human life, and a social critique of the role of landlords and monopolists in keeping wages suppressed and prices high to maximise their own libertas. However, most stopped short of taking their work to its natural conclusions and identifying moneylending and the ownership of companies as forms of unearned income as Adam Smith himself did. This is because most of them were creditors or (part-)owners of industrial or trade enterprises, and virtually all of their patrons were wealthy men from those professions.

“”The distribution of the income of society is controlled by a natural law, and this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.

—John Bates Clark, The Distribution of Wealth (New York, 1899), p. v

From the mid-19th century onward, Classical Economics' selective blindness to certain types of economic rent became an outright rejection of the whole concept. This occurred in response to two developments. One was that the economists' banker and business owner patrons had supplanted or merged with the landed aristocracy and developed their own monopolies, and so the critiques of their new income streams had become irksome. The other development was far more troubling: Karl Marx had taken the work of Smith et al. to its logical conclusion and concluded that all unearned incomes were economic rents. Faced with this argument, economists found it easier to deny that economic rent existed at all than apply it to some forms of unearned income and not others. Clark was the first to deny its existence, by working from the assumption that nobody would allow it to. Of course, rather than stating this extremely questionable assumption clearly he tried to make it sound logical by using Pseudostatistics and condemning anyone who criticised this logic as a bomb-throwing anarchist Marxist. By the time that Austrian school and Chicago school economists appeared in the 1920s-50s, they had little difficulty in using a combination of Quote mining and Lying by omission to 'prove' that the Classical Economists had wanted government to be "free" from "government intervention". This even extends to the "invisible hand" metaphor which is taken completely out of context. Of course, even the most basic reading of the actual works of Smith or Mill contradicts this misinterpretation, and so Neoclassicists no longer read or teach economic history.

Defining a "free" market

“”How ‘free’ a market is cannot be objectively defined. It is a political definition.

—Ha-Joon Chang, There Is No Such Thing as a Free Market

A "market" is a physical or metaphysical space legally defined and policed by government, in which individuals and organisations exchange goods and services through the use of debt, barter, and currency. They can be as large in scale as an entire market-society or market-world governed by many governments and private enterprises with many competing currencies and laws, or as small as a single family-household in which debts are rarely measured in currency and often forgiven. Unfortunately, what a market 'should be' "free" from and for what purposes is less clear as it is a highly politically charged issue. The Chicago school and Austrian school of economics have an Anarcho-capitalist definition of what a market should be free from: the government laws, government law enforcement, and government-backed currencies which have historically been necessary to create and operate them.

“”And the whole idea of classical economics from Quesnay’s Tableau Economique to all the way through Adam Smith and John Stuart Mill was to look at the finance sector and the landlord sector and monopolies as unnecessary [...] to tax away all the land’s rent or else nationalize the land [...] to have public enterprises as basic infrastructure so that they couldn’t be monopolized.

—Michael Hudson, Steve Keen And Michael Hudson: Fixing The Economy (2017)

Yet it is worth noting that the original interpretation of the Classical Economists including Adam Smith was that society should be freed from economic rents - unearned incomes - which came from increases in the value of land over time and the ownership of monopolies. In response to the Socialist call to free society from all economic rents including those from the ownership of finance and industry, the Classical interpretation was abandoned in favour of the redefinition made by Herbert Spencer in the 1870s and then used by Anarcho-Capitalists, Austrians, and Chicago-schoolers. Yet in the wake of the Great Recession, modern Keynesian such as the "rock star economist" Thomas Piketty have become popular for their calls to once again "free" markets from economic rents rather than control by government.

Free market fundamentalism

"Free market fundamentalism" is the term sometimes given to a strain of libertarianism that proposes that government can do no right when it comes to commerce, and that market pressure will weed out any bad products or corrupt businesses (the term used is laissez-faire, translating from the French approximately as "let it happen"). Liberals have largely abandoned laissez-faire capitalism as a dead-end, believing the idea to be too easily abused by the amoral and dishonest.

It's worth noting that Adam Smith's works, like other texts invoked by fundamentalists, are rarely read in their entirety by those who expound the doctrine they think it outlines. Smith did see a place for governmental regulation in a healthy marketplace. For example, without government regulation, companies such as British Airways would have had free rein to collude with their rivals and fix prices when setting their fuel surcharges, and Microsoft could continue its anti-competitive practices in Europe, thereby allowing it to maintain artificially high prices for its Office products. Or, in the case of the South Korean shipping industry, you don't want the market to kill off all its customers.

Arguments in favour

“”A rising tide lifts all boats.

—John F. Kennedy

In theory, in a society with no government and a "true" free market the price of goods and services will reach a natural equilibrium. A truly free market, however, is virtually unattainable, given crime, social attitudes, imperfect information, finite resources, and the constraints imposed by geography and physics.

In modern society, laws are required to maintain competition. This includes active prosecution of fraud cases, such as to prevent producers from lying directly or by omission about the ingredients in their products. No law requires people to understand what the ingredients are, so we have people worried about dihydrogen monoxide poisoning. In cases where fraud is more financial than edible, the Government requires that public accountants are trained by professional bodies and follow certification schemes. Without a third-party assessor, more unethical-leaning companies will hire their own auditors to sign off on their cooked books. We have seen the consequences of eroding what little trust companies have amongst themselves manifest in the real world with the 2007 Banking crisis. With a little regulation, the free market can go a long way on a short leash.

If they don't compete, they don't penalize customers for changing services, they can get good information on their services or products, and they want to make the most financially sound decision and there are several businesses in a market based on voluntary trade, a customer can refuse to buy from a business that provides worse service or shoddier goods than the others. When this happens, it can act as an incentive for companies to keep service (or at least to appear to do so). Nevertheless, the quality of service is generally higher under these conditions than when a firm has a natural and/or legal monopoly.

In theory, free markets put minimal restraints on innovation: if you have a bright idea and can finance its development, or get any one of the large number of venture investors to do it for you, you can develop your bright idea without being stopped by harrumphing or political meddling from a regulatory bureaucracy. If patents (another form of government regulation) are removed, you don't even have to worry about patent trolls; however, mega-corporations will be free to copy your idea and out-compete you.

Throughout history, the existence of free markets, or mostly free markets, has coincided with arguably the most productive moments in human history. Examples of civilizations that define this trend: the Roman Republic, the Enlightenment-era city-states, the British Empire, the American Republic, etc. Just ignore that, by coincidence or not, these societies were far from utopian and have histories of colonialism while having your lunch; ideas can work in the abstract, but life is more than the functionality of a single system, and the reality is far messier for how they play out.

Arguments against

“”So if you're gonna use a phrase like "a rising tide will lift all boats", you need to add something to that phrase. Something like, "a rising tide will lift all boats, which is great as long as you have a boat!!"

—Nish Kumar, The Now Show, BBC Radio 4, 17 Oct 2014

Those offering jobs have always had an easier time of it than those seeking them. This is why trade unions exist wherever and whenever they're legal.

Political economy is largely concerned with the "business cycle," where too many loans are made to businesses or individuals who will default in a time of lesser activity (the boom). When the growth in activity slows, the rate of defaults increases and lending is curbed in response, causing enterprises to stop hiring or begin firing employees, reducing the populations' capacity to consume and thereby increasing defaults, etc whereupon the amount of activity plateaus and then starts decreasing. This causes a lot of unhappiness, as people don't like being poor and/or unemployed. John Maynard Keynes proposed that governments could keep the booms from being too big so that the shocks when they went bad weren't so big either, and could employ people when they did. While definitely not a dirty red with a sweet moustache as advocates of other economic schools have made him out to be, his proposals were accepted in his lifetime and considered responsible for what's called the Golden Age of Capitalism.

Economists from considerably less reputable schools consider his proposals a slippery slope to Fascist/Communist Totalitarianism, so they should be ignored in favor of doing absolutely nothing, because eventually it will all sort itself out. Very few societies like to let economists use them as a laboratory to test their theories. Despite empirical difficulties, Keynes' detracters are cocksure that modern economic instability shows that Keynesianism failed to accomplish what it sets out to do: correct the boom-bust cycle.

In most cases, the assumption that a free market means universal competition does not hold up. Many sectors are "natural monopolies" — public utilities, which have large fixed costs that prevent anyone short of an oil baron from entering the market, would be an example — in which an unrestrained market will lead to or maintain a cartel or monopoly. Hence why utilities are often nationalized or run as collectives owned by the workers in the monopoly. Even an industry that is not a natural monopoly may be dominated by a cartel or oligopoly that make competition impossible (see the Gilded Age for the most well-known example) and hold the consumer by the balls, if not permanently then at least for a few years; more creative monopolists may attempt to conceal this with the use of multiple brand names for products produced by the same company. Unfortunately, businesses don't like competition; they'd prefer to drive their rivals out in order to eat up as much profit as possible. That is, after all, the driving force in capitalism.

Ironically, maintaining a maximally free market (yet without monopolism and the abuses that follow from it) would require one of three things:

• Competent governmental regulation provided by farsighted, patient, and completely rational people of uncompromising self-restraint and discipline, committed to the maintenance of stability and sustainability even at the expense of short-range profit.
• A business community — comprised without exception — of farsighted, patient, and completely rational people of uncompromising self-restraint and discipline, committed to the maintenance of stability and sustainability even at the expense of short-range profit.
• The personal intervention of Satan.

Market failure

When a market does not produce the most efficient possible outcome, this is called "market failure" in economics.

Market failures tend to boil down to one of two things:

• Sheer cost of entry or operation. The potential returns to building and operating a new rail line or undersea cable or private police service tend to be lower than simply buying out existing ones.
• Human nature. People tend to cooperate to benefit themselves and those like them, and hence tend to make agreements on zones of operation or set prices or organise mergers rather than compete to their mutual detriment.

Monopolies

There are various ways in which monopolies arise and some even argue that completely unregulated free markets naturally tend towards monopolies, pointing to the Gilded Age (which gave us the very term "antitrust") as an example. Monopolies, wherever they exist and are not subject to regulation, will set prices at a higher level than would ensue in maximum competition. Similarly, monopolies tend to be less willing to innovate or invest as there are few outside forces making them do it.

Classic examples for monopolies besides those arising from one company buying out or outlasting competition are the so-called "natural" monopolies. A classic "natural" monopoly would be a bridge — whoever wants to cross the river has to use the bridge. There is little reason to build another bridge and all the owner of the bridge has to do to keep his monopoly is to not charge an amount that would encourage a competitor to build another bridge. Analogous situations occur with other public infrastructures like power lines or railways. This is one of the reasons why such infrastructure is publicly owned and/or tightly regulated in most of the world.

It's very hard to deny the existence of this problem, but some microeconomists, like the Nobel Prize winner George Stigler, argue that the economic history shows that the government has done more harm than good on this matter, and maybe it's a better idea to let monopolies be eroded by new competitors.

Externalities

See the main article on this topic: Externalities

Another problem with completely unregulated free markets that most economists admit exists are so-called "externalities", i.e. effects of economic activity that are not paid for by those that decide on said activities. While externalities can be positive and negative, negative externalities are discussed much more often. Let's give some examples.

If a person lives in an old house, the retention of the house and embellishing its facade creates a positive externality - people who pass by that house are delighted by its facade, more tourists come to visit and so on. The owner of the house may have some small benefit from that beauty himself, but mostly he is forced to bear the costs and will not benefit much from the external effects he generates. Thus he may be tempted to let the facade fall into disrepair or to replace an old and aesthetically pleasing house with a newer, cheaper house. In many cities local zoning ordinances or heritage protection laws partially ensure that owners provide those positive externalities, thereby regulating the free market.

On the other hand, negative externalities are more often discussed as there are many more immediately obvious examples. Driving a car, for example, creates noise, air pollution and endangers pedestrians, costs which drivers don't or only partially bear. In an unregulated free market, people will thus drive more cars than would be optimal in a perfectly rationally planned and organized society. Another example is environmental pollution in general. Unless some entity regulates, businesses and individuals will pollute more than would be optimal.

There are some economists who argue for "market-based" solutions to externalities and that a free market could find a solution where people make contracts regarding externalities, but this only works when property rights are well defined and transaction costs are low. This idea was advanced by the Nobel Memorial Prize laureate Ronald Coase and it's properly called the Coase theorem. Overall, however, most economists agree that some sort of regulation is needed to promote activities that create positive external effects and to discourage activities that create negative external effects.

Another way to deal with externality are Pigouvian taxes that "internalize" the cost of externalities.

Public goods

In economics, a public good is a good that is both non-excludable and non-rivalrous. Many of these goods and services cannot be provided by the markets, even if there are some exceptions. In other words, it's impossible to prevent people from enjoying these services without paying, unless you have the monopoly of the use of the force. Why can't these products be provided by the market? It's not hard to undestand. If people can profit from them without paying and those who are providing it can't charge their consumers what incentive do you have to provide it? Economists usually mention fireworks as a textbook exemple of a public good. If a company wants to make fireworks show, it can't prevent others who are close enough from watching it, so people don't need to pay for it.

Albeit there's no consensus about which goods are actually public goods and should be provided by the government, some of these are roads, public welfare and basic research.

Asymmetric information, adverse selection and moral hazard

Sometimes buyers and sellers are not both perfectly informed about the quality of the goods being sold in the market, and information is costly or even impossible to gain accurate information about the quality of the goods being sold. For instance, when a consumer buys a used car, it is often very difficult for them to determine whether or not it is a good car. On the other hand, the seller of the used car and will probably have a pretty good idea of its quality. This sort of problem is called adverse selection. Because owners of the worst cars are more likely to sell them than are the owners of the best cars, buyers are often worried about getting a bad one. As a result many people don't buy used cars. This is the reason why a used car only a few weeks old sells for thousands of dollars less than a similar new car. A buyer of the used car might surmise that the seller is getting rid of the car quickly because the seller knows something about it that the buyer does not. When they suffer from adverse selection, markets fail. In our used car market example, owners of good cars may choose to keep them rather than sell them at the low price that skeptical buyers are willing to pay, crowding out the number of good used cars in the market.

Another problem arising from asymmetric information is called moral hazard. Sellers with more information are often tempted tempted to exploit their this advantages at the expense of their trading partners. For example, a taxi driver who takes the long route to jack up the fare, or an auto mechanic or the dentist who recommends unnecessary services. Suppose that a mechanic tells you that your car needs an engine overhaul when all it actually needs is are minor new parts. Not only this is a a ripoff, but is also a waste of time and resources, as the economy is producing a good that no one actually wants or needs.

While it's very hard to fix these problems, one thing that the government can do is to demand that companies have a standardized data disclosure system in order to prevent such distortions. The market itself can also fix these problems to some extent as consumers will probably realize if they are being constantly ripped off and will end up looking for another mechanic, for instance.

Free market mythology?

“”The hidden hand of the market will never work without a hidden fist.

—Thomas L. Friedman

While there are mountains of historical evidence that free-marketeers can point to show the successes of the free market, there are many that never accept cases where the market failed. So they have to churn out piles of revisionist history and misleading statistics to cover up the times when the infallible market screwed up. With the election of Barack Obama, wingnuts needed a new set of talking points and various myths seem to have gone into overdrive lately. Usually, some bogus study or press release is cooked up by a conservative or libertarian think tank, which wingnuts like Glenn Beck or Michele Bachmann then boil down into easily digestible talking points. Here are some articles covering this bullshit:

• Austrian school (as an economic authority)
• Ben Steinery (ditto)
• Chicago school (ditto)
• Depression of 1920 (as a triumph of the market)
• Financial Crisis Inquiry Commission (Republican bullshit about the Great Recession)
• Health care rationing (death panels!)
• Herbert Hoover (as a socialist)
• New Deal denialism ("FDR made the Great Depression worse, because Amity Shlaes said so!")
• Privatization/Deregulation (always a good thing)
• Reaganism (Gummint can never do anything right. Including the military!)
• Reaganomics (Trickle-down bullshit)
• Roosevelt Recession (never happened, or was due to labor unions)
• Rugged individualism (as a mantra)
• Rush Limbaugh's Thanksgiving (Thanksgiving as socialism vs. capitalism)
• Socialism (as a snarl word)
• Sound money (see Paul Ryan - more like Sound of money, yeh?)
• Tax cuts

See also

• Laissez-faire
• Commerce Clause
• Classical liberalism - Classical liberalism is classified as right-wing liberal in modern times. While social liberalism, a left-wing liberal, supports the government's involvement in the market to a certain extent, classical liberalism places great importance on the free market.

External links

• Wealth of Nations by Adam Smith at Project Gutenberg