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Source link: http://archive.mises.org/7685/how-free-is-the-free-market/

How Free Is the Free Market?

January 21, 2008 by

Most of our daily experience in life is not with the Department of Labor or Interior or Education or Justice. It is with Home Depot, McDonald’s, Kroger, and Pizza Hut. Our lives are spent dealing with the commercial sector mostly, because it is visible and accessible, whereas the depredations of the state are mostly abstract, and its destructive effects mostly unseen. We don’t see the inventions left on the shelf, the products not imported due to quotas, the people not working because of minimum wage laws, etc.

Because of this, we are tempted to believe the unbelievable, namely that government serves the function only of a night watchman. And only by believing in such a fantasy can we possibly believe the second assumption, which is that the problems of our society are due the to the market economy, not to the government that has intervened in the market economy. FULL ARTICLE

{ 28 comments }

fundamentalist January 21, 2008 at 10:53 am

Excellent article! Maybe one way we can sell true free markets is to call them democratic markets, since the public seems to worship democracies. The “invisible hand” argument hasn’t had much success; “laissez faire” has gotten a bad name, and “free markets” means chaos for many, but the public needs a simple analogy to relate to. Using the word “democratic” carries with it all of the warm fuzzy feeling that people have for the form of government, while expressing the idea that people choose the direction of the market/economy by voting with their dollars. In a way, a free market isn’t free in the sense that no one controls it; consumers control it with their dollars.

Paul Marks January 21, 2008 at 1:39 pm

70,000 pages of Federal regulations (plus the State and local regualtions), government (Federal, State and loca) spending at more than one third of the economy, and a credit-bubble fiat money financial system.

And the New York Times attacks the extreme “free market” in the United States.

I trust you sent a letter of protest to the New York Times.

However, I will make a point that I have often made before:

Americans have this odd idea that newspapers are or should be “objective” (at least on their “news pages”). However, this is simply never been true – and the division between “news” and “comment” is an artificial one anyway. “News” would be, for example, “the Dow has fallen by x per cent today” – what newspaper news story just leaves it at that without trying to explain WHY this has happened?

The New York Times is a leftist newspaper and explains things in a leftist way – that is to be expected.

It is a bit pointless for people to read stuff in a leftist newspaper and say “this is leftist” – of course it is.

It is as pointless as saying “water is wet”.

Jake January 21, 2008 at 1:44 pm

Now people should understand why Ron Paul is being censored and blacked-out by the MSM! :-(

Thia January 21, 2008 at 4:58 pm

thanks, Jeff, for this wonderful text. i will be sure to use it as an example to statists who believe the nonsense they are told by the government, the media, and academia. i appreciate the efforts you and the others expend in the fight against statism in all its forms.

Bruce Koerber January 21, 2008 at 5:41 pm

Dear Jeff,

In my new economic theory I not only affirm the insights of Hayek (“The point about complexity counts against government intervention, not for it. The major contribution of F.A. Hayek to social theory is to point out that the social order — which extends to the whole of the world — is far too complicated to be managed by bureaus, but rather depends on the decentralized knowledge and decisions of billions of market actors. In other words, he gave new credibility to the insight of the classical liberals that the social order is self-managing and can only be distorted by attempts to centrally plan. Planning, ironically, leads to social chaos.”) but prove that there is no moral authority for intervention.

“How free is the free market?” Only as free as is the exercise of free will and free will is only expressed when subjectivism reigns supreme. Since the economy is being and has been controlled by the empiricists we do not have a free market economy.

josh m January 22, 2008 at 3:47 am

Great article. Hobbes must be turning in his grave–and that’s good!

David January 22, 2008 at 6:28 am

Nicely put Mr Tucker. I have but one niggling point in that emerged in the very last line! I do not have quite the same attachment to the term ‘capitalism’ as you do, which term I believe should be firmly distinguished from the concept of the ‘free market’. Ive said as much before elsewhere on this blog.

From the Left, the term ‘free market’ is usually accompanied by the word ‘unfettered’, and held up as the villain ultimately responsible for a host of ( very real) social ills. These social ills, in turn, make up the emotive fount of well-meaning, albeit naieve, outrage that drives the ideological support base for the Left.

But this is a case of mistaken identity: Its not the free market that is responsible for all these social ills, but CAPITALISM – that is, that ugly nexus between the exercise of State Power and those (nominally) private corporations which are the beneficiaries of the exercise of such power.

These lines are not easily delineated into crisp black and white : it is often the case that free market participants indulge in capitalistic powermongering, simply because they can. For example, Wal Mart is largely a free market player, and this shows in its inventories, efficiencies and pricing. But when it invokes ‘eminent domain’ to force the acquisition of property that is not otherwise open for sale, it is indulging in capitalist (state) exploitation. In the eyes of its lefticst critics,

This failing is almost never distinguished from the more common and one-eyed vitriolic lambastings that it gets for putting inefficient mom n pop stores out of business simply by ensuring that its customers ( viz everybody) get more, and more kinds of, stuff, for less than they would otherwise have to pay. For the Leftist, both of these failings are all grist to the capitalist/ free market mill. This places the onus on us to explain the difference, and for as long as we too conflate the terms, we make this that much harder to do.

I would go as far as to say that ( all of) the social ills that are routinely held up by leftists as the fallout from the ‘brutality’ of the ‘unfettered’ market , are in fact the fallout from the exercise of state power on behalf of , yes, capitalists: big fat feline rent-seeking capitalists. Which is, of course, the very antithesis of the free market.

even that spectacular failure, Enron, is regarded on the left as THE salutory lesson in the ‘dangers’ of the ‘unfettered’ market. But even this wasn’t a market failure, as it had very little to do with a bona fide market. Enron was a child , and beneficiary, of regulation and State intervention, and I would speculate that the colossal failure wouldn’t have happened at all ( or if it had, it would have been closed out much earlier, on a much smaller scale), had it been a player on a bona fide energy market free of the influence of the State.

So, we free market proponents do ourselves no favours by casually treating the two terms as synonyms, as it gives the Left ( which, face it, has the emotive edge on us in marketing its ideology to Joe Public) the scope to perpetuate the conflation of capitalism and free markets as a single concept. this makes it much more difficult to articulate our reasoning in terms the largely economically uneducated public can clearly grasp.

How nice it would be to participate in a public debate against an interventionist who has just torn strips off capitalism and really fired up the audience with emotive zeal , and to reply coolly with ‘yes, we agree completely: capitalism does indeed do a lot of economic damage and we dont support it. Heres why…..(explaining the evil nexus between state power and Corporation patronage……),…..and concluding with, so you see, the free market is the SOLUTION to these problems, not the cause…….. Our Marxist/Keynesian friend here clearly doesnt understand the difference………….

IMHO January 22, 2008 at 7:27 am

Fundamentalist:

“Excellent article! Maybe one way we can sell true free markets is to call them democratic markets, since the public seems to worship democracies.”

I understand what you’re saying; but the term “democracy” has become synonomous with government intervention. Anyone who holds a press conference about the Middle East is certain to repeatedly use the word as a rationale for what they’re doing over there.

josh m January 22, 2008 at 7:34 am

I think that’s very well said, David.

“CAPITALISM–that ugly nexus between the exercise of State Power and those (nominally) private corporations which are the beneficiaries of the exercise of such power.”

However, I think the term ‘corporatism’ (aka, mercantilism) would be a much better fit for the definition you have given.

I could be wrong, but I don’t think the term ‘capitalism’ necessarily entails the nexus of state patronage and private enterprise.

Arend January 22, 2008 at 7:49 am

At least ‘we’ can always remain to call our ideology “voluntary cooperatism with private property and all its logical deductive implications”, because ‘they’ will never be able to steal that! HA!

fundamentalist January 22, 2008 at 8:21 am

IMHO: “…the term “democracy” has become synonomous with government intervention…”

That’s a good point. Socialists have ruined our best terms, liberalism, capitalism, free markets. The invisible hand and free markets translate to chaos for most people. Somehow we need to get across to people that the choice is between consumer directed markets and bureaucratic dictated markets.

David C January 22, 2008 at 8:42 am

Josh said
However, I think the term ‘corporatism’ (aka, mercantilism) would be a much better fit for the definition you have given.

I could be wrong, but I don’t think the term ‘capitalism’ necessarily entails the nexus of state patronage and private enterprise.

response: you have a good point, and indeed, it IS mercantilism. But the hard part is to explain all that to the other side, and the ‘undecideds’, who are mostly unfamiliar with economic basics.

it remains remains unfortunate and obscures more than it illuminates: the very etymology of the word ‘capitalism’ implies the wrong message: why should the term for only one of the several factors of production be used to label a market system that disavows special treatment for any one of them? what makes the label ‘capitalism’ different from ‘labourism’ ? Like it or not, if we are to try to disseminate the ideals of liberty and economic freedom, branding and sensitivity to unintended implication are things not to be dismissed lightly.

PS: Noticed theres another ‘David’ posting on some of these threads. I have added the initial C to diferentiate…..

IMHO January 22, 2008 at 9:42 am

“Somehow we need to get across to people that the choice is between consumer directed markets and bureaucratic dictated markets.”

As a woman, I am embarassed to say this (not to mention the fact that it may tick off Karen De Coster), but the majority of women I know have no interest in basic economics.

They’ll complain about the price of gas and home heating oil and say that the government should do something about the oil companies. Tell them that oil was $28/barrel before we started up the war in the Middle East, and they give you a blank look. If you’re on the phone with them, they’ll suddenly say they have to take another call and that they’ll get right back to you…they never do.

The other day a Libertarian got up on her high horse with me saying that people need to be more proactive about fixing government and not wasting time reading all this “stuff” about libertarian philosophy and economics. During the course of the conversation, it came out that she didn’t even know that the dollar was in trouble. : \

I wonder what they would think of this:

“The Fed slashed U.S. interest rates by three-quarters of a point, the biggest rate cut in more than 23 years, in an emergency bid to support the U.S. economy.” CNBC.com

Inquisitor January 22, 2008 at 10:05 am

IMHO, would that it were only women that exhibited this ignorance. Unfortunately, it isn’t. It seriously irks me that I actually have to explain the concept of profit to people, only for them to defiantly say “but that’s just theory; I know what profit is”, when they haven’t the faintest clue. The damage done by movements such as Marxism and modern “liberalism” seems irreparable.

IMHO January 22, 2008 at 11:14 am

Thanks Inquisitor. I’d rather be here than talking about Britney Spears, watching “American Idol” or following the recommendation of a friend that I should switch to reading material of a “lighter nature”. : )

fundamentalist January 22, 2008 at 3:16 pm

I often see criticisms of free market proponents that accuse us of blind faith in the markets. Those criticisms seem to define markets as some non-human entity, almost like a god. Free markets, to critics, means allowing these impersonal things to control us. We must find a way to remind people that the market is people, consumers and business people. We have faith in people, not government, to direct the economy.

newson January 22, 2008 at 8:07 pm

in agreement with fundamentalist: the left is very adept at communicating its ideology, but perhaps that’s because whilst much of it doesn’t make any logical sense, it’s not pitched at the intellect. it’s a play on the heart. free-marketeers are always going to have the difficulty of explaining the fairness of their more articulated position versus the shallow emotionalism of the “opposition”.

here in australia, the term “economic rationalist” is used as a pejorative. it’s said with a curl of the lip, and never to defend “economic irrationality”, as logic would dictate. rather it’s shorthand for cold, robot-like fixation on theory, riding roughshed over human emotions.

the left is always going to win the game if we want to play on their turf – “tragedy”. they are feeble when playing on our home ground – “comedy/irony”. south park’s success should be a wake-up call that even the great unwashed can sense b.s. from a mile off, and it’s the left’s very earnestness and humourlessness is where their flank is wide open.
pj o’rouke nailed this point years ago.

Inquisitor January 22, 2008 at 8:36 pm

Most ‘criticisms’ of libertarianism consist of ignorant blathering on the part of ill-informed morons (take Alan Haworth as a primary example.)

koobphong January 22, 2008 at 8:48 pm

The article wasn’t what I expected. I was expecting the writer to answer the question; “How free is the free market?” For example, there are the 3 big carmakers in the US, so in this market (car market), how free is it when you have only 3 sellers?

For example, compare market A and market B. Now market A have 5 sellers, market B have 6 sellers, which of these market is freer?

If you reduce the number of sellers down to one, is it still a free market? Whether the number of sellers is 1 because of government regulation or competition has killed off the other competitors, the result is the same, your choice has been reduce to one.

The free markets follows the law of survival of fittest. In any fair competition, the less competent will eventually die out leaving the most fit. They will consoldate and/or die out until eventually there is only one; the cooperation.

So, how free is the automotive market in the United States? 3 or 3 degrees of freedom. The free market exist if we are sell hot dogs down the corner of the street but not if we are making cars… it is just simply too expensive to enter that market.

So, there is no free market in the classical sense, not bc of government but because of the laws inherit in the very nature of the system itself.

I was introduce to the Austrian school of economic in business school and it made me a republican. I’ve been trying to follow it but but most of the people are simply reharshing old ideas.

Inquisitor January 22, 2008 at 9:29 pm

“I was introduce to the Austrian school of economic in business school and it made me a republican. I’ve been trying to follow it but but most of the people are simply reharshing old ideas.”

The irony is strong.

newson January 22, 2008 at 9:58 pm

koobphong’s multiple post suggests there’s a problem with how the mises new “comment” system operates. quite often i find there’s no picture in the “captcha” space.

alternatively, koobphong is carpet-bombing.

anyone who insinuates the us car market is not competitive is missing the big picture. sure, subsidies to the big three abound, but there are plenty of imports to mix it up, look at the shares prices of ford and gm and tell me who’s getting whipped. the us is the most competitive car market in the world, notwithstanding all government distortions.

were there votes in the hot-dog market, politicians would be all over it with “free” money. try and open a street stand without a licence and you’ll realize pronto that even the hot-dog market is far from an unhampered market. you’ll be dealing with health and local government ordinances long before you get to wield the ketchup or mustard.

jeffrey January 22, 2008 at 10:44 pm

oh there is a huge problem – or rather a small bug that is causing problems. we’ll get it fixed soon.

David C January 23, 2008 at 1:00 am

Koobphong said
For example, compare market A and market B. Now market A have 5 sellers, market B have 6 sellers, which of these market is freer?

If you reduce the number of sellers down to one, is it still a free market? Whether the number of sellers is 1 because of government regulation or competition has killed off the other competitors, the result is the same, your choice has been reduce to one.

Response: a mere count of the number of suppliers ( or consumers) does not give any indication of how free a market is. In principle, it is even possible for a single-supplier market to be free.

the test for market freedom lies in the extent to which the state ( or any other agency with coercive powers) is able to constrain the choices of both buyers and sellers, and indeed, potential buyers and sellers.

A single-supplier market is still free if there is no impediment to anyone entering that market as a competitor. If no-one chooses to, that choice would clearly be freely made, in response to the perception that the existing supplier is so efficient or makes such small margins that it is not worth doing so and their investment is better deployed in other areas where the demand and potential for profit is larger. And that is as it should be, because where demand and profit potential is greatest is precisely where productive effort is most needed as far as the entire community is concerned.

In their zeal for the selective application of their partial understanding of the benefits of a free market, some Western countries ennthusiastically pursue absurd anti-trust or competition legislation, commit the amazing irony of forcing competition by law, even in markets where it may not be necessary or desirable for consumers, and thus making a multi-supplier market decidedly unfree and less efficient than it would be with fewer suppliers. The logic behind this is so weird that I still don’t understand it.

Mrhuh January 23, 2008 at 6:19 am

This reminds me of a conversation I had with a friend a few weeks ago. He was interested in Ron Paul (naturally I encouraged it) but didn’t trust him on the global warming front (my friend is a sap for that). I told him that the best way to combat global warming if it is real is take the regulatory burden off of small businesses and businesses that engage in alternative and cleaner fuels. He disagreed and said that there should instead be a tax on gasoline so as to provide a disentive to drive everywhere. I was a little flabergasted, but forgiving, of his ignorance as I explained that there already were gasoline taxes and that they were a major reason that gasoline is expensive.

We need to remember that there is a difference between ignorace and stupidity. As honest economists, we need to look at the unseen and help others in doing this as well.

It’s horrendous the amount of economic ignorance that abounds. I remember on the Daily Show where Jon Stewart claimed that opposition to the minium wage hikes was sticking it to the poor. Normally I like Jon Stewart, but sadly his economics are dismal. Whenever someone tells you that minimum wage laws are good for the poor, ask them what America’s homeless think whenever the government raises the minimum wage.

Another problem is disputing historical myths, such as the myth that the Industrial Revolution was a time of decreased standards of living and that government regulations made things better, while big businesses fought tooth and nail. In reality, most regulations where of course lobbied for by big businesses to restrict competion and thus, gain monopoly status.

Michael A. Clem January 23, 2008 at 12:02 pm

Good thing David C. already covered Koobphong’s monopoly comments. I can submit, but it seems to take forever for it to go through.

koobphong January 26, 2008 at 8:18 pm

Response to David C.:

A market is “free” only in name, when there is only one seller. Free market, implies choice and compettion. If there is only one sellers how is there choice and competition.

Also, a market is free in name only, if the cost of entering that market is so high that only 1 person or 1 cooperation can enter. They then have a monopoly on that product.

David, seem to believe that a free market is a system in which there is no government regulation, period!! Anyone is free to choice to enter that market or not!!

Welll, I like to enter the car market. But I can’t! Not b/c of government but b/c I don’t have the capital, cost too much. Here, the hindrence to me entering that market is not government, or not b/c I don’t want to, b/c I don’t have the capital; the effect is the same.

Thus, I say that it is inherit in the very nature of the Free Market, that it will eventaully create a system in which it is no longer free. This is true of all systems of competition. The weaker will drop out until in the end there is only one.

Contrary to what David believes, 1 capitalist in a market is not a free market. It is a monopoly.

SoftwareEng January 31, 2008 at 10:52 am

Economic Downturn Structural Not Cyclical

Our current economic downturn is the direct result of an imbalance in the global economy precipitated through labor arbitrage. Prior to our current condition labor markets were relatively confined within nation state boundaries. Within these boundaries nation states enacted laws in varying degrees to ensure (at least in most developed countries) that labor was provided basic protections against an often times capricious employer. In addition, to laws governing basic worker rights, labor was afforded the right to organize into unions, guaranteed a wage above the level of subsistence, and afforded job security enforced through business custom.

Most important was the assurance that today’s job would not become the lost job of tomorrow. But once the global economy surged past the nation state breakers the obliteration of labor security commenced unabated. With the outflow of corporate capital in search of cheap labor abroad and unregulated inflow of foreign labor via “Temporary Worker Visa” programs (L-1, H1-B, and others) no job was any longer secure regardless of profession. There was talk of retraining workers displaced by these free (or was it lopsided) trade effects but as more and more workers became displaced across a multitude of professions the talk subsided and the realization set in that all meaningful employment had vanished from the United States. The result was a liquidation of competence, purchasing power (consumption), and a once throbbing heart of global economic dominance.

At this point businesses around the globe finally realized that a vibrant global middle class capable of purchasing had died a slow and agonizing death. Slow in that little by little year by year their numbers declined has jobs were lost to lower cost labor markets. But this new army of low cost labor wasn’t able to sustain the insatiable consumption of the global economic engine – its meager wages could barely sustain the basic necessities of existence. The race to the bottom was complete – the economic engine back fired one loud and last gasp for consumption – then expired.

The above will be our shared future both capital and labor if we don’t fully realize that one without the other does not make for an economy. Greed can only be a short term benefit for the long term result is an extreme maldistribution between capital and labor that eliminates any possibility that labor will easily regain a lost middle class propensity to consume. Granted capital will enjoy their excess wealth but this is a hollow transitory victory.

We must come to the realization that our current economic condition is a structural defect that can be remedied only if we work together.

To continue reading go to:
http://structuraleconissues.blogspot.com/

Inquisitor January 31, 2008 at 11:21 am

Ho hum…

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