This post argues use of the term “free market” in almost all contemporary political debate is at best inaccurate and often a positive hindrance in understanding contemporary issues.
Advocates of capitalism continually intone the term “free market” and then, with a flourish, contrast it to “socialism” with its record of totalitarian government, secret police, and walls to keep people in rather than out. Left libertarian opponents claim the “free market” will not have the bad effects that contemporary capitalism does. Opponents of both say they oppose “free market” approaches to public issues.
The term “free market” is in my opinion an example of how words and rhetoric inhibit our ability to think intelligently about important issues. In almost every case the term “free market” makes important issues disappear or frames them in a misleading way.
Where the term is useful
There is a sense in which the term “free market” makes sense. The market responds to price signals which help entrepreneurs, workers and consumers figure out advantageous actions within it. When prices adjust themselves based on signals generated from within the market process itself, we can say it is operating freely.
When the term “free market” is contrasted with price controls or rationing it is insightful. Price controls and rationing send counterproductive signals throughout the market order, encouraging people to make decisions which ultimately make the problems they try and address worse. For example, as a means for addressing high rents caused by insufficient housing strong rent controls will discourage housing construction because more money can be made by investing elsewhere. By contrast high rents and the high profits they generate will attract new investment into building dwellings, and so ultimately drive their price down.
Even when done fairly by some measure, rationing and lotteries have a similar impact. Under their influence there is no economic incentive to produce more. There may even be an economic incentive to hoard if possible, which leads to a diminishing supply of what is rationed. At best a black market will arise.
Rationing and lotteries might make sense when there is neither time nor opportunity for the supply of something to be increased, as perhaps with raft trips down the Grand Canyon, but it will do nothing to increase the supply. If supplies can be increased, freeing market process will do a better job of doing so than will either rationing or lotteries.
If “free market” advocates limited the term’s use to contrasting it with price controls, lotteries and rationing it would have useful content: free markets are when market processes operate freely.
But they don’t limit it to that.
“Free Markets” as a misleading and deceptive term
Contemporary advocates of “free markets” argue any government ”interference” in the market to some degree limits or “distorts” what the “free market” would accomplish if left to its own processes alone. This is, quite strictly, senseless.
Markets always operate within a set of rules, explicit or tacit, that define what constitutes a valid contract. Another set of rules defines what count as property rights, that is, what can be contractually exchanged in the market. In addition, still other rules create a means for enforcing those previous two sets of rules when they are violated. Very importantly, how any of these rules are defined will have an enormous impact on crucial details generated by the market process. There is not one set of “free rules” for contracts or property rights let alone their enforcement compared to which all others are unfree.
This point is very clear even if we stick to the views of hard core “free market” advocates.
Let me give some examples. Some advocates of free markets have suggested people should be able to sell themselves into slavery if they wish. In fact, except for one drunk Arkansas Republican, the only times I have heard slavery defended have been by advocates of “free markets” using this logic. On the other hand, other strong advocates of “free markets” argue that slavery can never be legitimate within a market context.
But these latter ‘free market’ advocates often defend indentured servitude, people who indentured themselves in order to hopefully be in a better position after they have paid their debts than would otherwise have been the case. But how much do we indenture ourselves? What powers over our choices do we give up in doing so? If I am unable to buy my way out of being indentured, in what way am I not a slave? Can the person with whom I contracted sell it (and so my indenturedness) to another? How does that differ from slavery? The range of alternative possibilities is great.
Can I or can I not make a binding contract to sell myself, either for a time or for life? What is the “self” I sell? Can an employment contract include access to me sexually? Can it be included in an explicit arrangement, as with prostitution, or as one dimension of a broader contract, as when working for someone in another capacity? Can it be implied or must it be explicitly described in a contract? Can anything be implied in an employment contract? Does such a contract include control over my activities that do not inhibit my getting my defined tasks accomplished? The list is long and we do not inhibit the market’s “freedom” by removing some rights from the list of property rights or some provisions from what can or cannot be contracted.
Similarly, a market is not more or less free if we have or do not have property rights to pollute others. Consequently, whether or not CO2 generation is a property right says nothing at all about whether the market is free. The same is true for noise pollution or any other kind for that matter. This is a very important point.
Opponents of doing anything to inhibit global warming argue regulating carbon is to violate ‘free markets.’ But it is a logical error to say that a carbon tax violates the principles of a free market. Economically such a tax would have the exact same impact as if carbon had become more scarce, encouraging finding alternatives and more efficient use when cheaper alternatives do not exist. Ironically for both sides, if carbon were made more expensive there is no mechanism superior to free markets for finding and encouraging further discovery of alternatives to our reliance on carbon as a source of energy. As it is the term “free market” is incoherently employed by those rejecting modern science’s judgment on global warming, thereby helping hide its actual value as a valuable, probably the most valuable, tool for solving the problem. I doubt whether any term can possibly be more misused than this. “Free market” economists who make this argument are truly little more than hacks.
A variety of possible property right definitions exists which, once defined, provide a context within which market processes can operate freely. The same holds with rules of contract once a society becomes complex and contracts are increasingly among strangers. Neither of these kinds of rules can be determined by the logic of the market alone which, to function, presupposes their existence. As a matter of historical fact those rules have been determined by whoever holds sufficient power to enforce them. At best this is by democratic government, but sometimes even in democracies it is by organized crime.
Free markets, or much more accurately, free market processes always occur within a context of rules that are themselves not products of the market. And with few exceptions Americans support market processes within these rules. We disagree over what the rules should be, not over whether to allow a market to function within their context. Therefore there is no significant opposition on the American ‘left’ to “free markets.”
Those using the term “free market” to define themselves over against others who would differently define the rules within which the market operates employ the term in the same way “pro-life” people use the word “life”: rhetorically and incoherently. They confuse important issues and inhibit rational discussion of genuine problem. Except when discussing efforts to regulate or otherwise override prices within the broader context of a market order, the term “free market” should be abandoned by all who interested in clear communication and rational analysis.
minor modifications added 7/23.