The Free Market: Fact or Figment?

Market-Based Management is predicated on the assumption that business has a lot to learn from the free market. Unfortunately, a perusal of the comments section of most economics blogs (and yes, most economists do tend to like free, or freer, markets) will typically turn up the following snarky comment: “you silly free market folks, there is no such thing as a free market; your beliefs rest on figment—you can offer little more than “faith-based” arguments, rather than solid facts.” I have always found this argument specious, un-thoughtful, and shallow, but if I am going to think such things, then I had better back them up—so here it goes:

1. Those making the statement do not know what is meant by free market: The term free market is a metaphor for allowing more and more mutually beneficial exchanges between consenting human beings. Perhaps a better term would be freer markets, because any exchange is naturally encumbered by something. There is no perpetual motion in markets. For example, I am free to exchange with my neighborhood grocery store on a wide variety of items, but I still must get off my duff to facilitate the exchange. Accordingly, a free market is still a free market even if it is encumbered by natural realities. It is the manmade realties that determine how free a market is.

2. Those making the statement cannot explain why encumbered markets work while free markets would not: If, as a paradigm, the market is so weak that a free one will not function, then logically a market suffering any encumbrance won’t be able to work either. Huh? A simple journey to any grocery store or shopping mall says different. Every product one observes will have faced numerous natural and government barriers to get from willing producer to willing buyer. Valuable goods may have encountered any number of barriers (unrest in the producing country, customs, rivers, taxes, regulations, etc., etc.), yet the market managed to get the goods to the customer despite all of this. In fact, consider the American market for illicit substances; the government spends billions and is willing to shoot to stop these trades, but they still appear. If free markets will not work, then why bother with wars against them? According to those attacking markets, the best way to stop illicit markets would be to free them up and allow them to collapse under their own ponderous freedom.

3. Those making the statement argue that there has been no such thing as a market free of government, ergo, free markets have never existed. This statement is completely at odds with the archaeological record. The free market began whenever the first two humans (actually, probably pre-human hominids) gestured and grunted their way to exchanging some fruit for Wooly Mammoth steak. Whenever archaeologists dig a hole, they keep finding stuff that should not belong in the locale—even stuff left from historical periods classified as “anarchy.” During the lawless “Dark Ages,” Byzantine coins still ended up in Norway and Middle Eastern coins in the British Isles. Chinese silks and spices still pressed into a decaying Roman Empire and the succeeding barbarian kingdoms. Despite being under siege from Viking pirates and internal strife, the Carolingian Empire was still presented with (and accepted) the Eastern practice of using forks. The historical record demonstrates that markets will function without government and in spite of government. However, based on flows, varieties, and quantities of goods, the historical record also indicates that government can enable markets by providing protection, rule of law, etc. This begs another cheap shot taken at free marketers—that we somehow don’t believe in government. This is not true. Markets will function in anarchy, and they will function under the worst oppression; but they will function best when government dedicates itself to creating a fertile environment for mutually beneficial exchange. A market operating in such an environment can still be considered a free market, or, at the very least a freer market than what currently exists in most of the world.

4. Those making the statement fail to address the impossibility of the free market’s antithesis. If the free market will not function, then its antithesis (a centrally planned and directed system of production and distribution) should prove both functional and superior. If a system of consenting human beings voluntarily trucking, bartering, and trading is impossible, then true prosperity must spring from a few enlightened human beings directing all the other human beings as to what, when, how, and where they should produce and consume. Sadly, humanity’s experiences with the latter—be it in ancient Sparta, declining Egypt, disintegrating Rome, or modern North Korea—have been disastrous. Incidentally, careful study of the Soviet Union has revealed that its “command and control” economy only somewhat functioned because of underground markets and informal relationships between government officials. The latter involved government officials taking stock of the resources under their control and swapping with other officials who had what they needed (you know, like a market). Of course, these markets were horribly inefficient, but they allowed a walking disaster of an economy to limp along for 70 plus years (with a little help from guns put to heads and high oil prices in the 70s). Anyone seeking to understand the impossibility of an effective command and control economy need only undertake the mind-blowing exercise of counting all of the goods and services in an economy, picking a particular good or service, and then asking oneself how it should be made, how much should be made, who should make it, where should it go, and who should consume it? After running through this process once, simply wash and repeat with everything from jumbo jets, to haircuts, to corndogs. It should only take a few seconds for even the brightest to realize the impossibility of this task. Accordingly, it is odd that those decrying a supposed impossibility (a free market), often turn around and advocate—umm—an antithesis which is a theoretical, practical, and proven impossibility.

There is so much more to write, but this post is long enough. We could go on to discuss the numerous times that “free markets” have been given the blame for things that are not their fault. However, I think that this is enough of a start for those of us who like freer markets to stick up for an institution that is more fact than faith, and that has done so much to benefit the billions of human beings who would be helpless without it (including those who rail against it).

Comments

[John T. Cooke]

Alastair, thank you for this blog. I am always needing more succint and simple discussion points to help my family and friends understand the benefits of free markets vs. more government control.