Unrestricted Free Markets

Unrestricted Free Markets

“Unrestricted free markets” is a term which makes no economic sense.

An economic policy is a law, regulation, practice, or strategy which affects an economy. Within any economy, the existing set of economic policies constitutes an economic system. Each economic system is unique, because each economy has its own set of policies. People like to use labels to define these systems, so we always hear about capitalist policies and socialist policies, with individual policies as well as entire economic systems critiqued according to how the observer perceives them in terms of capitalism and socialism.

In any economic system, market forces are going to be present. No government has ever been successful in creating an economy void of market forces. No government has ever successfully eliminated market forces from an existing economy. Economic facts of life include the presence of market forces. At the same time, no economic system can exist without a framework provided by a governmental power. If there is no framework, then there is no civilization, and any economy will collapse very quickly. Market forces require a governmental framework. Market forces require the presence of an infrastructure. Market forces require the existence of economic policies, whether the policies are considered to be activist or not. Economic results depend on the costs and benefits of the specific policies in place. Costs and benefits involve the effects of policies on the overall economy as well as specific effects on individuals and groups of individuals in the economy.

Since economic results depend on the policies in place, the distribution of income depends on the policies in place. A specific distribution of income in the past was influenced by the policies in place at that point in time. A specific distribution of income today is influenced by the policies in place today. Since the economy requires economic policies to be in place, there has never been a time in the past which anybody can point to and accurately state “the income went to those who earned it. Policy changes have taken that away.” This includes the effects on the economy of tax rates, tax breaks, regulations, and any other policy affecting the economy. Policy changes will affect the distribution of income, but this doesn’t automatically mean that the old way was better for the economy – or for society in general – than the new way.

In terms of the rhetoric labelling every policy or system as being either capitalist or socialist, the rhetoric is far from the reality. It is just that – rhetoric. There have been some governments, notably communist regimes, which have relegated market forces to the underground economy and officially denied the existence of market forces. But market forces were always at work within these economic systems, even if they were not allowed to work efficiently. There are economies with nationalized industries for various reasons – reasons such as the importance of the industry to the national interest, as a type of trade restriction, or even for national security. I should note that the definition of socialism is government ownership of the means of production. Nationalized industries are socialist subsets of national economies. The United States does not have nationalized industries. When I hear people using rhetoric such as “the federal government doesn’t produce anything”, my answer is: Of course they don’t produce anything. That’s not their job. They provide the infrastructure and the economic framework which allows the private sector to produce goods and services in the economy.

According to this definition of socialism – that the government owns the means of production – there is nothing socialist about the economic system in the United States. The private sector owns the means of production. Still, people like to use labels, so they redefine socialism to include any policies which increase the government’s regulation of the economy; policies which put more people on the government’s payroll; policies which create a safety net for individuals; policies which create automatic stabilizers to mitigate the consequences of recessions; some or all aspects of taxation; and the like. Using this wider definition of socialism, and noting that market forces are always at work in every economy, then the best we can do is state that every national economy in the world is to some degree a mixed economy (combination of capitalist and socialist). There are varying degrees of this mixture, and each economy is unique in the details.

I hear people advocating for “unrestricted free markets”. I have no idea what they are talking about. This language is used in conjunction with “getting the government out of the way so that the market can work its magic”. I don’t think advocates know what that means. Put simply, there is no such thing as “unrestricted free markets”. And the “magic” of free markets that some people expect if government “gets out of the way” cannot exist either.

There is nothing magical about how the economy works. The “invisible hand” which supposedly benefits society in some magical fashion is not something that occurs in the absence of a structured society. Government policies WILL affect economic outcomes. If the party on one side of an economic transaction is free to exploit the party on the other side of that transaction, then the “invisible hand” will not work to benefit society. It only makes sense, in terms of economic outcomes, when the “free” in “free markets” means that each side is equally free to accept or decline any potential transaction. This includes labor markets as well as product markets. If one side doesn’t have all of the relevant information that the other side has, then there is nothing “free” about that market. If one side is more desperate to complete a transaction than the other side, there is nothing “free” about that market. Only when the sides in each potential transaction have equal market power is the market truly “free”.

Freedom to exploit means freedom for those with less market power to be exploited. The “invisible hand” works when each side is free, through equal market power, to pursue its own self-interest. The absence of government regulation does not create a situation of “free markets” – it creates freedom to exploit. Government policies which provide producers with more market power than consumers, or which provide consumers with more market power than producers, do not create free markets. Government policies which provide employers with more market power than employees, or which provide employees with more market power than employers, do not create free markets. History repeatedly bears this out.

Many people support “free markets” because of a perceived connection between free markets and personal freedom. Personal freedom does not come to individuals if their lack of market power allows them to be exploited. Personal freedom and free markets are not going to result from giving exploiters more power to exploit.

Markets can be “unrestricted.” Markets can be “free.” But markets cannot simultaneously be “unrestricted” and “free”.

Personal freedom and free market forces come with the correct use of the government’s economic structure, with the correct economic policies. Of course the economy can suffer from ill-conceived regulations. But the economy can also suffer from not having a regulation which would be good for the economy. There can be too much government. But there can also be too little government. The government could have the wrong set of economic policies in place, but that doesn’t automatically equate to having too many government policies. Taxes are necessary, but the tax code can overly burden certain groups of taxpayers. Taxes can be too high; government spending can be too high. It depends on the results of policies, taking into consideration all costs and all benefits.

A blanket statement saying that taxes and government spending need to be cut, without properly addressing all of the costs and benefits, is not an advocacy for a better society. Rhetoric that cherry-picks certain costs and ignores all of the benefits of a type of policy, in order to make the case that less is more, is neither logical nor honest. An honest and thorough assessment of costs and benefits of specific policies can lead to better policy. But blanket rhetorical statements cannot.

“Unrestricted free markets” is a misnomer. The term makes no economic sense.

A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.

Paperback version from Amazon
Kindle version from Amazon
All eBook formats from Smashwords

Jerry Wyant