August 26, 2012
Why Free MarketsBy Stephen Mauzy
To exchange for greater benefit is as natural to humans as any innate bodily function. Exchange needn't be taught or explicated. No inculcation need occur. It just happens. A kindergartener exchanges his juice box for another kindergartener's cupcake. Because of inequality of wants -- one values the juice box more than the cupcake; the other values the cupcake more than the juice box -- voilà: value is created.
No one needed to "regulate" or instigate the exchange between the kindergarteners; each arrived at his own value for the items up for exchange, determined his utility for each item, determined the rate of exchange. Most important, each determined the course of action that would improve his situation.
Markets arise in kindergarten lunchrooms, corporate boardrooms, grocery stores -- anywhere people congregate. For markets aren't specific places; they are processes that people engage to elevate their welfare.
Welfare is best raised when people are most free to exchange without interference; only you know what's best for you. Despite what positivist economists -- notably Irving Fisher -- might lead you to believe, utility is impossible to measure. Utility is implied when an exchange occurs, but only the individuals involved in the exchange know the magnitude of the utility. Perhaps the one kindergartener would have accepted half a cupcake for the full juice box, while the other kindergartener would have offered two cupcakes for the juice box. We simply cannot know the extent to which each valued the exchange, but we do know that value was created because an exchange freely occurred.
These free-market exchange processes are always organic. They cannot be planned or directed, nor should they be anthropomorphized. Free markets aren't acting entities; therefore, free markets don't ration or allocate goods and services. Nor are free markets judgmental: sex for heroin is as legitimate as juice boxes for cupcakes. It's the value created and individual utility of each party that matters.
The popular collective "isms" -- communism, socialism, fascism, Marxism, Trotskyism -- of political economy are antithetical to free markets. They are the product of an unintelligent design, because they attempt the impossible -- to gauge from the outside what creates the most value for each individual. Therefore, they are antithetical to utilitarianism.
Ministers of the collective "isms" preach similar sermons: solidarity, with an undercurrent of coercion. The logic stumbles out of the gate: if solidarity requires threat of force, that's negative utility to the one threatened. If a transaction enhanced the threatened one's welfare, no force would be needed. Therefore, it's absurd to believe that multiple acts of coercion sum to a positive.
The mythical chimera of public goods -- those imagined quantities the free market always fails to deliver -- is a rallying point among "ism" acolytes, as is the nonexistent free-market externality (pollution) that imposes costs on others. Billions of tiny transactions are totaled to arrive at one aggregate book-entry number. If the number is insufficiency big or small, "ism" ministers conjure a particular brand of salvation.
Of course, the ministers overlook that markets aren't supplying anything; markets are simply processes of exchange. The amount of goods and services and the number of exchanges that occur in a free market always add up to the correct number; it can't be anything else. If a person is convinced that a good or service is under-supplied, then that person needs to devise a free-market solution; he needs to become an entrepreneur. If he's right, he'll succeed; if he's wrong, he'll fail.
As for negative externalities, they are always a free-market violation -- a property right violation in particular. A factory that chokes out pollution that wafts down upon an adjacent property is granted immunity from redress by government; the aggrieved must simply tolerate the trespass. Privilege is bestowed, and the factory disburses its costs instead of internalizing them.
What is more, those who bestow privilege are easily captured and manipulated in order to enable privilege-seekers to propagate negative externalities. The juice box trader convinces the teacher that the juice-box trade requires regulation. Not coincidentally, the best solution is to force everyone to trade by the rules devised by the regulatory agitator. The market for juice boxes would become "more efficient" if one juice-box trader were granted a monopoly and if the official exchange rate for juice boxes were set at two cupcakes for one juice box, with one cupcake going to the teacher.
To counter business-led capture, liberals favor legislation that purports to protect consumers, but that always raises consumer costs; hence more corporate taxes, more government regulation of business, more minimum quality standards. But if consumers were willing to pay for the protection liberals think consumers demand, clever entrepreneurs would surely arise to meet these demands.
Conservatives, whose sympathies appear to lie with free markets, are often misguided. They champion tax regimes that favor investment over consumption. So they favor sales taxes over corporate taxes, capital gains taxes, and dividend taxes.
But investment is simply future consumption. Why should investment be favored over consumption? Individuals allowed to freely produce and exchange without outside distortions will determine the optimal level of investment and consumption that produces the highest possible individual welfare. Tax schemes favoring one while disadvantaging the other always produce suboptimal outcomes.
Free markets work because free markets develop rules of engagement and attenuate moral hazard. No one can hide for long in a free market, and sins -- fraud, incompetence, irresponsibly -- are quickly punished; therefore, free markets are orderly markets.
Consider eBay. The company's rules aren't the driving force that keeps participants honest; it's the information the participants themselves develop and distribute. Buyers and sellers parse reputations before agreeing to exchange. Sellers on eBay even go out of their way to highlight a product's potential shortcomings to avoid unduly raising expectations and suffering subsequent hits to their reputation. Free-market transactions are a function of honesty and delivery of promised goods and services.
The free-market foundation of honesty and delivering what's promised works all the time and everywhere, including in security and property protection. At 11:00 pm on a Saturday night, is Disneyland or Central Park the safer venue? If given the opportunity, voluntary transactions in conflict resolution and punishment would emerge to effectively and peacefully resolve the disputes arising in everyday life. As it stands, governmental monopolies preclude the process from evolving.
Free markets always receive short shrift because quotidian human functions fail to ignite the mob's imagination. "Isms" are advantaged because they deliver the apparitional savior. They appeal to something-for-nothing fantasies. Everyone knows there is no something-for-nothing in a free-market exchange.
The good news is the free market can deliver the unseen better than the "isms": better roads, better medical service, better schools, better security, better courts. We know this because whenever the free market -- or the relativity freer market, to be specific -- is compared to government monopolists, the freer market always wins: Walmart over GUM, Mercedes over Trabant, Yamaha over Ural.
There is simply no such thing as inefficiency or failure in a free market. When free-market opponents point to a putative free-market failure, they point to an interventionist system pulsating with government-granted privileges: tariffs, subsidies, regulation, licensing, intellectual "property" protections, government-business collusion, land set-asides, zoning, building codes.
Free markets are imperfect markets, to be sure, because people are imperfect. Free markets are simply less imperfect -- far less imperfect -- than the alternatives. So a free-market economy is not only the best political economy possible, but it is also the best political economy imaginable by thinking adults.
Stephen Mauzy is a financial writer and principal of S.P. Mauzy & Associates. He can be reached at firstname.lastname@example.org.
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