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Friday, October 25, 2013

7 More Falsehoods About the Free Market

My last column enumerated several “timeless falsehoods” about the free market. The list doesn’t end there, of course, so this week I would like to add seven more (in no particular order).

1) The free market is “dog eat dog,” encouraging people to cheat and steal from one another with impunity. The free market operates within a framework of rules. Some of these rules are formal or explicit, such as property rights and contracts, while others are informal or tacit—such as rules of honesty, reciprocity, and fair play. No serious advocate of the free market denies that either kind of rule is essential for social order and that effectively enforcing them, by government or by private governance, promotes peaceful exchange.

2) The free market promotes monopoly. In the competitive market process, monopolies may sometimes emerge. They usually don’t last long, but if they do it’s not necessarily bad. By monopoly I mean a single seller of a product in a market. In a free market monopolies arise for two reasons: (a) a business drives competitors from the market by being more efficient or providing a better product, or (b) an entrepreneur is the first to offer a new product. In each case, if the monopoly persists it means that provider is more efficient or more innovative than its rivals. When government protects businesses from competition or subsidizes costs, efficiency and innovation suffer. But that, of course, is not the free market. (See No. 6.)

3) The free market stifles innovation. Now, some argue that a big company will buy up innovations from potential competitors in order to protect its market share. But as a rule, in a free market a business’s primary concern is not market share, it’s making profit. If an innovation is profitable it makes no sense for anyone to withhold it from the market. Company X may buy a new invention from Company Y in the hopes of, say, being better placed to market it; but if it turns out not to be profitable then, well, the company won’t sell it. That’s not stifling innovation, it’s avoiding a loss. When the L.A. Angels obtained the slugger Albert Pujols from the Cardinals, they didn’t do it to sit him on the bench but so he could hit more home runs for them. When he did “ride the pine” it wasn’t to hurt St. Louis, but because he couldn’t help the Angels.

4) The free market makes people selfish. People are just as selfish under socialism as they are in the free market (if not more so). Any system has to address the problem of how to harness that selfishness to promote the general welfare. The free market does it by maximizing the potential for voluntary exchange: Jack and Jill don’t have to trade unless each of them expects to gain from doing so. As Adam Smith explained in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

Some interpret Smith to mean that people will (or should) only help one another for material gain. But as Smith explained in his earlier book The Theory of Moral Sentiments: “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it.” In the daily, face-to-face contacts between buyers and sellers in a free market, people deal successfully with all kinds of strangers, which gives them the confidence to be beneficent. It’s not just good business (which of course it is), but the kind of sympathy Smith writes about is essential to the greater free society of which the free market is only one aspect. 

Which brings us to . . .

5) The free market discourages charity and sympathy. Strange that some would think that voluntarism wouldn’t thrive in a social order that is all about voluntary action and non-aggression. Perhaps that’s because many, including too many libertarians, believe the libertarian credo is, “Don’t tread on me!” Instead, I think it comes closer to the truth to say, “Don’t tread on others!” In an unfree society beneficence is typically limited to those you know well; the free market broadens our contacts. As Dierdre McCloskey has explained, the “bourgeois virtues” go well beyond what she terms “prudence alone.” And as a practical matter, wealth makes charity possible, and there is no better system for creating wealth than the free market, which decades of research have confirmed again and again

6) The free market means profit comes at the expense of others. This falsehood conflates profit-seeking with rent-seeking, or the free market with crony capitalism. In a free market, a person will voluntarily trade only if she expects to profit—that is, if she thinks the value of the house she gives up is less than than the value of the cash she gets in return. If the trade takes place it means both sides expect to gain. (Whether they do depends on their alertness and the unavoidable uncertainty of the world.) But in crony capitalism people use political power for privileges and benefits paid for by taxes, regulation, and inflation. Here, one person’s gain is indeed another person’s loss—truly “dog eat dog”—which characterizes our current “mixed economy.” That means, unfortunately, that today it’s very hard to tell whether the “profits” and “losses” we see are due to profit-seeking or rent-seeking.

7) The free market means that we approve of everything that goes on in it. I’ve written before that a free society flourishes in the presence of radical tolerance and radical criticism. One manifestation of criticism is free-market competition among goods and services. If you like something you buy it, if you don’t you don’t. But a free society is also tolerant: “Don’t tread on others!” I wouldn’t want my son to smoke meth, but I’m willing to allow its open sale. One of the risks we take in a free society is to allow ourselves and others to make mistakes. Why? Perhaps because we can never be certain when something is a mistake or not. And in a free society, even if we do feel certain about something, we refrain from using political power to force our beliefs onto others. True, we don’t compromise on the principles of private property and non-aggression, but we do tolerate (and peacefully criticize) what we disagree with.

Find a Portuguese translation of this article here.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.