2007-09-01

Leave it to the free market

Often people use the phrase 'leave it to the free market'. This applies whether or not they are in favour of free markets. For example:
  • We're in a mess with global warming, and that's what happens when you leave it to the free market.
  • Look at all the problems with the NHS, it should be left to the free market.

For me, this indicates a misunderstanding of the idea of free markets. A free market is a way to maximize society's wealth, given the following constraints:

  • The laws of physics.
  • Laws of the land, where society's morals are translated into rules that everyone must follow or be punished.

Examples of laws of the land are:

  • Don't murder or physically hurt people.
  • Don't pour mercury into rivers.
  • Don't steal other people's property.
  • Don't sell toys painted with lead paint.
  • Do give 30% of your income above £10,000 to the government.
  • Do give £10 to the government for every kg of CO2 from fossil fuel sources that you emit.
  • Everyone has freedom of speech.

A free markets takes these constraints and gives a system that optimizes society's wealth. Implementing a free market involves extra laws. For example:

  • Any company or individual is free to start up and offer any service anywhere to anyone.
  • No cartels for fixing the price of services or labour. In other words, companies or individuals can't get together to fix a price for their services. They must compete on price.
  • No monopolies. A company can't buy up all the other companies providing the same service.
  • In the employer-employee relationship, if one party wishes to end the relationship, they can.

The point that I want to make in this post is that the free market solution that you end up with depends on the laws of the land. There is no single free market solution. For example, if it's against the law to pour mercury into rivers, then your free market solution won't result in rivers polluted with mercury. If it omits the mercury law, then you probably will get mercury pollution.

Going back to the quotes at the begining:

  • We're in a mess with global warming, and that's what happens when you leave it to the free market.

I'd answer that free markets are just a way of solving an optimization problem. If you want the solution to involve reduced CO2 emission, you have to pass a law that makes it more costly to emit CO2.

  • Look at all the problems with the NHS, it should be left to the free market.

This implies that there's a single free market solution to health care. This is wrong. You have to work out a complex system of regulation. Each system of regulation would result in a different outcome. The free market is just a way of maximizing society's wealth given the laws of the land.

No comments:

Post a Comment