The Free Market

THE FREE MARKET….I didn’t really mean to spend an entire fortnight posting about income inequality, but it ended up taking on a life of its own after the first post, and I’m glad it did since it led to some interesting conversations. In any case, I think I’m done for the time being, and I’d like to finish up with one final post.

Several of the criticisms ? especially of this post ? were along the lines of “Perhaps Kevin doesn’t realize that there’s a reason certain people do better than others. It’s called the free market.”

Indeed I do realize that, and that’s really the whole point of all my posts. The problem is that while market-based economies are terrific at a wide range of allocation problems, free market capitalism isn’t a law of nature or a command from God. It’s an invention of human beings, and like any human tool there are places where it works well and places where it doesn’t. Roughly speaking, there are two areas where I think government intervention in free markets is justified:

  • Interventions that are designed to make capitalism work better. Example: capitalist economies work their magic via competition, but classical economists have recognized for over a century that laissez faire capitalism frequently leads to monopolies, which in turn destroys laissez faire capitalism. The answer is antitrust legislation, which is designed not so much to rein in free markets as to allow them to flourish. Securities regulation, which is generally designed to promote transparency and a freer flow of information, is another example.

  • Interventions designed to correct things that capitalism does poorly. Example: brutally exploitive child labor is a normal and predictable consequence of industrial capitalism. However, when it eventually became socially unacceptable it took government intervention to end it. A modern day example is minimum wage laws. A free market will inevitably price the least skilled labor at (more or less) subsistence levels, but today we have a social consensus that if you want to employ someone, there’s a certain minimum amount you should be required to pay.

Bottom line: I am a considerable fan of free market capitalism and generally think of it as the default mechanism for making economic decisions. However, while I’m also a fan of the scientific method, that doesn’t mean I think it’s the right tool to decide every single question of the workings of the world.

Likewise, capitalism isn’t the right tool to decide every single question of resource allocation and human interaction. As a democratic society, we can decide for ourselves what our priorities are, and if unregulated capitalism doesn’t meet our needs, we should feel free to intervene. The important thing is to understand the costs and limitations of interfering with free markets, to treat our ignorance with respect, and to be willing to change our minds based on changing evidence. Free markets work wonderfully well in a wide variety of cases, and we should be skeptical about our ability to improve on them ? but not petrified into inaction.

This is why economics (and economic history) is important. Not because it teaches us to worship at the altar of the marketplace, but because it helps teach us what the marketplace can do, how and when it can be safely interfered with, and what the costs and benefits of interventions are likely to be. As long as we interfere with our eyes open and maintain a healthy respect for the dangers of unintended consequences, there is no reason we must ? or should ? accept the results of the marketplace as gospel.