12 November 2008

Really, what is the “free market”?

I have mentioned, here and here that we do not have a free market economy. I have been remiss in not offering any explanation of the free market. I’m not going to do so now, either. Murray Rothbard does it better, here.

The free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services.

Thus, when I buy a newspaper from a news dealer for fifty cents, the news dealer and I exchange two commodities: I give up fifty cents, and the news dealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a
mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.

This simple reasoning refutes the argument against free trade typical of The “mercantilist” period of sixteenth- to eighteenth-century Europe, and classically expounded by the famed sixteenth-century French essayist Montaigne. The Mercantilists argued that in any trade, one party can benefit only at the expense of the other, that in every transaction there is a winner and a loser, an “exploiter” and an “exploited.”

We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a “positive-sum” rather than a “zero-sum” or “negative-sum” game.

How can both parties benefit from an exchange? Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the news dealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant values each good in question, and each participant’s bargaining skills….

A free market is exactly that – free. It is self-organizing and self-regulating, subject to the limitations that participants place on each other in the bargaining process. As soon as the least bit of regulation occurs it is no longer free. Something external to market enters in and binds the participants, coerces them into making the “right” sorts of exchanges, “fair” exchanges.

What we have is an interventionist/protectionist market. If you like that, then great. But let's stop calling it a free market. That ship sailed before the end of the nineteenth century.

Read the whole Rothbard article.

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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