Friday, November 28, 2008

There are no regulated markets, only restricted freedom

"We need smart regulation!" This is the mild version of the outcry for regulating market activities that came after the economic slowdown and the housing and financial crises. The talk seems to be that markets went to excesses, that markets failed, and that markets need to be regulated in order to prevent people from losing too much money. I think that term "regulated market" is an oxymoron. It makes no sense.

Markets are simply an abstract notion that means the voluntary interactions of individuals, given any and all constraints, to solve their economic problems and desires. When we say we are regulating a market, it sounds rather impersonal, technocratic, and even appropriate. But we don't regulate the market, we limit people's freedom to interact in some way. The market is not regulated. When people have less freedom, they interact differently, taking into account their increased constraints. The resulting interaction is the market.

People always face some constraints. We don't have enough money or enough time to buy all of the things we want, so as consumers we give up some purchases. If we are offering products for sale, we are incapable of communicating to all potential customers the value of our product, so we give up some sales. These are real constraints. If the authorities tell us it is illegal to buy or sell some product, some of us stop trading that product and some simply hide from the authorities. The market is not regulated, the market is simply the individual's voluntary efforts to satisfy some economic need in the face of the given constraints, be they natural or government created.

So let's be clear, we don't regulate markets. Even "smart market regulation" plainly means restriction on citizens' freedoms.