Free market - use, misuse, and an explanation

In a recent editorial (Shut Up, They Said Feb 13, 2009) The Wall Street Journal claimed that Congress should not restrict companies, which receive bailout money, from using this money for lobbying Congress. A reason it gave was that it is unfair to prevent corporations from lobbying when unions, which receive bailout dollars indirectly through workers’ wages and dues, aren’t restricted from lobbying Congress. Supporting the idea that companies could use federal handouts to lobby congress for more federal handouts is decidedly not a free market principle.

‘Free market’ is an oft misunderstood notion. As I wrote in an earlier post, all markets are free. The issue here is that in much of the public’s mind ‘free market’ is essentially a fascist idea, a state of affairs in which the government supports big private businesses at the expense (it is always at someone's expense) of everyone else. The public is basically right: such was the state of economic affairs under fascism. It is wrong, however, to associate it with the ideas of individual liberty and free market capitalism as advocated by Adam Smith, Friedrich von Hayek, and Milton Friedman. The WSJ, a supposedly free-market leaning paper, contributes to the confusion by defending privileges for big corporations at the expense of taxpayers.

Free markets mean that businesses compete for consumers’ attention and dollars, and the government does not support one business or another, nor interferes in the economic activities of citizens and businesses, except to enforce the don’t lie, don’t cheat, and don’t steal laws. (Where was the government when Madoff was lying to his investors and stealing $50 billion of their savings?)

Laissez faire, that economic concept of leaving people alone refers precisely to letting companies compete for customers’ business and not having government support one corporation or another. It does not mean letting the hungry starve or letting the homeless freeze to death in winter. Free markets mean legal competition without government support for anyone. The WSJ-types who support government bailout for corporations and the use of bailout dollars for lobbying are no different than the populists and socialists who want massive government transfers from “the rich” to “the poor and the middle classes.” Both oppose free markets and competition, they just choose different beneficiaries. Here is how Friedrich von Hayek described these people and the situation in his classic 1945 book The Road to Serfdom:

What in effect unites the socialists of the Left and the Right is this common hostility to competition and their common desire to replace it by a directed economy...

Yet… the universal struggle against competition promises to produce in the first instance something in many respects even worse, a state of affairs which can satisfy neither planners nor liberals [of the classical type]: a sort of syndicalist or “corporative” organization of industry, in which competition is more or less suppressed but planning is left in the hands of the independent monopolies of the separate industries. This is the inevitable first result of a situation, in which people are united in their hostility to competition but agree on little else. By destroying competition in industry after industry, this policy puts the consumer at the mercy of the capitalist and the worker of the best organized industries. Yet…it is not a state which is likely to persist or can be rationally justified. Such independent planning by industrial monopolies would, in fact, produce effects opposite to those at which the argument for planning aims. Once this stage is reached, the only alternative to a return to competition is the control of the monopolies by the state—a control which, if it is to be made effective, it must become progressively more complete and more detailed.

A case in point: on Feb 16, 2009 WSJ reported "Bankers Face Strict New Pay Cap." In addition, the recently passed economic stimulus bill contains restrictions on hiring H1-B (professional foreign) workers by any company receiving TARP funds. Add these to the Congressional restriction on the use of bailout money mentioned earlier. These policies seem reasonable in light of the current circumstances, but they also validate Hayek's assertion that in order for government's efforts to be effective, government's control must become progressively more complete and more detailed.

The real problem of government control isn't government control per se. Nor is it, necessarily, that it will lead to total enslavement (serfdom) of the citizens by the government (although, historically, that's what happened in Soviet Russia and Nazi Germany). The more immediate problem with government control of industry is that, political ideology notwithstanding, it leads to inefficiency, fewer products, higher prices, corrupt practices, and lower standards of living. It sustains a minuscule class of super rich government-backed oligarchs and a fairly equal, in its misery, class comprising almost all of the population. Exhibit 1: most of Latin America. Exhibit 2: Eastern Europe before 1989.

Described accurately, supporting free markets is not supporting a policy to aid any one business. It is supporting a policy of competition among businesses. Such competition leads to innovation, more efficient use of resources, lower costs and greater availability for consumers, and a higher standard of living. Without competition a democratic nation will slide toward an oppressive and inefficient system, going through a corporative stage first, as Hayek very coherently explained. But perhaps such an idea of free markets and competition sounds a bit far-fetched and utopian?

Interestingly, there is one area of American life where this almost utopian laissez faire idea is both the law and the practice. Read the First Amendment of the US Constitution: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;” The resulting free market for religion, where the government neither regulates nor supports one faith or another, provides Americans with the largest possible choice of religious options in the world. There are no restrictions on the number of foreign religious workers as in the case of other foreign workers, and there is practically no unemployment among them. Every church, mosque, synagogue, or temple of any kind exists, competes with all others, and flourishes despite its inability to collect taxes or to force anyone to support it involuntarily, and despite the fact that for over 200 years, through wars and depressions, no religious institution in America has received a government bailout. Consequently, America today is the most religious country in the Western world, so much so that at the dawn of the 21st century only in America does religious doctrine vie to displace science as the explanation of the physical world taught in the classroom.

Imagine if we had a 28th amendment to the Constitution that read, “Congress shall make no law respecting an establishment of commerce, or prohibiting the free exercise thereof.." and if we enforced it as religiously as we do the First... Ah, but then we'd be quixotic dreamers...