This is a synopsis of what I consider to be the merits and limitations of an economic system predicated on a free market economy. This is my personal opinion, and not to be confused with official doctrine of any political or economic system. But I have qualified my opinions with literature and studies on the subject. When necessary, I will reference them, but hopefully the merits of the system will be evident from my explanations themselves.
I will break this into sections, first outlining the basic principles of a free market system. Some would associate it with libertarianism, others with the idea of a limited government, others with utilitarian ideals. These labels (and other similar ones) carry implications beyond what I wish to impart, so I will refer to it as a free market system rather than these to avoid confusion. Later sections will deal with specific policy formation in various economic aspects. Lastly, since much of this involves a diminished role in government, I will discuss what the government should still do to ensure basic freedoms and economic efficiency, as well as deal with some of the main criticisms often directed at free market systems.
This is necessarily quite lengthy. I will be as brief as possible, but I realize that I am speaking to a limited audience. I apologize for the length, but also hope that it can serve as either a basis for discussion and debate, as well as information for those who may be curious about the tenets of this philosophy. Keep in mind that this is a very shortened version of these ideas. A full analysis would be far longer, and this is about as short as it could be while still maintaining the integrity of the philosophy.
The operative idea is freedom. A free market ensures people the most possible economic freedom, which is directly tied to political and personal freedom. Section 3 will deal with this theme more.
Freedom is achieved through voluntary choice in spending. Governments that take money away from people in order to provide a service are stripping away that freedom, while also enhancing their own power by controlling money, services, and resources. Centralized power in general can be seen as an enemy to a free market, and the goal is a dispersed (though not entirely equal) distribution of wealth and control.
The counter to this is that governments provide necessary services to many citizens, and therefore must take away money to be able to facilitate this. But in a free market, any service that is needed will eventually be provided because of demand for it, and it will crop up naturally as a private business. The presence of numerous businesses in any given field will ensure competition. If one group gouges customers, another will benefit that makes their cost more attractive to the consumer.
And the presence of this competition will force the companies to be more efficient. Any government-run institution is by default a monopoly, and therefore without direct competition. There is little, if any, incentive for them to improve their methods or efficiency, because they don’t face pressure from other competing services. Some pressure exists in the form of elected officials potentially losing their reputation (or their political party’s rep) as a result of failed programs. But this is minor and infrequent compared to the intense pressure of a competitive market.
I have hesitated to provide a specific example because so many are available that to use one would be to limit the concept. However, to make it relevant, we shall look at the Social Security system. This is quite simply involuntary old age insurance. We must contribute to it, and have no choice in the matter. And the myriad problems with the system, and its potential failure and collapse (predicted by some but not all politicians) speak the to flaws of such a system. It is coercive, meaning it is forced upon the consumer at the cost of a portion of their economic freedom. And it is inefficient. Yet it is a necessary service for many. Going “cold turkey” on such a system and removing it would doubtless leave many in ruin. But one cannot argue that it is more efficient or freeing than if multiple similar services were offered at competitive rates in a free market. People could choose to invest their money in such a system, or not do it and invest in some other interest.
Some might argue (quite rightly) that people can and will be very stupid. Many wouldn’t provide a solid financial base for themselves and wouldn’t choose to invest in such systems. True enough. But is it the responsibility of the government to hold the hand of every person, at the cost of personal freedom? And should a government decide what they feel is best for everyone, especially when a better alternative may exist? I would argue no to both, so long as the opportunity is still be provided to them (which it is). The choice is still available to them, and the operative idea is again that they have the freedom to do so rather than it being forced upon them. Some have even suggested a system like car insurance, where the government requires it, but it can be purchased independently from competitive providers. If one wishes to remain paternalistic, this accomplishes that while using the advantages of the free market.
Furthermore, for the majority who work toward their well-being, they will naturally work harder for their own economic prosperity than a detached and bloated government institution would. They will also make better decision for their well-being. A “blanket” program for all citizens will not help all equally, and many would be better off investing in various other interests. By leaving this choice to the person themselves, they have an increased chance of success while maintaining their freedom, and will doubtless invest more wisely and efficiently than a government with no personal attachment toward a person’s money, nor any responsibility except to statistical majorities rather than individual prosperity. The person is not forced into forfeiting wealth, and by the voluntary and co-operative nature of a free market, will not sacrifice his/her wealth unless there is benefit to doing so.
So in social security, and any welfare-minded service, some people who do not need aid receive it, others don’t receive enough, special interest groups allow for loopholes in the system which creates inherent inequality, people are being forced to contribute to this system monetarily which is a loss of freedom and an imposition of rights, and the system itself is wasteful. But the social security system has a monopoly on old age insurance, so any experts in the field work for the government and are only familiar with its function. Naturally, they want to “improve” or expand the system. This includes politicians, who, at best, want to reform it, not remove it or replace it with free market competition. Thus, we enter a vicious cycle of government control.
Later we shall look at other programs whose effects are similarly adverse.
III. The Dangers of Fascism
By fascism I mean governmental control in forms that limit citizens, economically, politically, or personally. There isn’t a line at which a capitalist society ends and fascism begins, but most developed countries have shades of both at various levels.
Most are familiar with the ineffectiveness of communism, so it won’t be advantageous to go into it at length. I will say this, however: there is nothing wrong with the intent of fascism or even communism. It is in their execution that we see they cannot work. One may even value personal contentedness over freedom, which is the allure of governmental control. If all are provided for in a sufficient manner, happiness could theoretically be higher than in a totally free market. To some, this would be seen as a better solution. And I might agree with them. It is, however, in practice that this idea fails, for nowhere in modern civilization does a significant loss of freedom, even with the gain of prosperity, account for a jump in happiness. Usually the opposite is true, since most societies will resent too much control over them.
The danger I wish to speak of, however, is a subtler one. It is easy to think that one can give up economic freedom for the perceived greater good, and still remain totally free in a social, political, and personal sense. This is untrue, as the three are closely linked.
Say a state is run with very little economic freedom. The jobs and wages of the populace, as well as economic tariffs, prices, trading, and investments are rigidly controlled by the government. The same state, however, also allows for great personal freedom. But how much freedom is possible in such a state? If a person wants to, say, protest for a cause that is not currently implemented (any cause will do), government regulations on economics will prevent him from raising funds, purchasing materials for broadcasting (TV commercials, radio spots, materials for pamphlets and letters), and mobilizing any sort of following simply because his potential followers (other citizens) are also on the government’s bankroll. If the cause is not somehow sympathetic toward the current government system, it will be impossible to enact. And if is indeed sympathetic, one wonders why there would be need for protests. Economic control, then, is tantamount to political control and to a lesser extent social control. There is not always this strong a correlation, but the effect that one has on the others can be clearly seen from this example.
Certainly, this is a polarized example to illustrate a point. No society would exist exactly like this. But the correlation is still present at lesser degrees of government control, though not as strong, and doesn’t change the danger outside of such hypothetical settings.
So one can even drop the label of “fascism” if it helps to make it more relevant, since even my country, the United States (which is closer to a free market system than nearly anywhere in the world), is far from totally free economically.
First some basics. Even at its freest, governments mandate education to a certain level for children and also create minimum standards for schools to meet. In a free market this would not change.
Education, to me, is tricky. A free market advocates privatizing education, perhaps on a voucher system where the government still collects funds then issues vouchers to citizens. They can then attend any school they choose with this voucher instead of mandated education at a specified district. The reasoning for this is that low income areas pay less overall tax money and thus have worse schools and less funding. This creates a cyclical system of keeping the lowest and highest in their respective places. Presumably, vouchers and privatization would create diversity and more opportunity for social and economic advancement.
The problem comes with the schools themselves, who would then be operating on profit, and have less incentive to actually perform well and offer the best possible education. I might argue that current public schools also have little incentive, but still strive for excellence, but the often merit-based funding for schools provided by the government (usually state-level, not national) nullifies much of this argument.
So I will temporarily relent on advocating full privatization, though this by no means closes the discussion.
Still, being in education, I can attest to the deleterious affects of various government mandates. Standardized testing provides a yardstick for legislators to gauge “success” in education. The tests themselves have been debunked by various sources (which I don’t have time to go into here) as biased and/or not gauging true education. Any teacher will intuitively tell you this as well, even without data to back them up (which exists in spades). It stifles diversity and consumes true education. Which is why I advocate basic standards of curriculum and success in grades. Not standardized testing. It isn’t going quite so far as full free market advocates would want, but it brings back an element of choice, diversity, and thus freedom to the schools themselves.
V. Distribution of Wealth
Distribution of wealth primarily involves taxation in various forms. This could be in the form of tariffs (which generally stifle economic interests in general for the sake of a select few) or direct taxes.
The advocate of freedom is against such measures as much as possible. But even the staunchest libertarian concedes that some funds must be collected for governmental use. The goal is to use them in a way that facilitates freedom as much as possible, and limits tax collection to the minimum needed to accomplish such goals.
One major argument against the free market is that the rich get richer and (ostensibly) the poor get poorer. Let us look at these one at a time. The former is mostly true. It is very possible to accumulate great wealth and keep it without heavy tax burdens in such a system. What is lost, however, is that a free market allows for more funds on all levels to be spent since it is being taken away from wasteful public services and put into the hands of the people to spend freely. The result of this is that the average income is increased not just in the upper economic bracket but in the middle and lower ones as well.
Economic equality is not the end goal. Some inequality must be accepted if we are to retain our economic (and thus political/personal) freedom.
The other point is that once we start to redistribute wealth to and from tax brackets, in the name of “equality,” one gets a very stagnant economy. One need only to look at a socialist or communist state to see that this is true. Equality might be upheld, but not only is freedom stripped away but there is also much less opportunity for fluctuation in one’s level of wealth. Social and economic mobility comes to a standstill.
Now we turn to what the government should spend their collected income on. We have seen as a general rule how government welfare programs create waste. So the only remaining option for allocation is to give the money directly to the people.
A free market is by nature competitive, so some people will “lose.” This can be seen as those beneath the poverty line or those on unemployment. Unemployment, in nearly any system, will exist. And these people do not have the funds needed to compete on the free market in any meaningful way, especially if we strip government aid programs away. The money, then, goes directly to these people. Some free market advocates are proponents of a negative income tax, which supplements income based on how far beneath living wage and/or the poverty line a person is. Most negative income tax systems halve the difference to living wage, so it is necessarily more for those further in poverty. Other are proponents of simply subsidizing money to these people up to living wage. Some would have stipulations attached to such money, such as a promise to either attend some form of schooling or enter the workforce. If a person fails to meet their end, the money is rescinded.
The variations are many but the theme is the same. Bring those beneath the poverty line up so that they can compete in the market and survive, and for the most part leave the rest of the market alone. Only the hardest materialist would want to leave the market totally free from redistribution of funds, and in an advanced society that is economically stable there is no reason for there to remain so many people at or below poverty that can barely survive (and sometimes don’t). Thus, it is the least amount of government intervention while ensuring the most amount of freedom and giving all a chance to live comfortably.
VI. Misc. Programs
I have tried to speak in abstract terms as much as possible to convey the principles involved. Here I will list a few government institutions that have harmful effects that would be better off in a free market. Meaning, the industry or service should either be run privately in a competitive market or it should be abolished altogether.
- Public Housing
- Minimum Wage
- Farm price supports
- Misc. aid or welfare programs designed to support a particular group of people or interest.
The list is by no means exhaustive.
The last of the four is left without specific program names because so many small-interest service programs are in effect that any one or two would mean very little, but collectively they are burdensome in much the same way Social Security is on a larger scale.
I hope that housing and farm price supports will be self-evident when applied to the principles I have discussed. But the one of these that seems to raise ire is minimum wage.
In theory, minimum wage ensures a certain respectable minimum for employees, thus protecting against businesses cheating employees. In reality, all it means is that businesses can hire less employees. This has the effect of maintaining unemployment rates at a much higher percentage than they would be otherwise. Outsourcing labor to poor countries is an obvious problem, and is evidence of this as well.
Now think of it this way: Say unemployment is 8% (not outlandish). The people in the lowest economic bracket are those who are unemployed and poverty-stricken. They are, of course, largely the same people in that 8%. So minimum wage laws do nothing to help these people. They simply ensure that more people exist that cannot benefit from such laws.
We have already seen how wage distribution can be used to help those in poverty. And it is done without taking freedom away from businesses (which minimum wage laws do) and without increasing burden on the unemployed. This is clearly a better solution than minimum wage laws, which actually have the opposite affect of what they intend.
One of the most fallacious assumptions about a free market or libertarianism is that the government does not exist in any meaningful way. We are not anarchists, certainly. Limited government, however, sacrifices the least amount of freedom and ensures basic rights.
Some basic roles of a limited government:
- Basic protection (police, military, court system, etc.). Though ideally the military is of minimal importance, since military force could easily be substituted for economic might and freedoms could again be stripped from the people.
- Protecting property rights of citizens, both physical property (land, housing) and intellectual property (patents, copyrights).
- Establishing standards for education
- Collecting and allocating limited funds when needed to impoverished citizens
- Enacting anti-trust laws to protect against corporate monopolies
- Establishing foreign relations
This list is by no means complete, and other similar lists will surely vary, but it outlines a few primary examples of the role of a government even at its most basic form.
VIII. Potential Problems
I have discussed the government’s role in curbing monopolies, but large businesses and corporations would still become inevitable. We see this in a number of areas already, and it produces a large amount of standardization of product, and occasionally stifles diversity. As a result of such “chain store” mentality, the diversity and quality of some services may go down. For example, the food industry is dominated by large chain stores (mostly fast food). Few, if any, would argue that the highest quality comes from these chains. But their dominance in the market ensures their prevalence.
No one would argue for government controlled food services, but it is easy to see how this principle could be applied to more relevant fields. We have already seen such concerns in education if it were to be made into a free market service.
My rebuttal to it is that the presence of such chains does not completely wipe out niche markets. Individual, privately owned restaurants (or small businesses in any field) still exist. They are less numerous, surely, but not in danger of utter extinction. Second, the dominance of such chains is still related to consumer choice. If they provide a valued service (in this case food) at competitive prices, they are rewarded by public consumption. Higher quality food (or higher quality anything) is still the choice of many, and enough to keep the higher quality services alive. One need not refer to the tendency of the masses to invalidate a system that is still essentially as free as possible, so long as those tendencies do not eliminate the choices present to others (which they don’t).
Still, if one sees this as an evil, it is a valid complaint. But my feeling is that the good still far outweighs the bad.
The same could be said of wealth. Despite some efforts to help the homeless and destitute, a free market system still advocates a protection of wealth for the poor and wealthy alike rather than redistributing it to government services or wage distribution to ensure fairness. As such, there will be some filthy rich people, and a free market protects this. An evil, perhaps, but it is also to be remembered that a free market system, under the premises of this thesis, will create a more prosperous economy than other systems. Personal wealth will be higher at all economic levels, in general, than in other economic formats. Wealth will fluctuate more wildly, certainly, but if we begin to worry about equalizing the “haves” and “have nots” beyond basic protections, we run the risk of falling back toward an economically socialist state. The middle and lower class might envy or resent the upper class, and they might even have less opportunity as a result, but they themselves will be better off than the middle and lower classes of other economic systems (if one accepts the premise that a free market is preferable to other systems). Total equality is impossible, so however unfortunate this may seem, we have to accept it and work toward the most prosperous system, however unequal it may be.
Again, a potential evil, but also a veiled strength of the free market, depending on how one looks at it.
The final problem is one of implementation. If only one or two of these things happen, it could cause ruin. Say we change nothing else, but remove minimum wage. It would be disastrous. The same could be said for most of the other examples I have given. It is a testament to the level of government control that we have, and the stifling level it has reached as well as the precarious balance it is on, and so all the more reason to enact change. But that change would have to be widespread to have any lasting and cohesive effect, so it is difficult to imagine it happening.
This is not true of every program, however, so smaller steps can certainly be made without endangering the whole.
IX. Social Issues
The role of such principles in social, not strictly economic, issues is tricky, and free market economists generally have little to say on them, if only because they fall slightly outside their realm. In general, such a system stresses freedom of choice in all aspects. To mention examples would be to polarize those on either side of any particular issue. But the principles involved call for leaving open as many choices as possible, and reducing restrictions on social matters unless they harm other individuals in an unjust manner.
Many social issues deserve their own lengthy analysis, and I wish for this to remain a primarily economic discussion, so I will refrain from saying more.
X. Conclusion
Hopefully I have adequately outlined the tenets of these ideas. The main point is that a free market is co-operative and voluntary, not forced, and that most things that are run through a centralized body can be better run via a dispersal of control in a competitive free market.
My brother once commented to me that there are likely specific ideas, practices, and policies may have some flaws to them in this system. And there may even be idealized systems that could be run through governments that would be superior to a free market. But when you return to the core principles, the idea of freedom itself, it is hard to argue against unless you do not see freedom as a goal unto itself. If you see it merely as a means to something else (what that something is could be anything) then there may be systems in which freedom is sacrificed for some higher good. This, oddly enough, can be a valid viewpoint and held by many, though it is one that I do not share.
Still, for most of us, even the prospect of this much freedom while retaining our basic rights and protections is enticing. I would hope that even the prospect of economic and social success in such a system would be attractive to many, and hopefully this provides a sufficient (if brief) outline of how such a system might be possible and effective.
Internet searches for many of these terms and ideas will yield many results for those who aren’t interested in lengthy reading. Libertarianism, Utilitarian ideas, limited government, are all related ideas. John Stuart Mill’s writings may be of particular interest. Mill popularized the idea of a Utilitarian Limited Government. Mill’s writing predates most modern economies, and is more philosophical in its nature than most economic/political theories.
Also of note are the writings of Nobel Prize winning economist Milton Friedman. Friedman did more than nearly any before him to popularize the concept of a free market, and his works are still in print today. Friedman’s work is far more in-depth than what I had time to cover, and makes use of a wealth of research and data from economies to justify his claims. His most important works are Capitalism and Freedom, which covers most of the “nuts and bolts” of a free market system, and Free to Choose, which he co-wrote with his wife. The latter of those two is more accessible to a general reader, less concerned with detailed analysis and complex reasoning than with general philosophies and relevant examples.
I understand. I realize I'm speaking to a limited audience, and don't expect most people to read more than perhaps the intro post unless they are genuinely interested in the topic.
...
And yes, this is what I spent the last two days writing. If only for myself, but hopefully others too.
I am interested (as I am in favor of Free Market) and I am taking my time to read it by reading it in parts. By the looks of what you have typed you seem to have summed it up perfectly. Although I'd have to read it all before I can properly make that statement. Good job and kudos.
Thanks. And yeah, take your time (anyone else too). No reason this has to be a fast-paced thread if there's only limited interest.
I've been in the middle of a lot of economic reading recently, and had also encountered quite a few of the same arguments when I would bring up aspects of a free market system on the forums, so I felt like a full-scale analysis would be in order. And it's also useful for my own purposes too since it helps to be able to articulate it better.
A few rebuttals actually stymied me (like the education thing, which was a debate I kinda "lost" with a friend), so I'm hoping there are others that know as much about some of this stuff to increase my knowledge as well, regardless of whether its for or against these ideas.
Anyway, to this end, if one is a free market advocate, of the current presidential candidates the only one that would have any appeal to libertarian sympathizers is Ron Paul. Unfortunately, he'd never win the nomination, but he's actually very consistent with his beliefs and votes against government power and taxation.
That said, I hate most Republicans on most social issues, so it's hard to fully advocate anyone running on their ticket. But I'd probably vote for him over a Dem, but will vote Dem over whoever else might get the Republican nomination because they aren't nearly as good for free markets and are generally a lot less progressive on social issues.
I would probably just not vote if that were the case. I'm pulling for Edwards, but it's really a two-horse race right now, and I see Obama as the (much) lesser of the two evils between him and Hillary.
I would probably make an exception and vote Republican if Paul got the nomination, but he won't so it's a moot point.
A bunch of people try to get the nomination from both major parties (Democratic/Republican). A winner is determined for both parties, then those two go at it in the general election. So it's essentially just two choices.
Occasionally someone will run on a 3rd party ticket, and there will likely be 1-2 semi-big parties that field a candidate (Green Party, Independents, etc.) but Paul is going for the Republican nomination but has very little chance of getting it. So he won't be on the ballot unless a miracle occurs and he gets the Republican nom (he's something like a distant 4th right now to get it).
He can (and has) run as a 3rd party libertarian (back in '88 I think) but he isn't this year so there's no libertarian candidate.
Ron Paul is, to my knowledge, the only one who has run on the libertarian ticket in recent memory. But America is a ridiculously polarized country. Over here you're either Democrat or Republican, and such a political war rages between the two parties that the vast (vast) majority of people are never exposed to anything outside of these two. The Green Party made a push a few elections back, but faded back into obscurity once the Iraq war caused another great divide in the country.
So yes and no. It exists, but it's nowhere near relevant enough to cause any change. Paul is a multi-term congressman, meaning there's at least pockets of the country that agree with libertarian principals, but still a tiny amount by any relevant comparison.
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Jan 15th, 2008 12:08 AM
