No, Government Doesn't Create The Free Market - America's Future

September 25, 2013

No, Government Doesn’t Create The Free Market

By: Adam Millsap

One of the misunderstandings propagated by the existence of an expansive government is the idea that only government can accomplish the tasks it has set for itself. A recent example of such thinking comes from the Huffington Post’s Robert Reich.

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Reich, a professor of public policy at the University of California, Berkeley, recently lamented the political right’s constant invocation of the “free market” (his quotation marks) as natural and inevitable. Mr. Reich believes that markets are never truly free, but are products of government rules. They are human creations that do not exist outside of a society, particularly a society with a government. “These rules [of markets] don’t exist in nature; they are human creations,” Reich argues. “Governments don’t ‘intrude’ on free markets; governments organize and maintain them. Markets aren’t ‘free’ of rules; the rules define them.” While it is true that markets need rules, it is not true that these rules must come from the government.

Academics don’t need to look far to recognize the power of a market beyond government control. R.A. Radford described, in a 1945 Economica article, the economic organization of a prisoner of war (POW) camp during World War II. Relatively advanced markets had formed for the variety of goods distributed to the prisoners by the Red Cross. Simple bartering occurred, but in the larger, more stable camps cigarettes became the common currency. That is, every good had a price in terms of cigarettes. Production of goods (e.g. pastel drawings) and services (e.g. laundry) formed in these POW camp economies as well. The prices of the goods and services were determined by the costs of production and the camp member’s willingness to pay for them; there were no wage controls. In time, a restaurant and a shop formed. These firms enabled prisoners to buy meals and other items without having to continuously seek out willing trade partners. Soon after their formation, those firms created a paper currency that was backed 100 percent by food. All of this complex economic organization occurred without any government rules or coerced organization of the type lauded by Mr. Reich.

A second group of examples that we are all aware of are black markets. Black markets are, by definition, free of government organization and rules because they actively avoid the heavy hand of the government. There are obvious black markets in illegal drugs, but various black markets exist in other goods in different parts of the country as well (a common one being cigarettes). All of these markets have rules, and — despite the violence that is associated with illegal drugs — many drug users and distributors never feel threatened when participating in these markets. The quality of drugs such as marijuana never receives certification by a regulatory agency, yet it appears that many dealers believe that it is in their best interest to sell a quality product that keeps their customers coming back for more. The rules of what can be traded, the terms of trade, how to resolve complaints, etc. are set by and enforced by the participants without any coercion by the government. This is not to say that these markets are perfect. But the fact is that despite the illegality of the goods being exchanged and subsequent lack of police protection many people are able to enjoy drugs like marijuana free from violence and government rule making.

It is unfortunate that in order to find markets free of such rules we need to examine illegal drug markets and POW camps but the extent of government intrusion has made examples rare. Mr. Reich’s claim that markets are not free of rules is really a straw man; no one who understands markets would ever argue that they are. However, just because a market needs rules does not mean that it needs rules created by a government.

Supporters of free markets do allow for a government role, but the government in this case is a referee, not a player or organizer. The government must enforce the rules set by the participants of the various markets. For instance, the government guarantees the terms of trade, such as contracts agreed to by the various producers and consumers, and it enforces property rights. The government is also responsible for enforcing the non-aggression principle — that is, the principle that a person is free to pursue their own ends provided that they do not forcibly interfere with another person’s ability to do the same.

Mr. Reich worries (without reason) that without government rules, slaves and babies may be traded and that Ponzi schemes and fraud will be pervasive. But previously slaves were traded with the consent of the government and slavery explicitly contradicts the non-aggression principle. Fraud violates the contracts between buyers and sellers and also has no place in a free market. A government whose role is to enforce the non-aggression principle, property rights and the terms of contracts can oversee markets without creating the rules of the markets.

Mr. Reich states that a proper democracy would create an economy that “would be working for us; we wouldn’t be working for the economy.” But a democracy that imposes rules on the various markets of an economy can never work for all of “us”. The majority, whether it is one of people or a legislative body, never consists of all of “us” and thus it must be promoting something that the minority finds disagreeable.

Lawmakers should not attempt to benefit some people at the expense of others, as Mr. Reich argues. Instead, as Nobel Prize winning economist Friedrich Hayek said in The Mirage of Social Justice, the goal should be “only to increase the chances of unknown persons whose opportunities will chiefly depend on their individual knowledge and skill as well as on the particular conditions in which accident will place them.” In other words, the rules of a market should be created absent the intent to benefit any one person or group in particular, but rather to enable the largest amount of unidentified people to achieve success; however each of them may define it. This may be a difficult objective but, contrary to what Mr. Reich believes, it is the proper one to pursue.

Adam Millsap is a 4th year PhD student in economics and graduate instructor at Clemson University in Clemson, SC. Adam Smith memorial image courtesy of Big Stock Photo.