Sunday, May 10, 2009

Myth of the Unregulated Market

Are free markets unregulated? Are there no controls on the extended order?

Essentially, economics is the study of how resources are applied and how the factors of production are managed in the struggle to create the wealth that sustains human populations.

Intellectual elites, proud of their intelligence and rationality, are unable to imagine that a self-ordering system could efficiently allocation of resources and manage production. When these elites see a functioning system they typically have two reactions:

1) It really isn’t self-ordering (because those things aren’t possible) so there must be hidden, and sinister, forces making the necessary decisions: the supposedly-free market is not free but regulated by Capitalists or the Wealthy or Jews, or some evil combination thereof. (See postings on Manichaeism)

2) A progressive intellectual elite (themselves), floating above the grubby struggle for personal gain that infests most of humanity, can, by making the decisions, improve efficiencies in production and allocation, increasing aggregate human wealth while allocating that wealth more fairly.

Even if they don’t believe in the international capitalist conspiracy, the rationalists see instabilities and confusion in the Free Market and just know they could do better by rationally regulating it. Conclusion: an openly-regulated economy would be a vast improvement over one covertly-regulated, or subject to irrationality. This conceit goes back at least to the French Enlightenment and is the subject of Fredrik Hayek’s book “The Fatal Conceit – the Errors of Socialism”.

I addressed the Manichaean myth of the hidden regulators in earlier essays – the pleasant and self-exalting idea that one is on the side of “good”, fighting against “evil”.

The free market is always regulated: by reality, by competition for scarce resources, and the fact that nobody willingly participates in any transaction unless he believes the transaction will be good for him.

Reality: only some things are possible. Everything of value has limits. Time and other resources used for one endeavor (e.g., to create one product) are unavailable for use on another. Rationalists may have glib arguments otherwise, but reality always wins. The free market operates within, and acknowledges, the realm of the real.

Competition: With all resources being limited, tradeoffs must be made in where to apply any given resource. In the most-free of markets, those who wish to have or use scarce resources must compete with others having the same desires. While perfection is impossible (see Reality), competition tends to move resources to those applications providing the greatest payoff (increase in total wealth) for society. Actions taken in a free market are regulated by the competing demands for scarce resources. Prices are how potential users indicate the value they place on each resource.

Mutual Benefit: in a society with individual liberty, every person is able to walk away from any transaction if he chooses. No one is coerced into offering for sale, buying, lending, or borrowing anything. Free markets are thus regulated by the natural requirement that any transaction must be to the benefit of all parties involved. Transactions structured for the benefit of one party at the expense of others simply don’t happen.

One of the cool things about this regulatory regime is no amount of lobbying can change these regulations, unless the free market is turned into a “not-quite-free market”, that is, the free market is destroyed. In any economic organization other than the extended order of mutual cooperation – the Free Market – regulations are subject to governmental whim and the lobbying, influence-peddling, and rent-seeking that government control always generates.

The regulation of the free market is also impersonal, universal, and timeless. They are laws of nature and laws of human nature. The regulations come about from the decisions of free people, not the intellectual constructs of those who see themselves as smarter and wiser than the rest of humanity.

If you read or hear someone mention the “unregulated free market” they are either ignorant or lying. Probably the former.