Economic Fallacies: "'Free Markets' Equals Lawlessness"

The "'Free Markets Equals' Lawlessness" fallacy understands free markets as markets without any restriction on the activities of individuals or corporations.

To examine the idea of free markets, let's look at one of our most cherished freedoms: freedom of speech. Most Americans see free speech as a very positive thing. They seek to protect it and encourage it. Yet every American knows there are limits to free speech. You can't yell fire in a crowded theater or incite a crowd to violence. Libel and slander are prohibited. We disallow false advertising. Perjury is illegal. Does this mean we don't believe in free speech? No. It just means that we know that every freedom exists in relation to other freedoms, rights, and obligations that must be protected.

We value free speech so much that we are willing to allow Klan rallies, anti-war demonstrations, and other unpopular events. It is better to have dissent out in the open so the public can evaluate the truth rather than having a political bureaucracy decide what may and may not be considered. It is one of the checks that our society places on government control.

We tolerate the abuse of free speech by those who abuse truth and righteousness because we value what free speech might mean when the government is on the wrong side of truth and righteousness. While we recognize it is unfair to incite violence, slander others, or perjure ourselves, we do not invent some "higher standard" of legally enforceable speech called "fair speech" to rein in every abuse that violates our sensibilities. We use our free speech to counter unfair speech, and we work to instill a higher sense of virtue in those who abuse free speech. We see a similar attitude taken toward other freedoms.

In Contrast, many Christians view economic freedom as a necessary evil. It is something dangerous that must be measured out. Christians want justification for why people should have economic freedom instead of placing the burden of proof on those who would restrict freedom, instead of seeing abuse as a necessary consequence of human freedom to be combated by virtuous people, just as with free speech, every economic injustice is highlighted as a justification for more restriction on freedom as if freedom itself were the problem.

The existence of "free markets" is not the same as the absence of law, nor is economic freedom independent of relationships to other freedoms. Markets are ideally made up of non-coerced participants trading with each other, each having full information. That ideal is never fully realized, but that is the aim. Essential to markets are laws and customs that create just and honest transactions (commutative justice.) Also essential is a just and honest court system for hearing and resolving disputes (remedial justice.)

One way commutative and remedial justice come into play is with what economists call externalities. Externalities are instances where a third party benefits or suffers economically from a transaction they weren't party to. For example, if you are my next-door neighbor and do a beautiful job landscaping your front yard, my property value goes up. That is a positive externality. However, suppose you are running a factory upstream from my community and dumping waste into the river so the water is unusable for me. In that case, you are generating a negative externality. Enforcement of my property rights requires that I be compensated for your use of my resources.

Strong juridical frameworks are essential for free markets because we know that markets create externalities and there are imperfections in markets. Unfortunately, Western nations are only now beginning to appreciate how essential juridical frameworks (combined with the values and institutions that underlie them) are to the function of markets. Western nations have just assumed the presence of Western property rights and ideas of justice by introducing free markets to developing nations. Many of these economies have 80-90% of their business happening outside of the formal economic system, and posts within the formal economic system are held by a connected elite who view these positions as their vehicle for personal enrichment through bribes and extortion. The imposition of free markets without attention to underlying social institutions and values tends to concentrate great wealth in the hands of the elite with little benefit to the vast majority.

Sometimes corporations from economically advanced nations have received aid from governments (political and military) to thwart change in developing nations and to protect the corporations' interests. Many lay this out as a critique of capitalism or free markets. It isn't. It is a critique of imperialism. Imperialism is not a component of capitalism. Imperialism is possible whenever one nation has the economic strength to fund political and military interventions in the affairs of other nations. Capitalism is one way to amass the wealth necessary for exploitation and domination. It is not peculiar to capitalism.

On a similar note, many argue that colonialism was a key ingredient to the formation of capitalism. Instead, I would suggest that colonialism was a holdover from a pre-industrial era. It was not essential. In fact, it is possible that colonialism hampered the expansion rate of worldwide wealth, even in developed nations. Protectionism by the USA and Europe on various agricultural goods is a contemporary expression of this same anti-market thinking.

Free markets circumscribed within a tight juridical framework are essential for prosperity, but we are learning that these arrangements can't be magically imposed on a society. Appropriate intermediate steps are frequently needed to emerge the underlying culturally appropriate institutions, values, and virtues that undergird economic freedom. Economic transformation through "extreme makeover" approaches rarely works.

"Free markets" is not a synonym for unbridled or unfettered licentiousness. This is a widely propagated distortion by polemicists that want more government involvement in the marketplace. The attempt is to paint a picture of a Social Darwinist "survival of the fittest" dystopia and cast anyone who speaks favorably of free markets as a heartless tyrant from a Dickens novel. It is similar to calling a free speech advocate a racist because she supports the freedom of the KKK to speak publicly. A free-market approach is none of this.

A free-market approach values freedom. It values virtuous market players making decisions within a strong juridical system. It recognizes the overwhelmingly superior ability of markets to synchronize supply and demand, and it places the burden of proof on those who would restrict markets, not those who opt for freedom. It is a system that recognizes that the price of freedom is some people behaving poorly. It is anything but lawlessness and licentiousness.

In conclusion, Pope John Paul II from Centesimus Annus:

Can it perhaps be said that after the failure of communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this model which ought to be proposed to the countries of the Third World which are searching for the path of true economic and civil progress?

The answer is obviously complex. If by “capitalism” is meant and economic system which recognizes the fundamental and positive role of business, the market, private property, and the resulting responsibility for the means of production as well as free creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a “business economy,” “market economy,” or simply “free economy.” But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative. (Centesimus Annus, 42)

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Comments

[Nate Custer]

Mike,

Have you read David Korten's Post-Corperate World? He makes a simular arguement, that for markets to work effectively good laws are required.

Do you think laws that require a corperation to bear the costs of polution it makes on a community are fair? Korten argues that the economics costs are passed off unfairly to governments and municpalities and thus are information the markets do not have in effectivly setting prices and/or shaping demand.

Nate

[Michael W. Kruse]

I haven't read Korten but I agree with your general argument here. The devil is in the details. Determining what the cost of an actual externality is tricky. Costs not allocated to the business become a subsidy but if costs are over allocated they become a penalty, hurting the economy.

Take the CO2 induced warming theory. Is CO2 an inconsequential contributor to warming temps or not? If it is a contributor, then is the change in climate of neglible or catasrophic importance? Now set a price.

These are some of the challenges.