by Gordon L. Anderson, Ph.D.
Many writers confuse a free market with a laissez-faire (or leave alone) approach to the market. This is a serious mistake. A free market only functions with a level playing field, or “planned competition” as Friedrich Hayek, referred to it in The Road to Serfdom. Laissez-faire is what Thomas Hobbes called “the state of nature.” This is a state in which the strongest take what they can from the weak. In the state of nature there is no legal order. In the United States we might think of the Wild West in the nineteenth century or some inner city areas where gangs freely roamed in the twentieth century. Or, we might think of the formation of the Russian mafia after the collapse of communism.
The goal of a free market is to allow everyone to compete in order to provide the most desirable goods and services at the lowest prices. In a laissez-faire economy the strongest and most powerful people or corporations want to control the market and prevent the majority from playing. The “invisible hand” can work in a free market, it cannot work in a laissez-faire economy. Today we see lobbyists for the largest corporations using their influence to get legislators to write laws that either create a laissez-faire market, which they like to call a “free market” to hoodwink the public, or to secure laws that give them direct advantages. You will not find a lobbyist for a large corporation advocating a genuine free market.
Many politicians will tell you the answer to large predatory corporations is to “regulate them.” Various forms of regulation include taxes and fees imposed by the government, government oversight committees that dictate corporate policy, or nationalization or socialization of the industry. In this case government is the beneficiary of the regulation, imposing itself through force upon the industry and redirecting some profits of the industry for some ostensibly public purpose. Regulation, in these forms, transfer some control or ownership of the industry to the government, either directly through law or indirectly through taxes or fees. This type of regulation does not create a free market in which the average person can move in and compete in the marketplace. Regulation is a term the government can use to hoodwink the public into believing it is providing a solution while all along it is simply using its power to forge a partnership with the outlaw corporation. In a government where such forced partnerships are legal, you are very unlikely to see a politician advocating a genuinely free market.
Let’s try to illustrate what we are talking about with a couple of examples. The first will be a Superbowl game. The laissez-faire approach would be to let everyone on the field play without referees. In this case, you would have anarchy, violence, the strongest players manhandling their way to a victory. This would in no way resemble fair competitive game that people would enjoy. It would not be a level playing field. One approach to regulating this game would be an attempt to weaken the strongest players by adding weight to their back, restricting their range of motion, or by mandating prescribed actions they must follow. This type of regulation fails to provide genuine free competition. It slows down the game and makes it less interesting because those with the greatest skill or strength are forbidden from using it. Neither the laissez-faire approach nor the regulatory approach leads to an acceptable Superbowl game that people would pay to see, or advertisers would be willing to support. The only way the game will be exciting is when the game is played by rules that stimulate competition, treat everyone the same, and has rules that are enforced by referees who create no imposition to fair play. However, if someone violates the rules they are immediately, and impartially, enforced by prescribed penalties. The role of the referee in a football game is similar to the role of government in a free market.
The second example I will use is the rules of driving on a highway. The rules, which are aided by the posting of signs, enable the flow of traffic so that users can get to their individual destinations without having an accident. Not to have these rules would lead to a system of anarchy on the highway that would prevent people, especially those without heavily armored vehicles, from reaching their destination in a timely manner and without vehicle damage.
The rules of a highway are considered legitimate when they apply to all drivers equally and assist drivers in attaining their destinations. If a particular class of people got shorter stoplights, or access to special roads, people in other classes would not consider the rules legitimate. If some classes of drivers were forced to go a long circuitous route, while others were allowed access to a direct route, the system would not be considered legitimate by those against whom it discriminated. Even people of conscience in the classes the rules favored would be struck by guilt and not consider such rules legitimate.
Traffic is not what we call “free-flowing” without the rules that plan for its to free flow. A free market, like free-flowing traffic, requires rules that, when followed, make it a free market. These rules include penalties and fines against anyone caught using their power to drive another competitor from the market by any means except selling better products at lower prices. They also need to forbid impeding the flow of traffic through some form of regulation that slows it down or tries to live parasitically on the system. With fair rules, and knowledge that fines will be enforced when the rules are violated, very little policing of the highways is necessary. Police might need to only patrol a street once a month to ensure drivers obey the rules. However, if the rules were unfair, or if they were not enforced at all, people would do lots of things to get around them, requiring constant police supervision that would be too expensive to maintain.
It is important to understand that a free market is neither a laissez-faire market nor a regulated market. Rather it is a market based on a rule of law in which the role of government is a referee on a level playing field, not trying to be a player itself. When the government tries to pick sides or set up in business itself, it effectively throws the game. In practice, this is what nearly all â€œregulationâ€ amounts to. In a free market, neither any corporation will suffer nor any government body will earn money when laws are obeyed. Only when a business would violate the rules, and a fine would be imposed would the income of the business or the policing body be affected.
Today we witness our legislators, particularly on the federal level, engaging in a contest between oligarchy on the one hand and welfarism or statism on the other. This is a direct result of a system in which nearly all lobbying represents one of these two sides–laissez-faire or regulation–while almost no lobbying represents a genuinely free market. This system is structured so that it is easier for politicians to give lobbyists from both sides legislation to serve their respective interests than to protect a free market. Thus we give advantages to corporate lobbyists and welfare lobbyists alike. The result is the continual erosion of the free market, and thus the power of the U.S. economy, from both ends.
The Constitution of the United States did not directly address the proper use of economic power. It was concerned with political power and left monetary policy to the legislators. A responsible monetary policy will not be to either remove government from the process, or to regulate industry in a way that impedes the economy. Goverment needs to be restored to its proper role of being a referee that enforces good rules that allow everyone to play on a level playing field and respects the basic laws of economics. This will allow for genuine competition for all Americans.
The citizens need to hold legislators accountable for this. My own suggestion elsewhere has been to amend the Constitution to separate commerce and government the way the founders separated religion and government. The amendment could be as simple as “Congress Shall Make no Law Respecting an Establishment of Commerce, or Prohibiting the Free Exercise Thereof.” This should be a good first step in restoring the free market, increasing economic productivity, and ending economic and credit bubbles and corruption.