Free Market Riot

If I told you what it takes
To reach the highest high
You'd laugh and say nothing's that simple
--The Who

My sister and I were chatting last night about the conclusion, drawn by many, that 'free markets' are the cause of our economic and social problems.

To assess the validity of this conclusion, we first need to define what free markets are. Free markets are social phenomena where people engage in unencumbered economic exchange.

Exchange is the result of contracts between buyers and sellers, and there is no outside interference on who contracts with whom. Sometimes the contracts are implied and informal, such as in the instance of the purchase of a pack of gum from a grocery store. Julie agrees to give one dollar to Krogers (KR); KR agrees to give one pack of Wrigley's Spearmint gum to the Julie.

Sometimes the contracts are explicit and formal, such as in the instance of the purchase of a home mortgage from a bank. The Smiths and a Wells Fargo (WFC) representative co-sign an elaborate set of documents in which the Smiths agree to pay 4.75% interest annually over 30 years to WFC; WFC gives the Smiths $200,000 today so that the couple can buy their dream home today.

Government's primary role in free markets is to preserve individual property rights, particularly as expressed via the contractual agreements between buyers and sellers.

The other key feature of free markets is capitalism. In capitalistic systems, productive capacity is privately owned. The owners decide what and how much to produce. Government has no say in the matter as long as property rights are not violated.

A common misperception about free markets is that the balance of power is tilted towards the producers--and in particular 'big business.' It is thought that capitalists can exploit the system since they control the means of production.

In free markets, however, the real power rests with consumers, not producers. Consumers, through their daily purchasing decisions, send signals to producers on what constitutes value. Producers must respond, or be driven out of business by others who satisfy buyers' needs with better products priced more efficiently.

It is therefore not monopolistically-minded producers nor government planners that determine the structure of production in free markets. Instead, it is consumers who solve society's basic economic problem of how scarce resources are allocated.

Freedom of choice, the bedrock of liberty, drives free market systems.

Unfortunately, the system described here exists in construct only. It is likely that few of us have experienced truly free markets on a large scale in our lifetimes.

All modern markets are interventionist in nature. Outside entities, primarily in form of government agencies, interfere with the contracting and production mechanisms to produce outcomes that, by definition, differ from those that would be obtained by free market actors.

Those who blame our problems on extant economic configurations are correct. But these configurations are not based on freedom. Instead they are based on interventionist measures that are driving us into the ground.

More the flawed nature of interventionism in future missives.

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