Does Freedom Ring in Our Markets?

Benjamin Martin: "May I sit with you?"
Charlotte Selton: "It's a free country. Or at least it will be."
--The Patriot

Whenever I encounter commentary about our ‘current free market’ system, my skepticism gauge usually ticks up a few notches. Few have witnessed truly free markets on a large scale in our lifetimes.

Classically defined, a free market, or capitalistic, economy is a form of social cooperation where the means of production, which for our purposes will be broadly construed to include all commercial and transportation activities, are privately owned. Although entrepreneurs make the production and distribution decisions, it is consumers who hold sovereign power in market economies. Buyers, through their purchasing decisions, signal value to sellers who must constantly strive to serve the wishes of consumers lest their positions in the supply chain become endangered.

Government’s role in a market economy is limited to upholding the property rights of market participants. Often this entails protecting against fraud or contractual violations.

In the United States, it has been quite some time since the scope of government involvement has approached the free market ideal. Today, government interference pervades markets. This interference assumes a number of general forms, including (Mises, 1998):

Restriction. By restrictive measures government forbids production or sale of certain output (e.g., tariffs, legal tender laws, alcohol during Prohibition), prohibits certain methods of production (drilling for oil in Alaska, short sellling bans, patents), or makes production more difficult or expensive (mandatory licenses or certifications, environmental regulations).

Price controls. Government fixes prices, wages, or interest rates above (e.g., minimum wage laws) or below (current Federal Reserve monetary policy, rent controls) those prevailing in an unhampered market.

Inflation and credit expansion. Government engages in monetary and fiscal policies that encourage increase in money and credit supply (e.g., Fed ‘quantitative easing, government sponsored entities such as Fannie Mae (FNM) and Freddie Mac (FRE) that facilitate ‘cheap’ loans, FDIC insurance).

Confiscation and expenditures. Government engages in the confiscation of property (e.g., taxation in general), subsidies (ethanol, solar, farming), transfer payments (Social Security, health care, shovel-ready projects, etc.), and direct ownership (various equity positions, such as the stake in Citigroup (C), taken during the recent credit crisis).

Nearly all of the above examples were brought to life in the past 100 years, with many originating or escalating dramatically in the past few years. Those who claim that the last decade or two saw a net reduction in government interference have yet to present a compelling case. On the contrary, broad proxy measures such as tax receipts, federal government spending, purchasing power of the dollar, number of government agencies and employees, and national debt levels suggest that the rate of government interference has been increasing on a longitudinal basis.

If ‘market economy’ is indeed an inappropriate label for our current condition, then what is a more valid one? At the other end of the economic spectrum is socialism, or planned economy. In the socialist state, all means of production are publically owned. Government makes all production and distribution decisions, and is therefore intimately involved in all facets of economic activity.

In between is the interventionist state. Also known as managed capitalism or mixed economy, interventionism involves private ownership of productive means, but government interference, through various forms of command and interdiction, forces participants to alter their behavior from the free market ideal. Practically speaking, most if not all economies in the world fall somewhere in this interventionist middle ground.

Over the past few months, I’ve been chewing thru classic work for insight into the character of this in-between economic form, particularly with respect to its stability. Nearly all of the thinkers that I have encountered, including Hayek, Mises, Rothbard, Marx, and Schumpeter, see the interventionist middle ground as unstable and transitory—i.e., interventionist states are fluid in nature; they migrate toward either the market or socialist poles. Where these minds differ is on predictability and persistence of the directional pull, and on the inevitability of an ‘endgame’ destination.

Mapping our present position, it appears, is relatively straightforward. Charting our future path, however, is altogether more challenging.

Reference
Mises, L. 1998. Interventionism: An economic analysis. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc.