Free Our Markets

by Howard Baetjer Jr

  But that confronted me with a big problem: I knew from high school history that capitalism had caused the exploitation and suffering of workers in the Industrial Revolution. I knew that unfettered capitalism had caused the Great Depression. I knew that abusive monopolies are inevitable in the absence of anti-trust restrictions. I knew, as everyone knows, that strong government regulation of pharmaceuticals via the Food and Drug Administration is necessary to prevent public health disasters. I saw that full freedom of enterprise would mean that anyone could practice medicine without a license, and I knew that would be disastrous. Though I was persuaded that it is wrong to tax people—to seize their property against their wills—even for the laudable purposes of feeding, clothing, healing, or educating the poor; I could not imagine how the poor could be fed, clothed, healed, or educated without such taxation.

  My cognitive dissonance was intense. How tragic, I thought, that principles of moral human behavior—respect for others’ property and freedom of choice—should have such dreadful practical results. …But what I knew turned out not to be so.

  I read hungrily: Hazlitt, Friedman, and eventually Hayek. (Henry Hazlitt’s Economics in One Lesson is the single most valuable book in my economics education; don’t miss it.) I thought long and hard for myself. Gradually, on one concern after another, I was reassured. I became persuaded, as Einstein said, that “God does not play dice with the universe.” The ethically right system of social rules—the classical liberal prescription of individual liberty, private ownership, and free markets—was also gloriously productive and beneficial to rich and poor alike. Indeed, it is the setting in which the poor become wealthier the fastest.

  At the same time, I began to question the efficacy of government for improving human lives. I came to suspect that taxation, restrictions, mandates, subsidies, licenses, tariffs, bailouts, prohibitions and all the rest, even if well-intended, usually protect monopoly, cause recession, burden the poor, enforce racial discrimination (as I learned from Jennifer Roback, the Jim Crow laws were legislation), obstruct education, and so on.

  My life had changed. I found myself driven to participate in the great struggle of ideas I saw being joined. I left my English teaching and threw myself into studying and teaching economics and “the ideas of liberty.”

  Even before I went back to graduate school to study political philosophy and economics, I took every opportunity I could find to explore and discuss the merits of free markets. For two years I worked for FEE, taking “the freedom philosophy” to schools and colleges. Also I had long, deep talks with a group of wise and thoughtful friends who were willing to engage with me. It was tough going.

  It was tough because those I talked with often knew the kinds of historical inaccuracies I had known until I started to study. They had been taught, as I had been, that government is necessary to make up for the market’s inadequacies and to remedy “market failures” in various areas: poverty, healthcare, wage rates, monopoly, schooling, recessions, sweatshops, trade imbalances, the environment, developing countries, and many more. I tried as best I could to defend economic liberty on each those different issues and concerns.

  I went to study at George Mason University and gradually became a better spokesperson for liberty as I learned more economics and economic history, but I grew frustrated at being on the defensive so much of the time, trying to explain why some intervention or other would cause more harm than good. I wanted to make a positive case for what Adam Smith called “the obvious and simple system of natural liberty.” Often those I talked with about particular policies didn’t have the basic understanding I was gaining of why free markets work at all, so I found myself wanting to go back to fundamental principles and start explaining there.

  I wanted to help others understand why economic liberty works to make us all better off in general, not just on particular issues—but I didn’t know how to go about it.

  I paid close attention, however, to the different kinds of arguments I heard and read, both for and against free markets. The more I learned, both in courses and in listening to fellow students debate, the more it seemed to me that all the most persuasive explanations of how and why freedom makes us all better off are grounded in three basic principles: One is that the prices generated in free markets communicate the dispersed knowledge people need to coordinate our different activities. The next is that profit and loss in competitive markets guide discovery of what works well to satisfy human wants and needs. The third is that market-based incentives are far healthier than the incentives in government intervention.

  When I was invited to teach an undergraduate public policy course, I took the opportunity to organize it around these three categories. My aim was to help my students learn to think about and evaluate public policy as I was learning to—as free market economists do—so that they could understand why free markets tend to generate solutions to social problems, and why government interventions tend to add new problems to old.

  The course succeeded. Organizing the case for economic liberty around knowledge, discovery, and incentives worked well enough that Jerry Ellig and I developed a set of summer seminar lectures for the Koch Summer Fellowship program the same way. At one of those seminars Peter Boettke, also there to lecture, suggested that I write up the framework in a book, adding an application or two. That was a good idea!

  About ten or fifteen years later (I have lost track), here is the book Pete suggested I write, its ideas fleshed out, refined and polished in many lectures in the intervening years.

  Free Our Markets aims to show readers that liberty, not the force of government, is the means to achieve the goals we all have for humanity—high and rising standards of living, increasing security and abundance for all.

  A tragedy of our time is that so many good-hearted people, people generously concerned about the well-being of others, don’t believe this. Of course, most people believe in mostly free markets. Since the collapse of the Soviet Union, very few hold that markets should be abolished. Most concede that a large degree of private ownership and freedom of exchange are necessary for society to work at all. But—and the “but” follows immediately—they believe that governments must restrict freedom to make capitalism work properly. They believe that full economic freedom would result in various harms that can be avoided with government intervention.

  This belief is tragic and ironic. It leads good people to try to improve on the “simple system of natural liberty” using coercion that they mean to be benign. They try to improve society faster than is possible, by means that can’t work, and their efforts set society back.

  To an advocate of full economic liberty such as myself, they ask such questions as these: “How can you claim that X should be unregulated (meaning unregulated by some government body)?” “Doesn’t the government have to restrict Y?” “How could we possibly leave something as important as Z to the free market?”

  Like many classical liberals, I am tempted to respond on principle alone. I could stamp my foot and protest, “Darn it! People ought to be free!” meaning free from others’ control of their lives and property. But I have learned that many good people—people whose generous concern for humanity I don’t doubt—will not endorse that kind of freedom as long as they think it would leave people worse off than they would be with some government intervention.

  Hence this book. It explains why, for practical economic reasons, free markets generally produce better results than even the best intended and most carefully crafted government interventions. The ideas presented here are the best of what I have learned from economists whose work I most admire, boiled down to foundational principles and illustrated with stories and examples for the interested layperson. The book offers a mental framework with which to analyze policies, a way of thinking about how and why the underlying institutions of a free market—private ownership and freedom of exchange—allow human beings to flourish, and why it’s unwise to compromise those institutions at all. My hope is that if peop
le come to appreciate why the free market works to make people better off, they’ll encourage their politicians to stop interfering with it, and we’ll all become better off.

  Thomas Sowell is supposed to have said, when told he had a lot of faith in free markets, “I don’t have faith in free markets; I have evidence.” I hope readers of this book, in the same situation, will be able to answer, “I don’t have faith in free markets; I understand how they work.” Put that way, the statement would not be strictly true, because free markets are too complex really to understand. Rather, the statement would mean, “I understand the principles on which free markets work, so I understand why they are indispensable to human flourishing.”

  Before going further let me clarify what I mean by a “free market”: I mean the freedom of all competent adults to exchange their justly-acquired property with one another as they see fit, as long as they respect others’ property and equal freedom. The book is thus pro-market, not pro-business. In a free market, businesses are subject to the relentless discipline of market feedback: the choices of customers, suppliers, and investors to deal with them or not. The crony capitalism we have seen of late in the United States, in which governments subsidize, sponsor, bail out, or otherwise protect certain businesses from the discipline of market profit and loss, is not free markets. It’s sort-of free markets, somewhat free enterprise. It’s precisely what this book condemns: it’s government intervention.

  Furthermore, though I focus on economic activity and use the term “free markets” to refer to the liberty of peaceful interaction, I am just as dedicated to human freedom to engage peacefully in non-economic activity and exchange. Marriages, bowling leagues, religious observance, charities of all kinds, non-profit associations, NFL fan clubs and the like are all valuable human endeavors to which the same basic rules should apply: respect for others’ property and freedom of association on peaceful terms. I advocate and work for a free market in a free society.

  Part I of this book argues that human beings need free markets because of three foundational principles mentioned above. A short-hand summary is as follows:

  1. We need the knowledge that free market prices give us;

  2. we need the guidance in discovering wealth-creating activities that free market profit and loss give us; and

  3. we need the incentives to serve others that private ownershipfand freedom of exchange give us.

  With this information and guidance and with these incentives, people cooperate and create for one another abundantly. Any interference with the free market process, no matter how well-intentioned, is likely to diminish the creativity of the system.

  Part II explores regulation. It addresses a challenge to free markets that is so widely accepted as to be treated as a truism: “Yes, free markets are well and good, but they have to be regulated to work properly.” Of course markets have to be regulated, but not by government, as the challenge implies. Part II applies the principles discussed in Part I to show that bottom-up regulation by market forces outperforms top-down regulation by legislators and bureaucrats, which generally causes more harm than good.

  Part III is a case study of the housing boom and bust and the financial turmoil of the first decade of the 2000s. I began writing this book well before these events occurred, so I had no plans for such a section. As the turmoil played out, however, many commentators blamed it on “unregulated free markets.” I saw that potential readers would probably not take seriously a book on the virtues of free markets that ignored all that economic distress. Hence, Part III. For the book, the timing worked to great advantage, because the episode helps me make my case. As Part III will show, it is precisely a variety of wrong-headed interventions into the economy—gross failures to follow the principles that make for spontaneous economic order—that caused all that damage to the economy.

  Unwilling to end on a negative note, I close with happily imagining all the good that can come from freeing entirely our markets in primary and secondary education. Change in this direction is starting to occur now. It is immensely promising. I hope my readers will help spur it along.

  The economic philosophy set out in Free Our Markets is not new. My favorite expression of it is Thomas Jefferson’s. In his first inaugural address in 1801, he reflected on the many blessings Americans have, such as protection from invasion by the oceans, a bountiful land, an industrious people, and religious tolerance. Then he asked his listeners rhetorically, “What more is necessary to make us a happy and a prosperous people?” He answered his own question this way:

  Still one thing more, fellow citizens, a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities.

  Note how radically limited a scope for government Jefferson defines. Its job is to “restrain men from injuring one another.” That’s all. It should “leave them otherwise free.” As to regulation, government should let people “regulate their own pursuits of industry and improvement.” As to taxation, government “shall not take from the mouth of labor the bread it has earned.” Are there other government functions? No: “This is the sum”—the totality—“of good government.” It should “leave [us] otherwise free…. ”

  Jefferson implicitly rules out any role for government in educating children; in providing for the poor, the sick, and the old; in regulating wages, what people ingest, health care, or the financial industry; in subsidizing exports, agriculture, the arts, or foreign governments; in bailing out banks, insurance companies or car companies. All of this is unwise and unfrugal.

  Educating children; providing for the poor, sick, and old—these are “pursuits of industry and improvement” that people should undertake as they see fit in mutual association with like-minded others. It is not for government to “take from the mouth of labor the bread it has earned” in order to care for the poor, sick, and old. That care lies in the personal responsibility of the citizens.

  Regulating industry likewise should be left to people in free association with one another. Government must always “restrain men from injuring one another,” but where there is no injury, where people freely consent to their own regulation of their affairs, government has no role. “This is the sum of good government, and this is necessary to close the circle of our felicities.”

  That was wise in 1801; it’s just as wise today. What follows explores why.

  Part I

  Principles of Spontaneous

  Economic Order

  Does any one person know how to make a pencil? How much profit is too much? Should price gouging after hurricanes be banned? Is there any social value to profit? Does the U.S. Forest Service sell out the National Forests? How did an oil company get permission to drill for oil and gas in a bird sanctuary owned by an environmental group?

  In these first three chapters, with questions like these and stories from real life, we investigate three broad principles that, taken together, explain why free markets are so effective at helping people flourish, and not just rich people, rich and poor alike. By free markets I mean liberty in the economic realm: liberty for all of us as individuals to do as we please with our talents and property, in peaceful interaction with others.

  Free markets are wonderfully productive, peaceful, and orderly. And, marvelously, their order is spontaneous, not planned. Let us try to understand in principle (not in detail; the detail would overwhelm us) how this order emerges.

  Chapter One

  Prices Communicate Knowledge

  Prices are precious.

  The economy is a fantastically complex, world-wide system of human cooperation. We all pursue our own purposes; no one is in charge of the whole system; and yet we cooperate. We all cooperate daily with countless people we don’t know, but whose specialized knowledge of ever-changing circumst
ances we must somehow take into account in order to coordinate our actions with theirs. Prices make this knowledge available and this cooperation possible.

  We need free markets because we need the information that free market prices give us about what others know. We have no other way to communicate this information to all who might use it. This is the first of three principles of spontaneous economic order that account for why human beings need free markets:

  Market prices coordinate the actions of billions of people pursuing their myriad goals, by communicating the changing, particular knowledge of everyone about the availability and potential uses of everything.

  This chapter explores this principle. It looks at how prices coordinate all our different plans and how helpless we would be without market prices to guide us. It examines how the nature of human knowledge makes prices necessary and explains why prices should always be allowed to go to their free-market levels, even after natural disasters.

  Three Lessons from “I, Pencil”

  We begin our discussion of knowledge with a classic—Leonard Read’s wonderful 1958 article, “I, Pencil.” As you read the excerpt below, please note:

  how many different skills are required to make a pencil,

  how many different materials are used, and

  in how many different places around the world these skills and materials are found.

  I, PENCIL

  MY FAMILY TREE AS TOLD TO

  Leonard E. Read

  I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.

  Writing is both my vocation and my avocation; that’s all I do.

  You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery—more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, as the wise G.K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.”