Thursday, August 25, 2011

Free Markets as Regulations

In comments on my post Penn Jillette's libertarianism, Rob wrote:

Exactly! The second someone decides some bit of matter is "property," unless we want to ascribe mysterious new properties to this matter, we pretty much need a referee to decide which bits of matter are whose. Well, sometimes we won't like the ref's decisions.

Dbonfitto wrote:

Regarding the use of force to redistribute food to the poor as bullying: Isn't it also bullying to use government force to protect private property?

This brings up an important point about private property.

There is a tradition of speaking as if free market principles represent an "unregulated" economy and that a "regulation" is something that goes against the free market.

This is a myth - a fiction - as much as any claim about gods or angels.

The fact of the matter is that what is called the "free market" is a set of regulations.

It is a set of rules that governs issues such as who owns what, how ownership gets transferred from one person to another, and what one may do with the things that they own. It comes with a set of requirements and prohibitions. It distinguishes legitimate ways in which one might reduce the value of another person's property (e.g., by opening up a competing business nearby) from illegitimate ways (e.g., starting a fire on one's own property that spreads onto one's neighbor's property).

And how are we going to decide issues that are in the gray area in between? What if I open up a factory that rusts your equipment? Or one that produces obnoxious smells or sounds that drives away your customers or prevents your enjoyment of your property? What if I build a building on mine that blocks your view?

And who gets to decide what counts as an obnoxious sound or smell anyway? Or whether a person has a right to a view if the view is the reason they bought the property to start with?

All of these decisions about what these rules and regulations are need to be decided in a set of government institutions and adjudicated in a court system. In short, it requires a huge regulatory bureaucracy. That bureaucracy gets to decide issues such as: What counts as a valid contract? What procedures should parties go to when they have a dispute over what a contract actually says, or whether its terms have been met? What should be done to somebody who fails to live up to their terms of the contract? How types of evidence should judges look for in answering these questions?

And, ultimately, the regulating bureaucracy is going to back up its decisions on what counts as the legitimate versus the illegitimate use and transfer of property from one person to another by force. In our contract dispute, you will take the contract to a judge that will make a decision - and will back up his decision with the power to direct violence against those who do not accept that decision. Either that or we end up with private wars - the soldiers of one company versus the soldiers of another, as each tries to force their interpretation of the contract on the other.

So the question, even when we are talking about the "free market" is not a question of whether we should adopt a regulated economy or an unregulated economy. The question is: Which set of regulations should we adopt?

Which invites the further question: What criteria are we to use in evaluating these different regulatory systems?

The position that all regulation is inherently bad and we should have a free market economy is simply incoherent. Regardless of whether or not a free market economy represents the best set of regulations, it is still a set of regulations - and a free market economy is a regulated economy.


mojo.rhythm said...

Spot on.

Private property is a social contract. Not a natural right. Hence it can be changed and re-adjusted in accord with the goal of maximizing the fulfillment of good desires.

Moreover, some regulations actually increase competition (e.g. a public health insurance option) and reduce information asymmetry (e.g. Elizabeth Warren's consumer protection bureau)--both very pro-market qualities.

BTW Alonzo. As far as economics is concerned, what best describes you? Neoclassical? Monetarist? New Keynesian? Post-Keynesian? Austrian?

UsefulMom said...

Thank you for this post! I'm so tired of hearing that the solution to every social and economic problem is deregulation and free markets. I don't feel that any pure system (totally free or totally regulated) will work for us in the long run. The solution is neither extreme.

The solution is moderate, reasonable regulation and a willingness to adapt, adjust, create or destroy regulations when it seems fit. You're post was really refreshing.

Anonymous said...

Very good post.