Is This a Free Market?

No, says Chris George.
From The Economist:

Faith in the free market is at a low in the world’s biggest free-market economy. In 2010, 59% of Americans asked by GlobeScan, a polling firm, agreed “strongly” or “somewhat” that the free market was the best system for the world’s future. This has fallen sharply from 80% when the question was first asked in 2002. And among poorer Americans under $20,000, faith in capitalism fell from 76% to 44% in just one year. Of the 25 countries polled, support for the free market is now greatest in Germany, just ahead of Brazil and communist China, both of which have seen strong growth in recent years. Indians are less enthusiastic despite recent gains in growth. Italy shows a surprising fondness for markets for a place that is uncompetitive in many sectors. In France under a third of people believe that the free market is the best option, down from 42% in 2002.

Predictably, this led to the “this is not a truly free market” type comments and responses on Reddit. It shouldn’t be a surprise that I agree. This is an incredibly stupid poll. I highly doubt they offered a definition of “free market,” let alone account for variation in understanding of it. This was simply a poll to rate the emotional pull of a phrase.

The following is an exchange** I had with someone who thinks “free market” is an appropriate description of our current economic system:

The idea that the US does not have “a free market” to you seems to mean that we are controlling all these markets with all kinds of burdensome taxes and regulations that are so pervasive as to distort the market from performing optimally. But why do those things exist, and what effect are they really having?

Taxes (excluding tariffs) affect many different markets simultaneously, almost by design. The cost is spread out to limit the impact. Of course, they exist to fund government, which in turn exists to deliver valuable services. Are we debating whether or not government services are (or at least can be) more valuable to society than the taxes that are extracted to provide them? I’m happy to have that debate if we are. Public goods, rule of law, and necessary regulation will make my case for me. US tax rates are generally low in comparison with our peers (in technology, not scale) around the globe, and in my opinion the cutoff point is too low. We aren’t buying as many government services as would be more valuable than the cost in tax as we could be.

Regulations are usually created to address some kind of exception where a normal market will not function optimally (meaning produce maximum welfare) in their absence. They are, by this definition, market improvements to private trade activities. There are certainly exceptions, in which regulations are politically motivated, exploitative, or otherwise counterproductive. If you need examples of situations where markets need regulatory intervention to perform optimally, there are many. Dispensation of public goods (e.g. gov’t built utilities, public airwaves, etc), counteracting monopolies, applying the cost of negative externalities back onto the producer, social equality, and even setting the basic boundaries of monetary trade (e.g. defining and controlling the money supply), and I could honestly go on all day. This is just freshman/sophomore economics.

Subsidies, tariffs, immigration restrictions, and other forms of protectionism are the highest impact examples of “bad” regulations. There are others, and imho, everyone single one of these should be stricken from law, but you don’t toss out the baby with the bath-water in the process.

Regulations like those requiring the licensing of hairdressers and interior designers? I work at a stock brokerage, part of a highly regulated industry. What does that entail? Mostly more paperwork, stress, and confusion. We’re not saints either, but it’s easy to get around the stuff that actually matters (for example, providing customers with unbiased information). If we had a sane regulatory policy, customers would have the regulations placed on them, guaranteeing their competence in performing a risky and difficult task. This is how we handle driving. You have to prove you’re capable of driving according to government safety guidelines. Why aren’t investors required to prove their aptitude? Such a policy would push costs onto the consumers of the service rather than socializing them onto the risk averse. It would also lower the costs of actual financial services by reducing barriers to entry and overhead. Which leads me to question why you didn’t acknowledge regulatory capture, public choice theory, moral hazard, asymmetric information, agency problems, calculation problems, collective action problems, etc. [Besides a brief aside] you’re not really applying critical analysis to government services. Private industries require regulation. Great. What about the government? Political pressure works for isolated bureaucrats, but not for competitive enterprise?

Here’s the kicker: no one can explain the fundamental difference between government (especially at the scope it is) and corporations. People can vote? That’s highly ineffective as people are, simply put, dumb. They lack incentives to remain informed and the information to make informed decisions. Meanwhile, concentrated interests have large incentives to lobby and engage in rent seeking.

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