The Failure Of Free Markets

There is a lot of talk these days about the evils on unrestrained laissez-faire. There have been market meltdowns, business failures and tremendous losses for businesses and individuals. I have to agree that markets have failed. The real failure, however, has been that free markets have failed to exist for many decades.

A free market means that buyers and sellers can trade on any terms that they find mutually beneficial. They can trade whatever they want with whoever, whenever, however and why ever they want to. As long as fraud or coercion is not involved in the transaction, both sides trade because they believe they will be better off after the trade. It is a positive sum game.

The free market is based on property rights. People can use their property and dispose of it in any way that does not infringe on the rights of other people. Property rights are the key to economic progress in any country. Lack of strong property rights and economic freedom is the reason that less developed countries remain less developed.

The economic understanding of market failure is any situation where the allocation of goods and services in an economy is not efficient or optimized. The popular view is that any result in society that we don’t like is caused by market failure. Thus, depressions, pollution, homelessness, and shortages are examples of the infinite variety of things that can be blamed on markets.

There are many cases where the problem is a lack of adequate protection of property rights. In the case of pollution, people who’s property rights are infringed by the polluter should have the right to sue for damages. An appropriate justice system would make it expensive for a business to pollute or do other bad things because of the money it would have to pay to people who’s well being and property they damage.

The main problem with the market failure concept is the belief that benevolent politicians and bureaucrats should save the day. This approach has been energetically followed, but the reality is that the failures of government dwarf any failures of any market. In practically all cases, events that are demonized as market failures are the unforeseen and unintended consequences of prior government intervention in the markets, interventions that are invisible to everyday consumers.

The chain reaction will follow a few well worn paths. One such path is when someone perceives that prices are too high. Government then imposes price controls. The inevitable result of price controls is shortages. That means that rationing must be implemented. Black markets develop to supply the needs of consumers who can’t get what they want. Government programs are implemented to stamp out black markets, which invariably infringe on the rights of everyone. The string of cause and effect can go on for decades.

Another path may be when someone perceives that their income is too low. Government programs, such as the Agricultural Adjustment Act of the 1930’s and its many successors up to today, may destroy product and productive resources to keep prices high, subsidize the non production of crops and livestock, impose high tariffs and other protective measures. The net result is higher prices and a lower standard of living for all those not privileged enough to be in the protected industry. The protections and higher profits draw more people into production or discourage inefficient producers from leaving. The new producers increase production more, requiring further interventions.

These cause and effect chains can be followed in numerous industries, such as oil and gas, housing, banking and finance, agriculture, health care, automobile, and so on. When seen in isolation, an event looks like a random development. When taken together, they display a fairly understandable chain of events, emanating from some original intervention. The sad fact is that, even though this country is nominally free, and is still one of the more free nations , there is not one market that is not subject to massive government intervention at some level, national, state or local.

The current mortgage crisis and market meltdown are the unintended consequences of government induced inflationary credit, artificially low interest rates, lending and housing regulations and, in general, the lack of free markets in banking, housing and money creation. The present interventions of massive liquidity injections to preferred players in the market will have predictable consequences down the road. When those consequences come home to roost, people will forget about the cause of the failure and only blame the markets that failed by not being free.