Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services.
Self-interest leading to negative consequences
It is not true that the case for the free market rests on the (false) claim that when people do what's in their own immediate interest, it will always lead to the best outcome for all. The great insight of Adam Smith (as well as earlier and later thinkers) was that this happens to be the case very often in the market economy. But this doesn't commit the believer in free markets to a straitjacket rule.
There are many examples of apparent failures of "naked self-interest" that are in fact failures of the government overseeing the issue. Conservationists point to overfishing as a refutation of Adam Smith, for example, when in reality overfishing underscores the importance of property rights.
For a different example, the economist A.C. Pigou used a hypothetical illustration of traffic congestion to show that the government could raise total welfare by imposing a tax on drivers who wanted to take a route that could accommodate only a limited number of vehicles. Frank Knight, however, showed that if the road were privately owned, then the alleged "market failure" would disappear â the private road owner would maximize his profit by charging a toll exactly equal to the hypothetical "optimum Pigovian tax."
The necessity of rules
There is a growing literature on "herding behavior," "informational cascades," and so forth, that uses neoclassical models of agents with rational expectations who end up making dumb investment decisions when they occasionally get locked into a "bad equilibrium." Many of the economists working on these models believe that they demonstrate the necessity for government regulation of financial markets.
Yet this is a complete non sequitur. Someone can be a proponent of free markets and still agree that professional basketball games need referees. The point is that the referees should be privately employed by organizations that receive voluntary payments from their customers.
More generally, the believer in laissez-faire isn't forced to renounce all forms of airline inspection or product safety. But these procedures can be supplied privately, either by the companies themselves, by outside watchdog groups, or by insurance companies.
The choice isn't, "Rules or no rules?" The choice is, "Rules made and enforced by voluntary contractual arrangements, or rules made and enforced by coercive agencies that can't go out of business?"
Freedom follows the free market
According to Dean Russell, the free marÂket economy is the key to all freeÂdoms. If the market is totally free, each person has complete freedom of speech, press, and religion. But if the market is totally controlled, there is no freedom in those or any other areas.
If the market economy has been totally abolÂished, there cannot be a free press. If the government owns the newspapers, it cannot question its own actions, or advoÂcate the reverse of what it is doÂing; otherwise, the government wouldnât be doing it in the first place. If the government leaves the presses under nominal private ownership but exercises complete control, the same situation necesÂsarily prevails. Since the officials of government must necessarily make the decisions in a controlled economy, they cannot deliberately make mutually conÂtradictory decisions. They cannot use compulsions in practice and then question the compulsions inprint.
Remember that the Soviet Constitution clearly guarÂanteed freedom of press and speech, as did the constitutions of other nations where the market economy has been abolished. In that situation, however, constituÂtional guarantees are without meaning. For no totalitarian government can offer its presses and audiÂtoriums to persons who are in total disagreement with governÂment policies.
But what about the so-called welfare state or mixed economy, such as that of the United States?
The only thing governments can control is people. For example, governments never control prices, just people. A can of beans doesnât care what its price is. But people careâthe people who grow the beans, can the beans, sell the beans, and consume the beans. And thatâs all that price controls can ever meanâpeople control.
Just as the government cannot control prices, it is also absurd to imagine that the government can support prices. Without exÂception, the only thing that govÂernment can ever do is to control peopleâto prevent them from doÂing what they wish to do, or to compel them to do what they do not wish to do. Thus, it follows that the governmentâs price supÂport program for agricultural products necessarily deprives farmers (and others) of their freedom.
And so it is with tariffs, subÂsidies, and all other government interferences with freedom of exÂchange. In every case, peaceful perÂsons are deprived of their freeÂdom to exchange their goods and services on mutually agreeable terms.
- Murray N. Rothbard. "Free market", The Concise Encyclopedia of Economics, referenced 2012-08-12.
- Robert P. Murphy. "John Cassidy Fails in His Critique of Markets", Mises Daily, December 28, 2009. Referenced 2011-04-03.
- Dean Russell. "Freedom Follows the Free Market", The Freeman, January 1963, Volume: 13, Issue: 1. Referenced 2011-11-02.