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I am a great believer and defender of freedom and liberty in general, abstract, terms and I believe the freedom to buy and sell, is an essential part of this. Personal freedom requires economic freedom. Economic freedom requires and implies the freedom to own property and to trade. Many who are in favor of regulating commerce build straw men and then demolish them (so it's OK to pollute?). So, before anyone does that I will answer that preemptively. A free market does not mean a lawless market any more than a free society means a lawless society. The function of the state is to create a framework where we can enjoy freedom of choice in our daily lives and in our commerce. To that end the state creates a framework of laws which, on the one hand, restrict our freedom but, on the other, enhance other's freedom. The only reason to restrict a person's freedom is if it protects other people's freedom (the proverbial "your right to stretch your fist out ends where my nose begins"). The following quotations are taken from The Road to Serfdom by F. Hayek, who is one of my favorite authors on this topic. I recommend his works. |
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The argument is in favor of making the best possible use of the forces of competition as a means of coordinating human efforts. It is based on the conviction that, where effective competition can be created, it is a better way of guiding individual efforts than any other. It does not deny, but even emphasizes, that, in order that competition should work beneficially, a carefully thought-out legal framework is required. [snip] Nor does it deny that, where it is impossible to create the conditions necessary to make competition effective, we must resort to other methods of guiding economic activity. [snip] The successful use of competition as the principle of social organization precludes certain types of coercive interference with economic life, but it admits of others which sometimes may very considerably assist its work and even require certain kinds of government action. [snip] Where it is impractical to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services and the price system becomes similarly ineffective when the damage done to others by certain uses cannot be effectively charged to the owner of that property. [When there is an important divergence between private interest and social welfare] some method other than competition may have to be found to supply the services in question. |
| But, where competition can be implemented it is the best system for satisfying the most people to the highest degree and giving them the highest degree of choice and of freedom. Nobody can tell better than me how much a product or service is worth *to me*. If I cannot find a person willing to deliver at that price, it means others have deemed it more valuable. If A is unwilling to do it for the price I offer I can try to find someone else who will do it. A free market is a competitive market. Free competition is of the essence of a free market. This principle of the free market prices being the best system for the allocation of resources is explained in The Use of Knowledge in Society, also by Hayek. |
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It is necessary that the parties in the market should be free to sell and buy at any price at which they can find a partner for the transaction and that anybody should be free to produce, sell and buy anything which may be produced or sold at all. [snip] Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about an effective coordination of individual efforts because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual's actions. |
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So what effect do laws and regulations have on the freedom of the markets? Which things should be subject to the free market and what things should be restricted? As has been said above, there are certain things which cannot be effectively subject to the free market. Let us look at some examples.
There are services which are services to the community as a whole and cannot be bought by the individual individually. The army which a country should have is a service for the entire country and different individuals cannot choose to have different levels of defense. In this case it is clear that a national decision needs to be reached at the government level. If the government is democratically elected then it should be able to reach a decision which is acceptable to the majority of the population. There is no practical way for the use of roads to be directly paid by the users as it would have meant a huge cost in toll collection and other expenses. Also, in most cases, it is not feasible to have several roads, side by side, serving the same route and competing with each other. The only practical way is for the government to build the roads and charge the users through a gasoline tax or the general public through a general tax. A gasoline tax is better in that the burden rests more directly on the users of the service. Clearly, these are services which cannot be bought individually cannot be therefore provided and bought individually. But products and services which *can* be bought and sold individually will gain from free competition. Now, what kinds of regulations are admissible? Laws and regulations which are of a general nature and do not intend directly to have the effect of altering prices or quantities or inducing people to alter their behavior in the market. These laws and regulations may have these effects indirectly and inevitably, but it should not be their purpose. Let us look at some examples: Suppose the government establishes a tax on CO2 emissions with the intention of encouraging a reduction in these emissions. Nothing wrong with that. The intention is to reduce overall emissions of CO2 which the government has determined to be a desirable goal. It is impossible to charge the individual or the corporation individually for their emissions so a tax on fuels and other pollutants is justified. Such a general law may well have the effect of people consuming less fuel and using the money for something else but it affects everybody equally across the board. What would not be acceptable is a different tax rate depending on the use . For example, tax only fuel used for recreation but not for industrial uses like the US started doing a few years back with boat fuel. This means the government has decided to favor certain activities (commercial fishing) in detriment of other activities (recreational fishing). This is a distortion of the market which leads to inefficiency and loss of freedom. It has the effect of discriminating one person and activity in favor of another person and activity. What you pay for fuel should not depend on what you will use the fuel for unless there is a differentiating factor which justifies it. If I can prove that fuel used by boats ends up polluting more than the same fuel if used by cars, then it would be acceptable to tax them differently. But the fact that recreational boats pay a tax of which commercial boats are exempt means only that the government has decided they can get away with taxing one group and not the other. This has the direct and primary effect of making encouraging certain activities over certain other activities. Not acceptable. So, general laws, setting up obligations and restrictions which affect everyone equally, which are not discriminatory in nature and which are based on a general social need, are perfectly acceptable. Laws prohibiting children work, or polluting or requiring safety measures, they are all fine if they apply across the board and their intention is not to distort the market. Laws should be general in nature and be concerned only with the social need they need to address and the social need can never be to favor one group over another A law restricting pollution runoff by farms may have different effects on different types of farms but the objective is to limit pollution which is a social need and the secondary effect is not intended. But a law setting different conditions for chicken farmers than for pig farmers means they are favoring one thing over the other which distorts the market. Farm subsidies are an abomination as they favor certain activities over others. Freedom is an end in itself and one of the basic premises is that governments should be limited in their powers by that thing we call the Rule of Law. the Rule of Law does not mean only that the government follows certain formalities but, more widely, that there is a set of rules in place which is as general and as limited as possible and as needed and which allow everybody to plan their decisions and affairs knowing what to expect from the society they are immersed in. The negation of the Rule of Law is arbitrary government. Most Western Countries have a tradition of Rule of Law. Rules were put in place and respected, even if sometimes they yielded results which were unexpected or even undesirable. But the certainty of the law helped people plan ahead their actions. Other countries have a stronger tradition of arbitrary government. The idea was that the law could not foresee all the cases and all the consequences and therefore it was better to have government officials decide each specific case. While that argument may seem plausible, in fact, countries with such government have always had much less freedom. |
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. . since legislators, as well as those to whom the administration of the law is intrusted are fallible men, the essential point, that the discretion left to the executive organs wielding coercive power should be reduced as much as possible is clear enough. While every law restricts individual freedom to some extent by altering the means which people may use in the pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action. Within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of the government will not be used to frustrate his efforts.
[snip] ...distinction between the Rule of Law and arbitrary government. Under the first the government confines itself to fixing rules determining the conditions under which the available resources may be used, leaving to the individuals the decision for what ends they may be used. Under the second the government directs the use to particular ends. [snip] The distinction between formal law and subtantive rules is very important and at the same time most difficult to draw precisely in practice. Yet the general principle involved is simple enough. The difference between the two kinds of rules is the same as between laying down the Rules of the Road (Highway Code) and ordering people where to go; or better yet, between providing signposts and commanding people which road to take. [snip] ... [formal rules are] a means for people to use in making their own plans . Formal rules are thus merely instrumental in the sense that they are expected to be useful to yet unkown people for purposes for which these people will decide to use them and in circumstances which cannot be foreseen in detail. In fact, that we do not know their concrete effect, that we do not know what particular ends these rules will further or which particular people they will assist, that they are merely given on the whole the form most likely on the whole to benefit all the people affected by them, is the most important criterion... [snip] The state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances... [snip] It is the Rule of Law in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government. [snip] It cannot be denied that the Rule of Law produces economic inequality -- all that can be claimed for it is that this inequality is not designed to affect particular people in a paticular way. |
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The state should not impose its ends but set the framework so the individual can seek his own ends. The state should be a "utilitarian machinery" and not a "moral judge" who decides what is good or bad.
When it comes to the market all this means the government should set general rules applicable to everybody and not intervene in the market by favoring certain ends over other certain ends.
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