This House would unleash the free market

In a free market, goods are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. The aggregate ‘market price’ is the result of all individual transactions and contains important information for both buyers and sellers. When there is more demand than supply, prices rise (because buyers have to ‘outbid’ each other), making it attractive for new producers to enter the market and thus adding supply. When there is more supply than demand, prices fall, causing some sellers to leave the market since their production costs are higher than the price at which they can sell. Thus, in the long run, markets settle on an ‘equilibrium price’ where demand and supply are exactly equal.  

Examples of the free market actually working are all around us: take the supply of the pen and paper used to take notes on. If the price is too high at one store, anyone would move to another store where it’s cheaper. Therefore, sellers have an incentive to provide the best quality at the lowest price.[1]

Central planning can never be as efficient as myriads of individually planning buyers and sellers in reaching this equilibrium. For example, a central planner who sets a price floor will likely create excess supply in that specific market. This has happened in the European Union, where the EU set a price floor on dairy products. The result were the well-known ‘butter mountains’ and ‘milk lakes’.

[1] It is of course slightly more complicated as there are multiple layers of supply and demand. There is a free market in the sale of pen and paper from stores to consumers. The stores themselves are also in a free market when it comes to sourcing the pen and paper from wholesellers or the producers. The producers are then also in a free market to source the materials to make the pens. The price at the retailer therefore has a floor below which someone will make a loss due to the cost of the production. 

It might be that under theoretical conditions, free markets match up supply and demand in the long run, but as the famous economist John Maynard Keynes said: “in the long run we are all dead”. Even if a stable equilibrium is theoretically possible, in practice, it almost never happens, with high fluctuations in price, shortages and excesses as a consequence (A Tract on Monetary Reform, 2000).

An example of a market never reaching equilibrium is the so-called, empirically observed, ‘Pork Cycle’. When prices for pork meat are high, producers flock to the market. Since it takes a while, anywhere from months to over a year, to raise pigs before slaughter, prices will continue to rise and producers continue to join – until suddenly, the new supply reaches maturity and there is a sudden excess of pork meat on the market. This excess will then last for a longer period, since many producers are ‘locked in’, waiting for their pigs to mature. The same dynamics operate in the market for skilled labour, since getting the required vocational training also takes time.

Even if equilibrium is reached, the outcome isn’t necessarily fair. An example is the Irish Great Famine: due to circumstance and bad policy, potato supply in Ireland dropped dramatically. This caused prices to rise beyond the budget of the average Irish citizen, but England could still pay the higher price. The perverse result was that even during the Great Famine, Ireland was actually still a net exporter of food (The Great Irish Famine, 1996). 

Companies in the free market not only compete on price, the also compete on innovation. This is because innovation allows companies to ‘leapfrog the competition’ by either driving their competitors out of the market by suddenly being able to provide a similar good for a fraction of the cost, or by creating a completely new market for a good or service. In the latter case, the company can expect to reap monopoly-profits for a while until the competition catches up. The corollary of this is that this innovation literally destroys older, more inefficient businesses in a process called ‘creative destruction’ (Capitalism, socialism and democracy, 2008).

Currently well-known examples of this are Apples’ iPad, which created a market for tablet computers that didn’t exist before, Microsoft’s capturing of the PC-software market or Google’s search engine, which made the competition irrelevant overnight.

These monopolies are, by their nature, temporary: the benefits of creating a new market are so large, that companies structurally and continuously dedicate resources to ‘out-innovate’ the current monopolies and create a new temporary monopoly for themselves. In this way, innovation becomes the key driver of every business (The Free Market Innovation Machine, 2004).

The free market doesn’t invest in fundamental research this is research to understand fundamental principles as it does not have a commercial purpose and may never result in a commercial product, ultimately, fundamental research is the key enabler of innovation. Private companies don’t invest in fundamental research, because by its nature it is open ended and very expensive and as a result may never pay back the investment.

One example is the invention of the laser: the foundations were laid by theoretical physicists like Albert Einstein. This theoretical work wasn’t done with the purpose to invent something like a laser, but to probe deeper into the fundamentals of reality. The first actual existing lasers emerged only 40 years later, and only then did corporations begin to be interested. More examples are Defense Advanced Research Projects Agency (DARPA), a military research lab, and CERN, the operator of the world’s largest particle accelerator. Between them, they serendipitously invented the key technologies of the internet, something that no one could have foreseen.

Governments have both the resources and the patience to invest in open-ended and long-term projects like this, whereas for corporations, this would have been too risky to be a sensible business decision.

Liberty is one of the highest values human beings strive for. Liberty means that individuals ‘own’ themselves: individuals only decide for themselves what to do with their minds and bodies during their lifetime. Private property is an extension of this, because private property comes about by undertaking an activity with one’s own body or mind: when I pluck apples from a wild apple tree, they become my property through me using my own body to do the plucking. Similarly, free exchange is an extension of this, because it only comes about if both parties perceive the exchange to be beneficial to them: I will only sell the apples I plucked if I get more value in exchange than the value that continued possession of the apples gives me.

Free markets are the only system of allocating goods and wealth in society that relies on these basic notions of liberty to operate. If someone becomes rich in a free market, then that came about through free exchange: this person has provided so many goods and services of value to other people, that they gave him or her great wealth in return. 

Compare this to the government redistributing wealth: that would require the government appropriating part of someone’s income via taxes. That income is private property. Appropriating private property, not voluntary exchange, amounts to theft, which means that taxes are a form of theft and therefore a significant harm to individual liberty. Free markets don’t harm liberty like this, which is why they are morally superior. 

The procedural justice of free exchange is important, but is presumes that humans are born with equal talents and in equally enabling environments. This is obviously not true: people can be born to parents with high or low socio-economic status and the talents they are born with, like IQ, are normally distributed.

Suppose you’re born with high talents but to parents with a low socio-economic status. That means your parents do not have enough income to spend on your education: their money is all spent on the basic necessities like food and housing. Since you don’t get the education you need to further develop your talents, you will also likely remain stuck in the same socio-economic class, as will your children, and their children. At the same time, the children of rich parents get more opportunities: even when they’re moderately talented, their parents can invest in maximally developing their talents or even give them a large endowment to live from.

An example of this lack of ‘social mobility’ is the United States, where parental income is an important predictor of a child’s future (Upper Bound, 2010). This is not just a gross and unfair inequality: it is also an infringement upon the liberty of the individual, who, in a free market, is effectively and structurally constrained to develop his or her own talents.

In a free market, goods are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. The aggregate ‘market price’ is the result of all individual transactions and contains important information for both buyers and sellers. When there is more demand than supply, prices rise (because buyers have to ‘outbid’ each other), making it attractive for new producers to enter the market and thus adding supply. When there is more supply than demand, prices fall, causing some sellers to leave the market since their production costs are higher than the price at which they can sell. Thus, in the long run, markets settle on an ‘equilibrium price’ where demand and supply are exactly equal.  

Examples of the free market actually working are all around us: take the supply of the pen and paper used to take notes on. If the price is too high at one store, anyone would move to another store where it’s cheaper. Therefore, sellers have an incentive to provide the best quality at the lowest price.[1]

Central planning can never be as efficient as myriads of individually planning buyers and sellers in reaching this equilibrium. For example, a central planner who sets a price floor will likely create excess supply in that specific market. This has happened in the European Union, where the EU set a price floor on dairy products. The result were the well-known ‘butter mountains’ and ‘milk lakes’.

[1] It is of course slightly more complicated as there are multiple layers of supply and demand. There is a free market in the sale of pen and paper from stores to consumers. The stores themselves are also in a free market when it comes to sourcing the pen and paper from wholesellers or the producers. The producers are then also in a free market to source the materials to make the pens. The price at the retailer therefore has a floor below which someone will make a loss due to the cost of the production. 

It might be that under theoretical conditions, free markets match up supply and demand in the long run, but as the famous economist John Maynard Keynes said: “in the long run we are all dead”. Even if a stable equilibrium is theoretically possible, in practice, it almost never happens, with high fluctuations in price, shortages and excesses as a consequence (A Tract on Monetary Reform, 2000).

An example of a market never reaching equilibrium is the so-called, empirically observed, ‘Pork Cycle’. When prices for pork meat are high, producers flock to the market. Since it takes a while, anywhere from months to over a year, to raise pigs before slaughter, prices will continue to rise and producers continue to join – until suddenly, the new supply reaches maturity and there is a sudden excess of pork meat on the market. This excess will then last for a longer period, since many producers are ‘locked in’, waiting for their pigs to mature. The same dynamics operate in the market for skilled labour, since getting the required vocational training also takes time.

Even if equilibrium is reached, the outcome isn’t necessarily fair. An example is the Irish Great Famine: due to circumstance and bad policy, potato supply in Ireland dropped dramatically. This caused prices to rise beyond the budget of the average Irish citizen, but England could still pay the higher price. The perverse result was that even during the Great Famine, Ireland was actually still a net exporter of food (The Great Irish Famine, 1996). 

Companies in the free market not only compete on price, the also compete on innovation. This is because innovation allows companies to ‘leapfrog the competition’ by either driving their competitors out of the market by suddenly being able to provide a similar good for a fraction of the cost, or by creating a completely new market for a good or service. In the latter case, the company can expect to reap monopoly-profits for a while until the competition catches up. The corollary of this is that this innovation literally destroys older, more inefficient businesses in a process called ‘creative destruction’ (Capitalism, socialism and democracy, 2008).

Currently well-known examples of this are Apples’ iPad, which created a market for tablet computers that didn’t exist before, Microsoft’s capturing of the PC-software market or Google’s search engine, which made the competition irrelevant overnight.

These monopolies are, by their nature, temporary: the benefits of creating a new market are so large, that companies structurally and continuously dedicate resources to ‘out-innovate’ the current monopolies and create a new temporary monopoly for themselves. In this way, innovation becomes the key driver of every business (The Free Market Innovation Machine, 2004).

The free market doesn’t invest in fundamental research this is research to understand fundamental principles as it does not have a commercial purpose and may never result in a commercial product, ultimately, fundamental research is the key enabler of innovation. Private companies don’t invest in fundamental research, because by its nature it is open ended and very expensive and as a result may never pay back the investment.

One example is the invention of the laser: the foundations were laid by theoretical physicists like Albert Einstein. This theoretical work wasn’t done with the purpose to invent something like a laser, but to probe deeper into the fundamentals of reality. The first actual existing lasers emerged only 40 years later, and only then did corporations begin to be interested. More examples are Defense Advanced Research Projects Agency (DARPA), a military research lab, and CERN, the operator of the world’s largest particle accelerator. Between them, they serendipitously invented the key technologies of the internet, something that no one could have foreseen.

Governments have both the resources and the patience to invest in open-ended and long-term projects like this, whereas for corporations, this would have been too risky to be a sensible business decision.

Liberty is one of the highest values human beings strive for. Liberty means that individuals ‘own’ themselves: individuals only decide for themselves what to do with their minds and bodies during their lifetime. Private property is an extension of this, because private property comes about by undertaking an activity with one’s own body or mind: when I pluck apples from a wild apple tree, they become my property through me using my own body to do the plucking. Similarly, free exchange is an extension of this, because it only comes about if both parties perceive the exchange to be beneficial to them: I will only sell the apples I plucked if I get more value in exchange than the value that continued possession of the apples gives me.

Free markets are the only system of allocating goods and wealth in society that relies on these basic notions of liberty to operate. If someone becomes rich in a free market, then that came about through free exchange: this person has provided so many goods and services of value to other people, that they gave him or her great wealth in return. 

Compare this to the government redistributing wealth: that would require the government appropriating part of someone’s income via taxes. That income is private property. Appropriating private property, not voluntary exchange, amounts to theft, which means that taxes are a form of theft and therefore a significant harm to individual liberty. Free markets don’t harm liberty like this, which is why they are morally superior. 

The procedural justice of free exchange is important, but is presumes that humans are born with equal talents and in equally enabling environments. This is obviously not true: people can be born to parents with high or low socio-economic status and the talents they are born with, like IQ, are normally distributed.

Suppose you’re born with high talents but to parents with a low socio-economic status. That means your parents do not have enough income to spend on your education: their money is all spent on the basic necessities like food and housing. Since you don’t get the education you need to further develop your talents, you will also likely remain stuck in the same socio-economic class, as will your children, and their children. At the same time, the children of rich parents get more opportunities: even when they’re moderately talented, their parents can invest in maximally developing their talents or even give them a large endowment to live from.

An example of this lack of ‘social mobility’ is the United States, where parental income is an important predictor of a child’s future (Upper Bound, 2010). This is not just a gross and unfair inequality: it is also an infringement upon the liberty of the individual, who, in a free market, is effectively and structurally constrained to develop his or her own talents.

Many global markets are dominated by a few big firms: look, for example, to the markets in fast food, dominated by McDonald’s, or the market for drilling and selling oil, dominated by Exxon, Shell and BP. This concentration of market power is natural outcome of free markets, this is because of economies of scale – a production line can produce each individual unit faster and more cheaply than if products were made individually. Also partly because the transaction costs of markets are too high (i.e. the costs of negotiating, monitoring and managing all the exchange relations necessary for production and distribution of the good or service involved), corporations have an incentive to structurally organize themselves into large firms (The Nature of the Firm, 1937). This also creates barriers to entry; while an individual may be able to manufacture an individual unit it is much more difficult to set up a whole factory from scratch in order to compete, there is then little possibility of competitors entering the market as a result of price rises. 

Being so large gives them an unfair advantage towards both their suppliers and their consumers. Large firms can collude to form oligopolies. This generates more profit for the firms involved, but raises prices above the market clearing price for consumers as the firms agree not to undercut each other, this may also be informal simply raising prices by reducing the amount of choice or supply.

Vis-à-vis their suppliers, these firms gain an equally unfair bargaining advantage. A prime example is the market for (low skilled) labour: with a surplus of (low skilled) labour, each individual worker either has to accept a very low wage or be replaced by someone who does want to work for that low wage. This unequal bargaining power keeps the price for labour very low, so low that workers have no surplus budget to invest in themselves to be able gain skills, negotiate better jobs and thereby lift themselves out of poverty. 

It’s not true that all markets naturally lead to a concentration of power. Whenever concentration of market power, even leading up to a monopoly, does happen, this is caused by the underlying cost structure of the industry, whereby a company experiences increasing returns to scale and relatively high fixed costs. This means it is most efficient for the first entrant in a market to become as big as possible, as fast as possible. An example of such a natural monopoly used to be the markets for utilities: when the distributing networks for water or energy weren’t built yet, the first company to expand would gain a natural monopoly.

Given that a natural monopoly is a consequence of the underlying cost structure of the industry, there is not much one can do to change it. Basically, one can choose between a private unregulated monopoly, private monopoly regulated by the state, and government monopoly (Capitalism and Freedom, 2002). Of these, the private monopoly is best. A government monopoly would not just be a monopoly, but would also have the force of law to back it – the result would be the most direct form of regulatory capture, where the business interest takes over the public interest of the government agency. 

A ‘common good’ is a resource which has finite but replenishable supply but which is by its nature ‘non-excludable’ (meaning it’s hard to exclude individuals from using the resource). One example is the stock of fish in the sea. If all fishermen would refrain from overfishing, the fish population would have time to restore itself. But each individual fisherman has an incentive to capture and sell as much as possible. Since in a free market, there is no government coordinating supply and demand, each fisherman acts on their individual incentives. The result is rapid, irreversible depletion of the common good (Tragedy of the commons, 1968).

A ‘public good’ is a resource which is also ‘non-excludable’ but is also ‘non-rivalrous’, that is a good whose consumption by one consumer still allows simultaneous consumption by other consumers. One example of this is the air we breathe: every breath I take does not prevent you from taking a breath, nor can I feasibly exclude you from breathing. Other examples of public goods are schools, roads and national defense. Public goods suffer from the ‘free rider’ problem: once the good is produced, no one has an incentive to pay for the good. Since the good is non-excludable, no one can prevent someone from using it. This also leads to what economists call ‘negative externalities’: industries can freely pollute the air we breathe and not bear the costs for it. The issues of climate change are a direct example of this: corporations aren’t forced to pay for the negative externality of emitting greenhouse gases, and so continue doing it.    

A free market can only operate when some basic conditions have been met. One of these is the condition that exchange of private property is possible. It’s important to realize that private property is both a normative concept but also a legal reality: in everyday life, private property exists because there are contracts and title deeds that prove that something is my private property.

This legal dimension of private property is key to realizing how the government can make free markets work even for common and public goods. The key is to create private property rights that are rivalrous and excludable, and enforce them accordingly. It is these private property rights that are traded, not necessarily the good itself (The Private Production of Public Goods, 1970).                          

For the public good of roads, the private property right the government can create is the right to operate a toll booth on that road. For the common good of fisheries, the government can create conditional exploitation rights to private actors, and for carbon dioxide emitting industries, the government can create limited, tradable emissions rights. The most well-known example of government created private property rights is intellectual property: even though listening to music is non-rivalrous and with the internet, relatively non-excludable, the government’s enforcement of intellectual property allows a business like iTunes to survive and thrive. 

The free market views the human body and the human mind as a mere instrument: the only value an individual being has is the value it can sell its labour (whether it be manual or mental work) for on the market. Workers don’t work because they want to produce something they themselves find inherently valuable; they work to earn a living. And given that most people are not entrepreneurs or business owners, this means that most people will spend the most of their waking day labouring for goals set to them by others, in partial processes subdivided and defined for them by others, all to create products and services which are only valuable to others, not to themselves (Alienation, 1977).

This commodification of the human body and mind can go so far that humans actually start selling themselves: free market proponents propose to legalize the selling of one’s own organs. When humans start selling themselves, they perceive no value in themselves anymore – all they see in themselves is an instrument to satisfy other people’s desires, a product to be packaged and sold.

This becomes even more pronounced when we take into account that the free market exacerbates inequality: if someone is born into a poor family and can’t get out of it, it might seem the only way to get out of it, is to sell oneself. Thus, the proposal to legalize the selling of one’s own organs amounts to an ‘unconscionable choice’: a choice which is, given the circumstances, unreasonable to ask of someone. 

The notion that labour alienates might have looked true in Marx’s days, but nowadays, employers have learnt that if they want to get the most from their workforce, they need to make their jobs meaningful. Employers can do this by offering work that fits an employee’s ‘intrinsic motivation’ (Intrinsic motivation at work, 2009), and by designing the work process in such a way that it facilitates ‘flow’ (Beyond boredom and anxiety, 2000). Interestingly, these days, companies actually compete for labour by making their work environment more meaningful, as for example Google’s ‘Life at Google’-page shows (Life at Google).

As to the idea of allowing a market in organs: if people willingly and knowingly choose to sell their organs, what is wrong with it?

Also, consider the status quo: demand is still there, but the prohibition effectively lowers supply, leading to a significant number of deaths every year for lack of donor organs. Why is that morally more justifiable?