Free Market Economy Defined
Free market economy is a buzz word - or phrase. It's one of those terms that when most people hear it they think they know what it means.
Perhaps we shouldn't be too hasty in that assumption. Though we may be prone to assuming such understanding, a surprising number of people when queried have a harder time than you might think providing a precise definition of the term.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
This is prologue to acknowledging the limits of offering my own definition. It is not offered under the delusional burden of finality or conclusiveness, but only because I believe it is useful to do so. It is a definition that I believe provides useful distinctions about the nature of our world. This is why I find it useful and insist upon its use.
Additionally, my definition is not piecemeal or makeshift. Rather, it is principled and lends itself to precise analysis. I believe there's value in that. If anyone thinks differently, there's nothing I can do about that.
What is irrefutable here though is that this is what I mean by a free market economy. If anyone wants to criticize my attitude to, or conception of, a free market economy, it is this that must be criticized. Otherwise they would quite literally not know what they're talking about.
With those caveats in mind, I offer my definition, building as it were, back-to-front. An economy is defined as the dimension of a society addressing the employment of resources: material, human or otherwise. Exactly how those resources are employed exceed the definition.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
Relative supply and demand, arising from the vicissitudes of trade, determine the value of resources in a market economy. If it is readily available and/or very few people want it, it will be perceived as having a lower value. Since those offered the resource find it comparatively easy to get, more of it will usually be required for them to exchange it for what is valued higher on a one-to-one basis. This is what is meant by saying that if fetches a lower price. In comparison, resources that are less readily available, and/or more widely in demand, all else being equal, command a higher price in relation to other resources. Prices are than the differential between the values of resources as derived from supply and demand. Though, demand is always subjective .
This is the operation of a market economy. A free market economy is still more specific. The use of the word "free" would allow it to be interchangeable with "voluntary." In a free market economy anyone is free to exchange any resource with anyone else who wants to freely participate in that trade.
The distinctions here may be illustrated with the case of marijuana. In most of the world the selling and buying (not to mention growing and consuming) of marijuana is illegal. Police forces use their monopoly of legitimized violence to attempt to prevent such exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government violence used to suppress markets increases prices by constraining free trade. The same dynamic is not restricted to supposedly criminal resources. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, effectively - and usually intentionally - constrains freedom to trade.
Politically well connected sellers can influence government policy, directing its police powers in service of their economic interests. It is this kind of crony mercantilism that is the antithesis of a free market economy.
Perhaps we shouldn't be too hasty in that assumption. Though we may be prone to assuming such understanding, a surprising number of people when queried have a harder time than you might think providing a precise definition of the term.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
This is prologue to acknowledging the limits of offering my own definition. It is not offered under the delusional burden of finality or conclusiveness, but only because I believe it is useful to do so. It is a definition that I believe provides useful distinctions about the nature of our world. This is why I find it useful and insist upon its use.
Additionally, my definition is not piecemeal or makeshift. Rather, it is principled and lends itself to precise analysis. I believe there's value in that. If anyone thinks differently, there's nothing I can do about that.
What is irrefutable here though is that this is what I mean by a free market economy. If anyone wants to criticize my attitude to, or conception of, a free market economy, it is this that must be criticized. Otherwise they would quite literally not know what they're talking about.
With those caveats in mind, I offer my definition, building as it were, back-to-front. An economy is defined as the dimension of a society addressing the employment of resources: material, human or otherwise. Exactly how those resources are employed exceed the definition.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
Relative supply and demand, arising from the vicissitudes of trade, determine the value of resources in a market economy. If it is readily available and/or very few people want it, it will be perceived as having a lower value. Since those offered the resource find it comparatively easy to get, more of it will usually be required for them to exchange it for what is valued higher on a one-to-one basis. This is what is meant by saying that if fetches a lower price. In comparison, resources that are less readily available, and/or more widely in demand, all else being equal, command a higher price in relation to other resources. Prices are than the differential between the values of resources as derived from supply and demand. Though, demand is always subjective .
This is the operation of a market economy. A free market economy is still more specific. The use of the word "free" would allow it to be interchangeable with "voluntary." In a free market economy anyone is free to exchange any resource with anyone else who wants to freely participate in that trade.
The distinctions here may be illustrated with the case of marijuana. In most of the world the selling and buying (not to mention growing and consuming) of marijuana is illegal. Police forces use their monopoly of legitimized violence to attempt to prevent such exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government violence used to suppress markets increases prices by constraining free trade. The same dynamic is not restricted to supposedly criminal resources. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, effectively - and usually intentionally - constrains freedom to trade.
Politically well connected sellers can influence government policy, directing its police powers in service of their economic interests. It is this kind of crony mercantilism that is the antithesis of a free market economy.
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posted by Vittoria @ February 13, 2014
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