The free exchange of goods and services is necessary for the functioning of a modern industrial economy. It is not just because freedom is good in itself, although it is. It is not just because free competition spurs companies to produce better goods at lower prices, although it does.
It is that in order to makes decisions within a modern economy, it is necessary to compare relative values. You can’t do that unless you know the prices of things, and the only non-arbitrary way to set prices is through agreement of a willing buyer and a willing seller.
So the economics profession is perfectly right to start with the concept of free markets as a premise. The problem is when that concept is taken to a self-defeating extreme. Free markets are not the same thing as the absence of rules and regulations. If that were do, Lebanon under the warlords or Haiti after the earthquake would be the greatest free market countries in the world. The New York Stock Exchange draws investors from all over the world because they have confidence that a listed company’s financial report bears some semblance to reality, and that a broker is not trying to rip them off.
To say that rules and regulations as such are inconsistent with the free market is like saying traffic lights and speed limits are inconsistent with free driving. You could make the argument that individual drivers are better able than traffic police to decide when to stop and start and how fast to go, but that is not a freedom that would be meaningful to me.
The test of a proposed law are regulation is (1) whether it is consistent with basic Constitutional rights, (2) whether it promotes the common good and (3) whether it can be enforced impartially.
For insight into what happens when decision-makers decide that “free markets” can function without law and regulation, I recommend Yves Smith’s book, ECONned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism and her web log, naked capitalism.
Tags: Capitalism, ECONned, Economics, Financial Regulation, Free Exchange, Free Markets, Liberty Under Law, Wall Street, Yves Smith
October 28, 2012 at 3:55 pm |
“To say that rules and regulations as such are inconsistent with the free market is like saying traffic lights and speed limits are inconsistent with free driving. ” – First let’s say: YES! They are consistent: everyone knows they have to stop at the red light, to reduce speed in certain areas, signal when they change direction etc. Then let’s imagine there’s a rule that says you have to stop every time you see a bird flying by the side of the road, you have to stop, get out of the car and do the hamster dance every time you see a cat, but not a dog, or a rat, and, in fact there is a whole list of similar things you are supposed to do/not do if a certain number of things happen etc… Also, it has been decided that everyone is supposed to drive under the speed of the snail, so that no one gets hurt, but you should wear a helmet, a chain for a seat belt with 10 locks and also a life vest, just to be sure no one gets hurt. And, instead of 2/3 colors at the streetlight, there are 100 tiny led lights that keep blinking at every second…. In the meanwhile, all the big trucks that transport meat, are allowed to circulate freely, they don’t have to stop at the traffic lights, they are exempted from following all the absurd regulations that all the other drivers are supposed to follow under penalty of hefty fines or even losing their driving licence, and you have to get out of the way whenever they pass………
You know that the list of rules is so long, confused and intricate that it’s extremely difficult if not impossible for many to always remember and follow those rules and many of them lose their licence or give up driving altogether, because the risks and the fines are too much for them, But the big truck drivers don’t have to worry, they always reach their destinations on time, and they drive on smiling and whistling with optimism… and sometimes they run over the small cars.
There is no doubt we have to follow some regulations, but I also think it’s clear that there should be certain limits to those rules and to the power of those who make driving regulations and pick which people get to drive freely and which not. I wish we lived in a world where rules and regulations were established according to common sense, and not by corrupt people that sell them and turn hem into an industry. Unfortunately, even by looking at the traffic regulations today, one can clearly see we’re a loooong way from that…
October 28, 2012 at 4:30 pm |
I think you make a good point. My argument was against the extreme position that trying to regulate the financial markets is automatically bad. I wasn’t arguing that rules and regulations are automatically good.
I think rules and regulations have to be considered on a case by case basis. I agree that there are a lot of foolish regulations, and that that the total amount of regulation can be counterproductive.
I think the trend in U.S. society is increasing governmental interference with the lives of individuals, while the large corporations and institutions, which should be restrained, are given free rein.