Free Market

Economist Yaron Brook on economics of a free market, the main principles of the idea, and Ayn Rand’s contribution to philosophy of capitalism

faq | November 3, 2016

A free market is a market free of government control, regulations, coercion and force. A free market means freedom to act without coercion in the pursuit of the values we need in order to live and to thrive and to flourish and to prosper. In a free market, people can act without force in order to produce economic values, create and produce wealth. In a free market, the only job of government is to catch crooks, to protect people from fraud, to help arbitrate disputes using a justice system. Government has to define property rights, to make them clear: intellectual property rights, physical property rights. But other than that, the government has no role, no economic policy — it leaves the market alone.

The only job of government in a free market should be to protect individuals: our freedoms, our ability to go out into the world and do what we want to do in pursuit of the values that we need in order to live and to thrive. So the government is there to protect individual rights. That is the ideal government, the government that only protects individual rights and does not regulate, does not control, does not tell us what to do in our bedroom, does not tell us what to do in business. A system like that is to protect people who are rational and who want to use their minds in order to live the best. The free market idea says that the more constraints society or government places on you, the more limited scientific research is, the more limited entrepreneurship is, the more limited human beings’ ability to pursue the things that they think are necessary for their lives is.

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The free market idea came closest to realization in the 19th century in America. The founding fathers of America had the right idea, but even they were inconsistent because they had slavery. So they did not apply the idea to everybody, and it never fully existed. Today we get closest to it in places like Hong Kong and Singapore, but Singapore constrains some freedom in other ways — there is no free speech, for example. Hong Kong is the closest, but that is disappearing because the Chinese are imposing their will on Hong Kong and it is changing for the worst. So, there is no place where we have real freedom.

History of the Term “Free Market”

The term was introduced in the 19th century in France and it was called laissez-faire. Laissez-faire means ‘hands-off’. According to this idea the government is supposed to be ‘hands-off’. But the idea of free markets, the idea of capitalism, the idea of government that is very limited, is a product of the Enlightenment of the 18th century. It goes back to John Locke, who really developed the idea of individual rights, liberty, property, and the pursuit of happiness. In terms of markets Adam Smith in The Wealth of Nations (1776) describes what a free market would look like. And there were a lot of thinkers from 1776 till today who refined the model, who improved it and articulated the case for it.

wealth_of_nations

First page from Wealth of Nations, 1776 London edition (wikipedia.org)

Ayn Rand’s Ideas

The first thinker to make a model case for free markets and explain why it is right and moral was Ayn Rand. She did that in books like Atlas Shrugged and in nonfiction books like Capitalism: The Unknown Ideal and The Virtue of Selfishness. These were the books that articulated the economic plus the moral case for freedom.

The main thing Ayn Rand added to this idea was the philosophical foundation. A lot of people believed in freedom, but they did not have a moral argument for why they believed in freedom. It is a good idea to be free, but they could not justify it philosophically. This was a weakness, because when you cannot justify something philosophically, people who have more fundamental ideas than you do on the other side (let’s say Karl Marx, who believed in the opposite), they are going to win because their ideas are more fundamental. What Ayn Rand provides for the first time is a moral, ethical defense of this idea of freedom. She identifies the fact that freedom is fundamentally about the individual.

Ayn Rand

Photo of writer Ayn Rand (1905-1982) from her Soviet passport (wikipedia.org)

There is an example in the movie Braveheart with Mel Gibson. In a part of the movie they all say: Freedom! But what do they really want? They want to be ruled by a Scottish king instead of being ruled by an English king. That is not freedom. That is you preferring your tribal authoritarian to somebody else’s tribal authoritarian. Real freedom is about not having a king, not having a ruler, not having authority telling you what to do, but you deciding what to do.

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Ayn Rand identifies freedom as the individual’s freedom to act on his own behalf and act in the pursuit of his rational values. She was unique in that sense. But then she also says: why is that moral? It is moral because the purpose of morality is your own happiness, your own flourishing, your own success. If you think about all moralities since Jesus, they are always focused on other people. You should sacrifice, you should be selfless, you should help the poor, you should help these people and those people. But nobody talks about you, about what you should do for yourself. Ayn Rand says: why? Why should I focus on other people? Why am I not as important as they are? And for me, aren’t I more important than they are? I only have one life. So she says morality should really be the science of achieving success and happiness. Morality should be the science of human flourishing, of how we achieve flourishing for individual human beings. And it turns out that the most important thing to achieve human success is to use your mind, human reason. If you believe that reason is the way in which individuals achieve flourishing, then what you want is to create a society in which reason is free to think whatever, and to act on those thoughts. And the enemy of reason, the enemy of science, the enemy of free thinking, is force: authority and guns. If they point a gun to your head, you cannot think, you do what you are told. So you want to create a society in which force does not exist, so that individuals can pursue reason to achieve their happiness. So the basis of individual human happiness is the morality of individual flourishing.

new_york_city_may_2014_-_033

Atlas. Lee Lawrie. 1937 (wikipedia.org)

The Main Principles of the Idea

The main principles of the free market are:
— Reason is the means by which individuals succeed, achieve their values and flourish
— Individual human flourishing is the purpose, it is the goal
— In order to achieve individual human flourishing we must extract force from society
— We must build governments in order to protect us, but otherwise leave us free — that is, to protect us from criminals, terrorists, invaders, and to arbitrate disputes.

So those are really the principles: it is reason, individualism, individual rights and freedom. The idea of free markets can really exist. It just needs a different culture other than what we have today in the world. It means new ideas, a different attitude. So what we need in order to achieve freedom is a different attitude about morality, ethics, right and wrong. What we need is to start focusing on the individual instead of the group and the collective. What we need is to start focusing on what it will take to achieve individual flourishing, rather than ‘how can I sacrifice’, ‘how can I be selfless’. So it needs people to rethink their fundamental beliefs. People’s ideas change all the time. So it is achievable, but it is going to take a long time.

Economics of a Free Market

Supply and demand is the law of economics. When people are free, prices are set by the laws of supply and demand. People change how much they demand of a good based on its price, which is determined by its supply. And this feedback is changing, because constantly the supply is changing and the demand is changing and therefore the prices adjust. And that is why you go into the marketplace and prices move. They move within a particular spectrum but over time they change. Sometimes they change dramatically, like oil collapsing because suddenly people discovered that there is much more supply, and demand is much smaller that they thought it would be. Supply and demand are the means by which prices are set in the marketplace when it is left free.

Now, regulations can affect supply and demand. But the law of supply and demand, just like the law of gravity, always holds. For example, there is a big debate in the United States about raising the minimum wage. At the federal level the minimum wage is $7.25. And they want to raise it to $15. So even if you want to work for $8 and even if they want to pay you $8 the law will say they have to pay you $15. Regulations can impose a price like that. They raise the price, so the demand for jobs goes down. If they raise the price artificially, demand goes down and people get unemployment. If the government raises the price artificially, which is what regulations do, demand and supply adjust. In that scenario the regulation of prices is not determined by the market, it is determined by external fact, by government regulations.

The same story applies to market entry and exit. In free markets, if you can show that you can make money, entry is relatively simple. You can raise capital, go to venture capitalists, to banks, you can raise capital and you can start a business. Or you might go out of business if your business is not doing well, or if you decide to exit in a different way, for example, you can sell your company. So it is a very dynamic market: people enter the market, leave the market, businesses fail, businesses are created constantly. There is constant turnover. Once you regulate, you limit the turnover.

In the United States, to start certain businesses you need a license. There is a barrier to entry because now some people do not have the time to take the course, they do not have the money to pay the fee. All the money they have is just to start the business, and now you are not letting them start the business. Entry is constrained. There is the same thing about exit. The government now can decide to bail out some companies. Again, the decision is not based on the market, it is based on whether a politician or a bureaucrat decides you are worth saving and somebody else is not worth saving. So it adds government, always as the element of the arbitrary. It takes it away from science, the supply and demand, and subjects it to the opinion of the central planner.

Free Market in Different Economic Systems

There are really only two economic systems: there is the free market, or there is socialism or even communism. Everything else that exists in the world is a mixture of the two. So what we have today in Russia, America and Europe is some capitalism, some freedom, and some government. All the systems that exist in China, in Russia, in America, are different. America has a little bit more markets and less socialism, China has more government and just a little bit of markets. Russia is somewhere in between. So it is all variations, but it is either: the state controls everything, or markets control everything, and then we mix the two up.

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America was the closest to this idea, but it is not anymore, because people gave up freedom slowly, for the last hundred years. Today the government is too involved, there is too much planning. The cause of that is America has never fully understood the ideas of the founding fathers, of the Enlightenment, the idea of individual rights, the idea of individual freedom. When immigrants came, they were willing to participate, they worked hard, but they brought the European ideas, and European ideas are very different from the ideas of freedom in America. They are much more collectivist. Europe is not the most entrepreneurial place, so people believe in tradition. And these European ideas — that the group is more important than the individual — have destroyed the school system, the educational system and ultimately the political system. So America today is less free than it was a hundred years ago.

Current State of the Idea

The idea of the free market is constantly being applied to new areas. So for example when the financial crisis happened, we had to come up with an explanation for why it happened. The 2008 crisis is a crisis of regulations and of the state. Free markets would never cause the 2008 crisis because they have correcting mechanisms that would never allow it to get that bad. But when government is involved, it lets bad things accumulate. For example in America there is something like ‘too big to fail’. The government says: if you are a big bank, we will not let you fail. So if you are a CEO of a bank like that, you think that you can take on a lot of risk and get all the rewards, and if something goes wrong taxpayers will bail you out. That is what happened in 2008. Constantly the people on the free-market side think about how to address the different challenges of what is going on in the world.

It is hard to imagine the world with a completely free market. People would be much richer. We would have such advanced technology. We would live to be a hundred and fifty or older, because biotechnology has the capacity, if freed up from regulations and freed up from state control, to really extend human life dramatically. We might have rocket ships going to Mars, we might be colonizing Mars. More importantly than that, there would be no poor people in the world, because if you think about the last thirty years, over a billion people have come out of poverty, primarily in Asia because they have adopted free markets — not complete free markets, but a little bit. The problem in the world today is that there are still a billion or two billion poor people. And free markets would solve that — there would basically be no poor people, not by the standards of today. And people would be responsible for their own lives.

Edited by Liana Khapaeva

PhD, Executive Director of the Ayn Rand Institute
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