Why We Need the Government in the Marketplace

David Brodwin, https://www.usnews.com

The relationship between companies and the marketplace is a lot like the
relationship of sports teams and the context of play, which includes the field, the
rules of the game, and the rules of the league. Football wouldn't be worth watching if
the field was not maintained in good condition, if the rules of the game weren't clear,
if the rules weren't enforced uniformly by the refs, and if league rules like free agency
and salary caps didn't keep the game competitive. A few teams from big cities would
take control, tie up key talent, and then would seek to bribe the refs and rewrite the
rules to ensure perpetual dominance.

In our economy, individual companies are the teams on the field, but government
controls the context in which play occurs. Government maintains the marketplace,
and no other entity has the power to do this. The scope of government in managing
the markets includes the following:

 A solid legal foundation, for example patents, contracts, and property rights
 A stable currency
 National security, so business does not get disrupted by foreign threats
 Stable and orderly conditions in capital and labor markets
 Efficient infrastructure: roads, trains, airports etc.
 Preservation of competition
 Management of externalities—for example, catch limits on a fishery

Let's return to the first question: Are there any conditions under which government
should put a team on the field?

There is rarely value in having government field its own team in well-functioning
competitive markets. We don't need or want a government enterprise making toaster
ovens. However in some cases, market forces have failed to address needs, and in
these cases government entities operate with greater efficiency and effectiveness
than private sector firms. For example, Medicare operates more efficiently than the
private system when it comes to covering the healthcare needs of older Americans.
When the United States established the Medicare Advantage program to promote
private sector competition, it became clear that private corporations would need
a subsidy of $15 billion per year in order to compete with the allegedly-inefficient
government plan. Private sector providers simply could not match Medicare's
efficiency even though Medicare is actually legally prohibited from negotiating drug
prices with pharmaceutical manufacturers while private corporations face no such
restriction.
The much maligned post office offers another example. Even though everyone loves
to complain about it, the fact remains that the U.S. Postal Service can send a letter
overnight or in two to three days for less money than Fedex. And the post office's
edge prevails despite the numerous obstacles imposed by legislators. For example,
the post office is required by law to prefund its pensions to an extent unprecedented
in private industry. And Congress repeatedly blocks the post office from closing
redundant post offices and subcontracting the work to local merchants.

[See a collection of political cartoons on Congress.]

Often the private sector can outperform government. Sometimes the government
can outperform the private sector. Private isn't always better. What drives efficiency
and effectiveness is whether real competition exists, and if not, how the operators
are measured and incented. In parts of the U.S. economy with little competition, the
private sector has shown remarkably poor performance. For example in broadband
internet, which is a near-monopoly, broadband services cost much more and provide
much less capacity in the United States than in any other developed country.
Likewise in healthcare, many local markets face near-monopoly conditions. With no
effective competition, and minimal negotiating power on the part of payers and
patients, healthcare costs in the United States have risen far faster than in other
developed countries.

In a vigorous and open marketplace, competition does a remarkably good job of

spurring companies to innovate and become more efficient. But what is often true is
not always true, and we need to heed the difference. Private sector companies can
be remarkably sluggish and inefficient when markets are not competitive and
companies have won government subsidies and protection. Such is the case with
banks that are too big to fail (and bankers who are too big to jail.) In these cases a
firm government presence is needed to restructure markets so that competition
prevails. The invisible hand can't work without it.
 The Free Market Doesn't Need Government Regulation

SHELDON RICHMAN, https://reason.com

Most people believe that government must regulate the marketplace. The only
alternative to a regulated market, the thinking goes, is an unregulated market.
On first glance that makes sense. It's the law of excluded middle. A market is
either regulated or it's not.

Cashing in on the common notion that anything unregulated (disorderly) is bad,

advocates of government regulation argue that an unregulated market is to be
abhorred. This view is captured by twin sculptures outside the Federal Trade
Commission building in Washington, D.C. (One is on the Constitution Ave.
side, the other on the Pennsylvania Ave. side.) The sculptures, which won an art
contest sponsored by the U.S. government during the New Deal, depict a man
using all his strength to keep a wild horse from going on a rampage.

The title? "Man Controlling Trade."

Since trade is not really a wild horse but rather a peaceful and mutually
beneficial activity between people, the Roosevelt administration's propaganda
purpose is clear. A more honest title would be "Government Controlling
People." But that would have sounded a little authoritarian even in New Deal
America, hence the wild horse metaphor.

Square Circle

What's overlooked—intentionally or not—is that the alternative to a

government-regulated economy is not an unregulated one. As a matter of fact,
"unregulated economy," like square circle, is a contradiction in terms. If it's
truly unregulated it's not an economy, and if it's an economy, it's not
unregulated. The term "free market" does not mean free of regulation. It means
free of government interference, that is, legal plunder and other official
aggressive force.

Ludwig von Mises and F. A. Hayek pointed out years ago that the real issue
regarding economic planning is not: To plan or not to plan? But
rather: Who plans (centralized state officials or decentralized private individuals
in the market)?

Likewise, the question is not: to regulate or not to regulate. It is, rather, who (or
what) regulates?
All markets are regulated. In a freed market we all know what would happen if
someone charged, say, $100 per apple. He'd sell few apples because (under
current cost conditions) someone else would offer to sell them for less or,
pending that, consumers would switch to alternative products. "The market"
would not permit the seller to successfully charge $100.

Similarly, in a freed market employers would not succeed in offering $1 an hour

and workers would not succeed in demanding $20 an hour for a job that
produces only $10 worth of output an hour. If they try, they will quickly see
their mistake and learn.

And again, in a freed market an employer who subjected his employees to

perilous conditions without adequately compensating them to their satisfaction
for the danger would lose them to competitors.

Market Forces

What regulates the conduct of these people? Market forces. (I keep specifying
"in a freed market" because in a state-regulated economy, competitive market
forces are diminished or suppressed.) Economically speaking, people cannot do
whatever they want—and get away with it—in a freed market because other
people are free to counteract them and it's in their interest to do so. That's part of
what we mean by market forces. Just because the government doesn't stop a
seller from charging $100 for an apple doesn't mean he or she can get that
amount. Market forces regulate the seller as strictly as any bureaucrat could—
even more so, because a bureaucrat can be bribed. Whom would you have to
bribe to win an exemption from the law of supply and demand? (Well, you
might bribe enough legislators to obtain protection from competition, but that
would constitute an abrogation of the market.)

It is no matter of indifference whether state operatives or market forces do the

regulating. Bureaucrats, who necessarily have limited knowledge and perverse
incentives, regulate by threat of physical force. In contrast, market forces
operate peacefully through millions of cooperating participants, each with
intimate knowledge of her own personal circumstances and looking out for her
own well-being. Bureaucratic regulation is likely to be irrelevant or (more
likely) inimical to what people in the market care about. Not so regulation by
market forces.

If this is correct, there can be no unregulated, or unfettered, markets. We use

those terms in referring to markets that are unregulated or unfettered by
government. As long as we know what we mean, the expressions are
unobjectionable.
But not everyone knows what we mean. Someone unfamiliar with the natural
regularities of free markets can find the idea of an unregulated economy
terrifying. So it behooves market advocates to be capable of articulately
explaining the concept of spontaneous market order—that is, order (to
use Adam Ferguson's felicitous phrase) that is the product of human action but
not human design. This is counterintuitive, so it takes some patience to explain
it.

Ends and Means

Order grows from market forces. But where do market forces come from? They
are the result of human action. Individuals select ends and act to achieve them
by adopting suitable means. Since means are scarce and ends are abundant,
individuals economize in order to accomplish more rather than less. And they
always seek to exchange lower values for higher values (as they see them) and
never the other way around. In a world of scarcity, tradeoffs are unavoidable, so
one aims to trade up rather than down. (One's trading partner does the same.)
The result of this, along with other features of human action, and the world at
large is what we call market forces. But really, it is just men and women acting
rationally in the world.

The natural social order greatly concerned Frédéric Bastiat, the nineteenth-
century French liberal economist. In Economic Harmonies he analyzed that
order, but did not feel he needed to prove its existence—he needed only to point
it out. "Habit has so familiarized us with these phenomena that we never notice
them until, so to speak, something sharply discordant and abnormal about them
forces them to our attention," he wrote.

. . . So ingenious, so powerful, then, is the social mechanism that every man,

even the humblest, obtains in one day more satisfactions than he could produce
for himself in several centuries. . . . We should be shutting our eyes to the facts
if we refused to recognize that society cannot present such complicated
combinations in which civil and criminal law play so little part without being
subject to a prodigiously ingenious mechanism. This mechanism is the object of
study of political economy. . . .
In truth, could all this have happened, could such extraordinary phenomena
have occurred, unless there were in society a natural and wise order that
operates without our knowledge?
This is the same lesson taught by FEE's founder, Leonard Read, in I, Pencil.

Most people value order. Chaos is inimical to human flourishing. Thus those
who fail to grasp that, as Bastiat's contemporary Proudhon put it, liberty is the
mother not the daughter of order will be tempted to favor state-imposed order.
How ironic, since the state is the greatest creator of disorder of all.
Those of us who understand Bastiat's teachings realize how urgent it is that
others understand them, too.

QUORA

What is free market capitalism?

Let’s break this question down.

A market is a place where different parties (buyers and sellers) exchange value - goods for
money, time and effort for money, money for services and so on.

Free means there is no compulsion, but transactions happens voluntarily. People are not
forced nor tricked or cheated into buying. So you have the option to buy/sell or not, based on
your will and on enough available information. If someone lies about the quality or quantity
of what’s being sold, that’s cheating and therefore does not count as voluntary transaction
(you wouldn’t buy if you had full information, therefore you are forced to buy on wrong
grounds, making the transaction not voluntary). If a third party is harmed in the process
(e.g., the goods were stolen) that’s not free because being robbed is involuntary. This is an
example of negative liberty - the freedom from harm by others. For this freedom to be
protected, in practice a party like a government is needed (to guarantee rule of law, to protect
ownership, to make standards enforceable, and so on).

Capitalism is a Marxist construct used to describe an economic system based on private

ownership of the means (and results) of production and voluntary exchange. As a result of
the central premise of voluntary exchange, a price system is in use under capitalism: money
is not just a means of exchanging goods and services, but it has foremost a signal function of
the value exchanged, price being the amount at which economic goods are exchanged - high
price means high value, low price means low value. Under socialism, price does not signal
value because value is set by a central authority rather than by the parties willing to exchange
the goods. This leads to a lack of intelligence as to what needs to be produced. Under
socialism/Marxism, value is estimated based on the amount of labor needed to produce,
rather than the amount of value buyers want to give. So basically, capitalism means people
are free to own the fruits of their labor, to exchange it as they see fit.

So does free market capitalism exist anywhere? Not as described here. There is no
government that leaves the market completely free as theoretically described here. However,
there are degrees of free markets. All advanced societies have built their wealth on the
productivity of citizens enjoying a degree of economic freedom - trade under a market price
system creates an economic surplus that makes buyers and sellers better off. Free market
economies tend to grow due to productivity improvement (productivity is a measure of
efficiency, expressed as input vs output). An example of a more or less free industry is
software, and this industry perfectly illustrates how much more value we get from it over
time. A polar opposite is the medicine industry, which is one of the most regulated and
unfree. No country has a completely free market, but some come closer than others - Hong
Kong is more free than the US which is more free than Europe.

Free Market
By Murray N. Rothbard, FEATURED ENCYCLOPEDIA ENTRY
BASIC CONCEPTS, ECONOMIC SYSTEMS, THE MARKETPLACE

“
F ree market” is a summary term for an array of exchanges that take place in
society. Each exchange is undertaken as a voluntary agreement between two
people or between groups of people represented by agents. These two
individuals (or agents) exchange two economic goods, either tangible
commodities or nontangible services. Thus, when I buy a newspaper from a
newsdealer for fifty cents, the newsdealer and I exchange two commodities: I
give up fifty cents, and the newsdealer gives up the newspaper. Or if I work for
a corporation, I exchange my labor services, in a mutually agreed way, for a
monetary salary; here the corporation is represented by a manager (an agent)
with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also,
each will repeat the exchange next time (or refuse to) because his expectation
has proved correct (or incorrect) in the recent past. Trade, or exchange, is
engaged in precisely because both parties benefit; if they did not expect to gain,
they would not agree to the exchange.

This simple reasoning refutes the argument against FREE TRADE typical of the
“mercantilist” period of sixteenth- to eighteenth-century Europe and classically
expounded by the famed sixteenth-century French essayist Montaigne. The
mercantilists argued that in any trade, one party can benefit only at the expense
of the other—that in every transaction there is a winner and a loser, an
“exploiter” and an “exploited.” We can immediately see the fallacy in this still-
popular viewpoint: the willingness and even eagerness to trade means that both
parties benefit. In modern game-theory jargon, trade is a win-win situation, a
“positive-sum” rather than a “zero-sum” or “negative-sum” game.
How can both parties benefit from an exchange? Each one values the two goods
or services differently, and these differences set the scene for an exchange. I, for
example, am walking along with money in my pocket but no newspaper; the
newsdealer, on the other hand, has plenty of newspapers but is anxious to
acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant
values each good in question, and each participant’s bargaining skills. How
many cents will exchange for one newspaper, or how many Mickey Mantle
baseball cards will swap for a Babe Ruth, depends on all the participants in the
newspaper market or the baseball card market—on how much each one values
the cards as compared with the other goods he could buy. These terms of
exchange, called “prices” (of newspapers in terms of money, or of Babe Ruth
cards in terms of Mickey Mantles), are ultimately determined by how many
newspapers, or baseball cards, are available on the market in relation to how
favorably buyers evaluate these goods—in shorthand, by the interaction of
their SUPPLY with the DEMAND for them.

Given the supply of a good, an increase in its value in the minds of the buyers
will raise the demand for the good, more money will be bid for it, and its price
will rise. The reverse occurs if the value, and therefore the demand, for the good
falls. On the other hand, given the buyers’ evaluation, or demand, for a good, if
the supply increases, each unit of supply—each baseball card or loaf of bread—
will fall in value, and therefore the price of the good will fall. The reverse
occurs if the supply of the good decreases.

The market, then, is not simply an array; it is a highly complex, interacting

latticework of exchanges. In primitive societies, exchanges are all barter or
direct exchange. Two people trade two directly useful goods, such as horses for
cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-
step process of mutual benefit creates a situation in which one or two broadly
useful and valuable commodities are chosen on the market as a medium of
indirect exchange. This money-commodity, generally but not always gold or
silver, is then demanded not only for its own sake, but even more to facilitate a
reexchange for another desired commodity. It is much easier to pay
steelworkers not in steel bars but in money, with which the workers can then
buy whatever they desire. They are willing to accept money because they know
from experience and insight that everyone else in the society will also accept
that money in payment.

The modern, almost infinite latticework of exchanges, the market, is made

possible by the use of money. Each person engages in specialization, or a
division of labor, producing what he or she is best at. Production
begins with NATURAL RESOURCES, and then various forms of machines and
capital goods, until finally, goods are sold to the consumer. At each stage of
production from natural resource to consumer good, money is voluntarily
exchanged for capital goods, labor services, and land resources. At each step of
the way, terms of exchanges, or prices, are determined by the voluntary
interactions of suppliers and demanders. This market is “free” because choices,
at each step, are made freely and voluntarily.

The free market and the free price system make goods from around the world
available to consumers. The free market also gives the largest possible scope to
entrepreneurs, who risk capital to allocate resources so as to satisfy the future
desires of the mass of consumers as efficiently as
possible. SAVING and INVESTMENT can then develop capital goods and increase
the PRODUCTIVITY and wages of workers, thereby increasing their standard of
living. The free competitive market also rewards and stimulates
technological INNOVATION that allows the innovator to get a head start in
satisfying consumer wants in new and creative ways.

Not only is investment encouraged, but perhaps more important, the price
system, and the profit-and-loss incentives of the market, guide capital
investment and production into the proper paths. The intricate latticework can
mesh and “clear” all markets so that there are no sudden, unforeseen, and
inexplicable shortages and surpluses anywhere in the production system.

But exchanges are not necessarily free. Many are coerced. If a robber threatens
you with, “Your money or your life,” your payment to him is coerced and not
voluntary, and he benefits at your expense. It is robbery, not free markets, that
actually follows the mercantilist model: the robber benefits at the expense of the
coerced. Exploitation occurs not in the free market, but where the coercer
exploits his victim. In the long run, coercion is a negative-sum game that leads
to reduced production, saving, and investment; a depleted stock of capital; and
reduced productivity and living standards for all, perhaps even for the coercers
themselves.

Government, in every society, is the only lawful system of

coercion. TAXATION is a coerced exchange, and the heavier the burden of
taxation on production, the more likely it is that ECONOMIC GROWTH will falter
and decline. Other forms of government coercion (e.g., PRICE CONTROLS or
restrictions that prevent new competitors from entering a market) hamper and
cripple market exchanges, while others (prohibitions on deceptive practices,
enforcement of contracts) can facilitate voluntary exchanges.

The ultimate in government coercion is SOCIALISM. Under socialist central

planning the socialist planning board lacks a price system for land or capital
goods. As even socialists like Robert Heilbroner now admit (see SOCIALISM),
the socialist planning board therefore has no way to calculate prices or costs or
to invest capital so that the latticework of production meshes and clears. The
experience of the former Soviet Union, where a bumper wheat harvest somehow
could not find its way to retail stores, is an instructive example of the
impossibility of operating a complex, modern economy in the absence of a free
market. There was neither incentive nor means of calculating prices and costs
for hopper cars to get to the wheat, for the flour mills to receive and process it,
and so on down through the large number of stages needed to reach the ultimate
consumer in Moscow or Sverdlovsk. The investment in wheat was almost
totally wasted.

Market socialism is, in fact, a contradiction in terms. The fashionable discussion

of market socialism often overlooks one crucial aspect of the market: When two
goods are exchanged, what is really exchanged is the property titles in those
goods. When I buy a newspaper for fifty cents, the seller and I are exchanging
property titles: I yield the ownership of the fifty cents and grant it to the
newsdealer, and he yields the ownership of the newspaper to me. The exact
same process occurs as in buying a house, except that in the case of the
newspaper, matters are much more informal and we can avoid the intricate
process of deeds, notarized contracts, agents, attorneys, mortgage brokers, and
so on. But the economic nature of the two transactions remains the same.

This means that the key to the existence and flourishing of the free market is a
society in which the rights and titles of private property are respected, defended,
and kept secure. The key to socialism, on the other hand, is government
ownership of the means of production, land, and capital goods. Under socialism,
therefore, there can be no market in land or capital goods worthy of the name.

Some critics of the free market argue that PROPERTY RIGHTS are in conflict with
“human” rights. But the critics fail to realize that in a free-market system, every
person has a property right over his own person and his own labor and can make
free contracts for those services. Slavery violates the basic property right of the
slave over his own body and person, a right that is the groundwork for any
person’s property rights over nonhuman material objects. What is more, all
rights are human rights, whether it is everyone’s right to free speech or one
individual’s property rights in his own home.

A common charge against the free-market society is that it institutes “the law of
the jungle,” of “dog eat dog,” that it spurns human cooperation
for COMPETITION and exalts material success as opposed to spiritual values,
philosophy, or leisure activities. On the contrary, the jungle is precisely a
society of coercion, theft, and parasitism, a society that demolishes lives and
living standards. The peaceful market competition of producers and suppliers is
a profoundly cooperative process in which everyone benefits and where
everyone’s living standard flourishes (compared with what it would be in an
unfree society). And the undoubted material success of free societies provides
the general affluence that permits us to enjoy an enormous amount of leisure as
compared with other societies, and to pursue matters of the spirit. It is the
coercive countries with little or no market activity—the notable examples in the
last half of the twentieth century were the communist countries—where the
grind of daily existence not only impoverishes people materially but also
deadens their spirit.