In Defense of the Free Market
Lindsey, David S.
Such "spread the wealth" programs are to be encouraged for a variety of reasons; property gives people a sense of security and independence which is very desirable in our...
...Production continues to rise until the increased supply drives flown the market price enough to eliminate abnormal profits, i.e., un8 The A l t e r n a t i v e ; March, 1972 til the cost per umt of output, including a normal profit, just equals its market price...
...An additional moment's reflection may also suggest that a decentralized mechanism which deals with this problem by relying upon the voluntary decisions of every individual could not avoid total chaos...
...The economic arguments emphasize that free markets generally allocate resources efficiently in response to the material wants of consumers...
...The pragmatic arguments are that direct state interventions to correct real or alleged market imperfections have been (and will always be) generally counter-productive...
...even hypothetically...
...Paul, Minnesota...
...Competition ensures that an agreement to exchange (of rent) a factor of production or comnodity is voluntary rather than coerced because competitors provide alternatives to any particular transaction...
...The case for free markets is difficult to summarize...
...even the government's performance of its basic functions has been very spotty...
...The functions assigned to the state by advocates of the free market system generally lie in the classical liberal tradition of limited government .and the rule of law...
...The case for free market competitive capitalism deserves reconsideration...
...T HE EXTENSION of state regulations and controls in the last several decades has reduced the role of the free market in guiding the economic activity of Western countries...
...Capital as well as other factors of production flow into the high-profit industry and are allocated efficiently by suppliers who try to reduce costs as much as possible...
...George Stigler expresses the spirit of the pragmatic" arguments for laissez-Iaire: Any economist who wants the government to act "whenever the market falls short of perfection is like a judge in a singing contest who awards the prize to the second singer merely on the basis of having beard the first...
...the historical causes of the retreat from free markets deserve re-examination...
...This effect is desirable, because high profits mean that the cost of production per unit is less than the market price--a measure, remember, of the benefits consumers receive from the last unit purchased...
...Minimum wage laws and urban renewal programs have reduced the employment and housing opportunities of the disadvantaged...
...Free market, competitive, capitalism can be usefully defined as the economic system in which factors of production and commodities are privately owned and in which transactions among economic units are made voluntarily, on terms agreeable to all transactors...
...Markets are free in that first, neithe buyers nor sellers are excluded from entry by law, thereby promoting com petition, and second, no legal restrictions are placed on the terms of the transactions regarding price, quantity, or quality, thereby enhancing the range of voluntary agreement...
...Douglas Houghton and Mr...
...Its advocates have offered a variety of justifications for their views...
...In fact, the record of governmental economic programs is poor...
...Just as high profits signal that output should be increased, losses signal the opposite...
...We are confident his essay is well worth waiting for...
...These are but a few of many examples...
...This trend has strengthened the common presumption among intellectuals that the case for free markets is fundamentally invalid...
...Most unfortunately the failures of governmental activity have been commonly attributed to the free market and have in turn given rise to additional state programs...
...Those who scoff at him today may wish in years to come that they had listened to him while there was still time...
...d) to reduce involuntary exchanges caused by neighborhood effects," like air pollution...
...Most economists concede ~ that free markets in actuality will not achieve complete economic efficiency because perfect competition will not always exist and because the market price will not reflect all the economic costs and consumer benefits of a good in the presence of external neighborhood effects...
...I am convinced that such policies are indeed compatible with both a high level of economic incentives and with a free society--but that is a whole new essay...
...The libertarian position is that the free market is the system of economic organization which permits maximum individual liberty...
...He intends only his own security, only his own gain...
...People seem to be ever more willing to sacririce economic freedom in order to realize an apparent gain in income, security or equality...
...Improper monetary management has contributed to both depressions and inflations...
...Essentially, the state's proper role is viewed as that of rule maker, umpire and nightwatchman...
...Alternative welfare arrangements are plainly feasible...
...in economics from the University of Wisconsin in 1965, his M.A...
...The principles underlying demand, supply and the price mechanism explain why the invisible hand" works so well...
...And he is led by an invisible hand t o promote an end which was no part of his intention...
...Michael Clurman received his B.S...
...Adam Smith first provided the answer in the Wealth of Nations in 1776: Every individual...generally neither intends to promote the public interest, nor knows how much he is promoting it...
...The critical flaw in Britain's National Health Service "model" is that when a service is provided "'free" it embodies no mechanism to' sort out priorities and ensure economy by suppliers and users...
...Furthermore, the lobbying system matches the powerfully represented special interests of producer and worker organizations against the weakly represented common interest of all consumers...
...If his program, when enacted, fails to work, it nevertheless becomes entrenched...
...at the University of Chicago...
...This responsiveness of producers to consumer demand is why free market competitive capitalism has been termed a system of consumer sovereignty...
...It denies kidney machines to save life but removes tattoo marks t save pride...
...Perhaps the most significant reason, however, is that the values of the electorate are changing...
...Milstein is a first-rate advocate...
...RET The A l t e r n a t i v e ; March, 1972 9...
...I can suggest several possible reasons why the results of governmental programs continue to fall far short of their objectives while at the same time the economic role of the state continues to increase...
...The economy clearly becomes more efficient when it increases the output of a good which has a value to consumers in excess of the production cost...
...their arguments fall into three rather indistinct categories: (a) economic, (b) pragmatic and (c) libertarian...
...Flexible prices automatically adjust to clear markets, thereby eliminating surpluses and shortages...
...The failure to extend private property rights to commonly owned resources has worsened the environmental problem, as have the activities of several governmental agencies, such as the Army Corps of Engineers...
...By pursuing his oum interest he frequently promotes that of society more effectively than when he really intends to promote it...
...c) to maintain a stable monetary standard...
...Voluntary transactions in the free market represent relationships among free men...
...As these academic innovators developed more sophisticated alternatives to the crisis-prone state system, the skepticism and cynicism of those who dismissed the liberal innovations as "'politically impossible" seemed increasingly perverse...
...The justifications for the free market which I label 'economic" naturally derive from standard economic analysis...
...The libertarian refuses to make this sacrifice...
...Oftentimes the /~esults of the program are not carefully examined, and its less obvious faults are not discovered...
...Presumptions are too often poor substitutes for analysis...
...Thus, a free market price is a trelative) measure of the subjective benefits consumers receive from the last unit of a good they buy...
...In a given period of time, a consumer buys just enough of a good to bring his subjective valuation of the last unit down to equality with its market price...
...The essence of their liberal critique was whether a monolith dependent on taxation could raise standards in welfare to match the affluence generated by competition and choice in free markets...
...David E. Lindsey is an assistant professor of economics at Macalaster College in St...
...The free market possesses an automatic feedback mechanism which discourages a firm that fails to satisfy consumers' demand at appropriate costs from staying in business...
...But it does not follow from this view that free markets ought to be dispensed with, because income can be redistributed by taxation and transfers outside the market, e.g., by a negative income tax...
...The basic economic problem is the scarcity of available resources relative to unlimited human wants...
...another unit is worth less than its price to him...
...Why does the free market come as close to attaining economic efficiency as it does when consumers are mainly interested in their own wellbeing and producers are interested in maximizing their profits...
...The political process does not possess an effective negative feedback mechanism to eliminate programs that fail...
...Given these market prices, consumers spend their available income on various goods so as to attain the greatest satisfaction...
...It was two Labour Ministers for the Social Services, Mr...
...does not necessarily imply equity in the distribution of commodities, however," because views about equity differ widely...
...The result is mounting pressure to improve service combined with stiffening resistance from taxpayers to government expenditures...
...I believe that the attitudes underlying this situation are mistaken...
...Is it reasonable to expect state intervention to mitigate these inefficiencies...
...Rights to the ownership of property are invested in individuals and households, although managers of other economic units, like firms or unions, may intermediate some transactions among thesp ultimate owners...
...This obstruction did not silence academics who felt drawn to examine alternative "models" of financing welfare...
...Practice confirms what economic theory predicts: when pricing is suppressed, scarce resources are wasted and urgent needs denied...
...F OR MORE THAN twentyfive years since the inauguration of the Butler-Bevemdge regime of universal government provision, intellectual debate on the British welfare state has been inhibited by the undemonstrated objection that radical reform is "'politically impossible...
...and (f) to prevent private monopoly and collusion which restrains competition...
...initiated coercion is a repugnant means to any end, even economic efficiency...
...They often simply assume that increased state intervention was necessitated by the failures of the free market...
...If there were no way lo make one person better off without hurting someone else, then an economist would say the economy was fully efficient and resources were rationally allocated...
...In this way the producers' desire to maximize profits causes the free market to automatically approximate the following condition for economic efficiency: the economic cost of the last unit of goods produced must equal their subjective benefit to consumers...
...Election results prove nothing, so long as all parties offer much the same welfare table d'hote...
...High profits act as an effective signal to expand output in this industry...
...Indeed, provoked by the complacency of sociologists and political commentators, independent economists associated with The Institute of Economic Affairs have, since its foundation in 1957, persisted in asking unpalatable questions...
...Some opponents of free markets argue that a distribution of income according to what a person and the resources he owns add to the value of production -- the principle of distribution in the free market -- is inequitable...
...For him liberty is the primary political value...
...Economic power is decentralized and, most importantly, is not in the hands of the state, which has historically represented the primary threat to liberty...
...from Harvard in 1968...
...All systems fall short of perfection, but the emerging challenge for students of the "welfare state was how to mingle the equity of public finance with the efficiency of private payment...
...To put it awkwardly, how scarce resources to be used with what techniques to produce which commodities to be distributed to whom ? A moment's reflection reveals the staggering proportions of this problem in a world populated by billions of people...
...Of course, private or market alternatives to many of these state functions have been occasionally suggbsted, as have additional governmental responsibilities...
...The politician who promises a rapid government-1 solution to a pressing problem has an advantage in a campaign...
...He is presenHy doing an economic study of the computer industry for a firm in Boston...
...No other country has gone so far as Britain in discouraging fees, charges and insurance by supplying medical care and education without direct charge to those families who could pay...
...e) to care for the insane and the infirm...
...Hence far from proposing that state welfare be replaced by wholly private provision that would jeopardize the minority least able to care for themselves, liberal economists have refined policies that would permit choice between public and pl:ivate suppliers: minimum standards, contracting-out, tax refunds to encourage self-help, acting directly on low income, vouchers to enable everyone to pay for a choice...
...Efficiency...
...Accordingly, the defender of the free market is a disadvantaged participant in the marketplace of ideas," while the ~speculator," who envisions beneficial results from new anti-market reforms, enjoys substantial returns...
...How could they be sure that spending ten billion pounds --not eight billion or twelve billion--a year on state welfare was what the public preferred...
...our essay on socialism by Tom Milstein of the Young People's Socialist League was los.t in the postal system - - an inauspicious circumstance for any essay proposing extended government services -- and will be featured in our April number...
...This initial reaction, though understandable, departs surprisingly from the truth, because free markets in fact provide a remarkably efficient device for the rational allocation of resources and distribution of commodities...
...In addition, much greater effort must be made to redistribute income directly through tax reform, more generous family assistance and other programs...
...The verdict of history concerning free markets is rarely questioned by intellectuals (least of all, ironically, hy the reformers who most strongly challenge the status quo, which is, after all, the most recent verdict of history...
...A student oJ Milton Friedman, he received his Ph.D...
...b) to provide for the common defense...
...The hidden costs of this proposal, though, are the inefficiencies introduced as a result of both the reduced incentives to work for rich and poor alike and the decline in savings and capital formation...
...Tariffs and patent laws have lessened competition...
...At that point he buys no additional units...
...Political "leaders" should have learned something from the Britain Unfortunately...
...property gives people a sense of security and independence which is very desirable in our over-wrought, urbanized civilization, property ownership gives people a stake in the society and aversion to violent change which certainly should be welcome in America, and finally, wealth earns income and thus a more equal distribution of wealth automaticalIy results in a more equal distribution of income...
...His views are certainly unfashionable...
...That is, in terms of every individual's own preferences, there is little scope for altering the outcome of the free market in a way that could ,hake everyone better off...
...Consider the owner of capital who wants to maximize the return on his investn~ent, i.e., his profits...
...Richard Crossman, who most bluntly voiced the commonsense view that people will expend more money in direct payment for better welfare than they will pay in taxes unrelated to the services they receive...
...He is induced to invest in the industry where expected profits are the highest...
...An arbitrary list follows: (a) to operate a legal system which prohibits initiated violence, theft and fraud, defines property rights, enforces contracts, adjudicates disputes, guarantees liberty and disperses just punishment to convicted criminals...
Vol. 5 • March 1972 • No. 6
