I was recently reminded of a profound truth about the free market and the prices that sit at its center. Unfortunately, this truth is often overlooked both by critics of the market economy and by economists like me. The simple truth is that the price system works thanks to and only because of a set of institutions that promote cooperation between us.
As an economist, I’m used to making the case that free markets, while imperfect, are a better alternative to government intervention. It goes something like this:
The free market’s price system, along with competition from sellers for buyers and from consumers for good deals, play an important role in gathering and processing the information about our economy that is dispersed among millions of buyers and sellers. The resulting prices are a measurement of how much people value goods and services.
In a well-functioning competitive market, the argument continues, the critical price “reports” tell us the most advantageous ways to use finished goods and services, intermediate goods, raw materials, and human time and talent, and guide entrepreneurs to produce what we want. . Most intensely as efficiently as possible. In economic terms, prices convey information about scarcity and the incremental substitutions of wealth.
Enter Samuel Gregg and his wonderful new book, “The Next American Economy.” Gregg’s case for the free market goes beyond the classic economic argument.
He writes that “the case for free markets involves rooting an economy in what some of its most influential founders thought would be America’s political future; That is, a modern commercial republic”. He added that “politically, the ideal embodies the idea of a self-governing state, in which people regularly consult with the governed; in which the use of state power is limited by strong commitments to constitutionalism, the rule of law, and private property rights; And the citizens consciously embrace the specific habits and disciplines needed to sustain such a republic.
Yes! I like to believe I’m a great advocate for markets, but when I neglect these last points, I’m sabotaging my own case. Terms like “competitive markets” give the impression of a heartless process. But the most important aspect of the competitive process is cooperation.
Indeed, massive cooperation happens daily all over the world. Consider, say, the shirt you are wearing. It was perhaps made of cotton from Texas and thread from Canada, stitched together in Vietnam and shipped to you in a vehicle assembled in Japan.
Imagine the trust built in such a cooperative system. This is partly the product, as Gregg explains, of the existence of property rights: the exclusive authority to decide how a resource is used. Will you sell your work time to Apple or John Deere? Will you spend your income on a Toyota or a Harley? Underpinning all this is the rule of law, which gives every person security in his or her property rights. The law must be clear, known and stable.
No serious free marketer believes that markets are perfect. We are not utopians. Unfortunately, perfect markets and perfect competition are often the starting point of economics textbooks. This rosy starting point leads many to conclude that when conditions are less than perfect, the best course of action for a correction is government intervention. This is wrong.
The government is not only imperfect, but the market is a process to find and correct errors. As Arnold Kling recently wrote, “Entrepreneurial innovation and creative destruction tends to solve economic problems, including market failures.”
This is not to say that the government plays no role apart from protecting property rights. But it means that faith in government intervention should be tempered with an acknowledgment of government’s own flaws, including a tendency to favor one group of people over another and an inability to adapt when policies fail or circumstances change.
The bottom line is that when we talk about the “free market,” it’s shorthand for a combination ofa As Greg reminds us, all these elements are a quintessential part of what George Washington envisioned for the new nation he led and described as “a great, a respectable and a commercial nation.”
Veronica de Rugy is the George Gibbs Chair in Political Economy and a Senior Research Fellow at the Mercatus Center at George Mason University.