Free market

The free market is the whole of all voluntary interactions.^{[citation needed]}

Self-interest leading to negative consequences

It is not true that the case for the free market rests on the (false) claim that when people do what's in their own immediate interest, it will always lead to the best outcome for all. The great insight of Adam Smith (as well as earlier and later thinkers) was that this happens to be the case very often in the market economy. But this doesn't commit the believer in free markets to a straitjacket rule.

There are many examples of apparent failures of "naked self-interest" that are in fact failures of the government overseeing the issue. Conservationists point to overfishing as a refutation of Adam Smith, for example, when in reality overfishing underscores the importance of property rights.

For a different example, the economist A.C. Pigou used a hypothetical illustration of traffic congestion to show that the government could raise total welfare by imposing a tax on drivers who wanted to take a route that could accommodate only a limited number of vehicles. Frank Knight, however, showed that if the road were privately owned, then the alleged "market failure" would disappear — the private road owner would maximize his profit by charging a toll exactly equal to the hypothetical "optimum Pigovian tax."

The necessity of rules

There is a growing literature on "herding behavior," "informational cascades," and so forth, that uses neoclassical models of agents with rational expectations who end up making dumb investment decisions when they occasionally get locked into a "bad equilibrium." Many of the economists working on these models believe that they demonstrate the necessity for government regulation of financial markets.

Yet this is a complete non sequitur. Someone can be a proponent of free markets and still agree that professional basketball games need referees. The point is that the referees should be privately employed by organizations that receive voluntary payments from their customers.

More generally, the believer in laissez-faire isn't forced to renounce all forms of airline inspection or product safety. But these procedures can be supplied privately, either by the companies themselves, by outside watchdog groups, or by insurance companies.

The choice isn't, "Rules or no rules?" The choice is, "Rules made and enforced by voluntary contractual arrangements, or rules made and enforced by coercive agencies that can't go out of business?"

Links

• By the Way, Free Markets Are Free by George F. Smith, January 2010
• Free market on Wikipedia