Principle No. 8: The free market should not be distorted by government-designed dictates or advantages
“I think all the world would gain by setting commerce at perfect liberty.”
- Thomas Jefferson, 1785
“But even our commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences...”
- George Washington, Farewell Address, 1796
“If industry and labour are left to take their own course, they will generally be directed to those objects which are the most productive, and this in a more certain and direct manner than the wisdom of the most enlightened legislature could point out.”
- James Madison, speech to the Congress, 1789
The “free market” is an economic system in which individuals, rather than government, freely make decisions regarding the value of their economic activities and transactions.
For example, if I have an item — let's just say it's a box of some sort — that I'm willing to exchange (sell) for $10, it's because I prefer having the money to having the box. If you are only willing to exchange (buy) the box for $5, it's because you prefer the box to the $5, but the value of the box is not worth $10 to you. In a free market system, you and I would be free to either negotiate an amount that is satisfactory to both of us or to walk away with no exchange at all. The government would have no say in how much I must charge for the item or how much you must pay for it.
Or, let’s say I want to create a job in my business that will make more of those boxes. When I do the math, I determine that I won’t be able to make any money from adding that job unless I limit the wage to $6.00 per hour. In a free-market economy, if you were willing to work for that amount of money, you and I should be able to reach that agreement between ourselves, without the government requiring a higher wage. If forced to pay a higher wage, I simply wouldn’t create the job, because I couldn’t afford it. This would leave me without the ability to grow that part of my business, and it would leave you—who would willingly work for that amount of money—without a job. In other words, the government would be telling you that you do not have the right to work for that amount of money.
That is exactly what the government does do through minimum wage laws.
This is really a matter of property rights, where I have a right to keep my property (or my labor) until I willingly, without coercion, choose to do something with it. In the example above, if I get to the point where I just want to get rid of the box, its value to me might decline to $5, but I am able to make that choice, because it is my property. As a buyer, you also have the right to keep your money until you willingly, without coercion, choose to spend it.
Notice the condition placed on the exchange. In a free market, exchanges are entered into willingly, without force or deception. To be worthy of that market freedom, the exchanges also must be legal and moral. If an exchange takes place under coercion or fraud, it is not a free market exchange. If an individual is lied to in order to persuade him to purchase something, such as when a product or service is misrepresented, this is not considered morally voluntary either. Thus, a free market is one without force or fraud.
That is where government does have a legitimate role: to punish those who don’t fulfill their contractual agreements, who use force or deception to gain something, or who sell or purchase an item that is illegal.
To accomplish this, government should establish a dependable system of justice, so that individuals and businesses can know the “rules of the game” within which they are free to operate. Ideally, that system of justice will impose rules that are sufficient to provide clarity, but scarce enough to limit the financial and time burdens required to understand and comply with the rules.
This system of justice requires the involvement of all branches of government: a legislature that passes clear, limited-scope laws; an executive branch (police, regulatory agencies, etc.) that enforces the law consistently and impartially; and a judicial branch that interprets the laws only within the power granted to it to do so, and that judges with consistency, impartiality, and fairness those who have been charged with violating the laws.
Aside from a strong system of justice, there is very little government should do in the free market, at least in comparison to all the things government is doing now. Most free-market economists agree that government has an appropriate role in regulating “externalities”—those activities that go beyond the supplier-consumer relationship. This would include air pollution, water pollution, and similar problems that occur beyond the company’s property line.
But here’s the caution: When government tells businesses through laws or regulations what they should or should not do, or when government gives tax or regulatory advantages to one business over another, it runs the high risk of inviting corruption, inefficiency, and favoritism. It also artificially increases the cost of doing business. When regulation is necessary, it should be based on sound science and economics, and it should be done in a manner that allows relative freedom in compliance, not detailed micromanagement. It should also be done only after consideration has been given to the cumulative burden of a new regulation on top of other ones affecting the same industry.
Making a profit in a legitimate business is a good thing, unless it is gained by fraud or coercion. Making a profit allows an enterprise to stay in business, to provide for its customers’ needs, to provide jobs for people in the community, and to help the market stay competitive by offering options to consumers.
Freedom to succeed necessarily requires the freedom to fail. When government tries to keep people from failing, it actually can encourage people to take risks they are not equipped to handle. A government safety net changes the way industries behave, just as it changes the way individuals behave. If government is likely to bail them out, there is less need for responsible, efficient operations, or decisions based on market demand.
Government-designed advantages, such as subsidies or tax preferences for one or a few businesses, is sometimes known as “corporate welfare,” and it can have just as detrimental an impact on the free market as government regulation. Some companies or individuals, or perhaps a particular industry might benefit, but competition is hindered, and the taxpayers are left footing the bill. History (including recent history with the Mississippi Beef Processors plant) has shown that government usually does not do well in predicting successful ventures. More importantly, it should not use taxpayers’ money to speculate on business ventures.
It might be appropriate to provide roads, water and sewer systems, and other infrastructure for a project that shows promise, as measured (among other things) by the private capital which has been invested or committed to it. Tax breaks in some cases are acceptable, because they are often provided to companies that would not be paying taxes if they were not here. In other words, there is no real loss of revenue.
But money should not be taken from taxpayers and given to a private company to subsidize its business. To do so forces a taxpayer to invest in a company involuntarily, which violates the foundation of a free market - a voluntary exchange. It also distorts the market, because economic investment is based on the power of government, not on the demand of the market. Competitors cannot compete fairly with government-subsidized companies.
The power of eminent domain should not be used by the government to take property from one individual or company and give it to another private entity. To do so violates the right to sell private property without coercion. This particular use of eminent domain has the effect of making government the ultimate owner of all property, as it can take a person's land simply because those in power want someone else to have it.
Abraham Lincoln said, “You cannot strengthen the weak by weakening the strong. You cannot help the wage earner by pulling down the wage payer…You cannot build character and courage by taking away man’s initiative and independence.”
Simply put, markets work better than mandates and corporate welfare. Government officials who realize the need to let the free market work will govern with humility and restraint.
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