Chains That Give Freedom

As I read our class blog one problem seems to jump out, the class understanding of free markets. As we talk about Coase and free market solution to environmental problems it is imperative that a true understanding of what exactly constitutes the "free market" that is being talked about. Private property advocates view of markets are not those left without fetters (regulation). Don Boudreaux captures this idea perfectly here (http://cafehayek.typepad.com/hayek/2004/11/index.html, scroll down towards the bottom of the page, it is the entry titled Fettered by Unfettered Language) . There are two fetters that are essential for the market to run efficiently.

The first and foremost is competition. Markets that are free are bound by it. Private firms compete for consumer dollars and access to supplies, like water. What this does is create a system in which firms cannot afford to discriminate based on any criteria including race and gender because by doing so they eventually lose profit. For example, a law firm (firm A) has two applicants for a litigatory position, one black, one white. Now assume that the black candidate is far superior in every aspect, but the law firm refuses to hire the young attorney because in their neck of the woods it would be unpopular, the inferior white guy gets the job.

How does the market handle this discrimination? Well, suppose that this firm A is engaged in a large litigatory dispute in which it is forced to put its only litigator to work. Firm B, the firm that is opposing Firm A, is from out of town and is the firm that hired the superior black applicant. Firm B will then have the advantage in the trial and in the market as well. By winning such a case against the discriminating Firm A they will be able attract high profile clientele while Firm A will pay the price of their discriminatory preferences by losing their clients to the other firms. Firms do not need regulation that says do not discriminate, the market will cure the social problem itself. (for further information on this see Sowell "Civil Rights: Rhetoric or Reality") Markets transcend things like discrimination because of competition.

The second fetter is equally important; "the common law of property, contract, and tort, all supplemented, when appropriate, by criminal law." Those who advocate free markets understand that in order for transactions to exist in the market, there needs to be a system that guarantees contracts are enforced. Without contract enforcement the entire free market system would be undermined and there would be no incentive for individuals to participate. Thus free market advocates like F.A. Hayek knew and understood that contract enforcement was a prerequisite to the free market he advocated.

Hayek knew that civilization rested on the appropriate application of these fetters. That is why he said, "Most of the advantages of social life, especially in its more advanced forms which we call "civilization," rest on the fact that the individual benefits from more knowledge than he is aware of. It might be said that civilization begins when the individual in the pursuit of his ends can make use of more knowledge than he has himself acquired and when he can transcend the boundaries of ignorance by profiting from knowledge he does not himself posses." (The Constitution of Liberty Ch2 p 22, F.A. Hayek) Man would not be able to take advantage of the knowledge of his fellow without the fetters on the market that fostered transactions. Man is only willing to transact if he is secure in his property through the common law with criminal law to back it up.

Thus to have free market solutions intended by those like Milton Friedman, F.A. Hayek, Thomas Sowell, Walter Williams, Professor Simmons and myself means to fetter the market with its institutional fetters; competition and common law and then let it work its magic. These types of markets can solve the market failures that government regulation tries to fix. It only takes time.