Free Markets

We all share concepts that are considered axiomatic, despite rather imprecise shared understanding. These are told to everyone as obvious, and a simple restatement of the concept is understood to contain its own proof. The concept of free markets is one of them.

The freedom concept is often invoked when state’s actions are feared to have implications that are not ideal for corporate financiers, providers of capital and subsequent beneficiaries. But, one ought to ask, free from what? Often, people say that markets should be free from state intervention. This presupposes that markets exist exclusively from the state, that in some way markets’ existence is inevitable. Their is another hidden argument in there that suggests that options other than markets are inconceivable, but we won’t go there.

I would say that the markets do not exist despite the state, but because of the state. Markets exist because arm’s-length transactions are possible. If arm’s-length transactions were not possible, capital will flow through bank-loans, and not markets. Bank loans as a primary means of financing may seem antiquated and a bastion of developing countries, but it helps to remember that more than half the financing in Japan is relationship-based, flowing from coffers of banks, and not the bond market.

Without state support of property rights and market stability, financial markets would cease to exist. Markets run according to rules and laws, which are legislated by the state. Market stability would be absent without existence of an entity that boasts relatively unlimited liquidity and an unconstrained balance sheet in the short-run.

Sorry if this seems to be a rant, but I am tired of hearing the free markets argument as if contains its own proof. I would like to see a well-functioning market that does not have state actor behind it. But, until then, perhaps those shouting from rooftops about the axiomatic nature of free markets should feel less smug. It would also help them to find out that who is paying them to shout (most often, in a form of a state-sponsored currency).




1 Comment

  1. It is a well understood argument that there has to be a strong state, judiciary, which guarantees property rights for free markets to exist. The state’s purpose should be to create the infrastructure and environment for free market to flourish.The state also needs to provide a balanced regulatory environment as well. What one also has to appreciate is that sometimes the aims of free markets runs counter to the process of democracy. The creative destruction process of free market causes pain, which a democratic process cannot allow some of its people to suffer. And hence, can the govt, effectively tackle the two. Also is the problem of aggregating data, which will get heavily biased in a bureaucratic process. But in the end, do I think markets can regulate themselves? Yes, but a lot of injustice and pain has to occur for that ( people dying in a air carrier which does not adhere to safety standards, before people switch to a safer choice) Markets can be much more efficient, when the state provides a strong environment for it and protects it. Hence they go hand in hand. Its all about finding that balance šŸ™‚

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