There Is No Such Thing as A ‘Free Market’.

I.B. Economics.

Anyone studying economics, no matter how briefly, will soon come across the phrase, the ‘ free market’. We also talk about ‘ free marketeers’, who are economists who believe that the less the government ‘ interferes’  in markets the better. They tend to argue that when the government steps into markets and introduces, for example, a minimum wage or a price ceiling, then this results in a restriction on the ‘freedom of choice’ of the players in the market, and also causes a loss of efficiency in the market. One of the main themes of the IB Economics  course is the debate about the extent to which governments should intervene in markets and should attempt to control them, and the extent to which should they should leave them alone and let them just get on to ‘do their job’.

For Ha-Joon Chang in his excellent book ‘ 23 Things They Don’t Tell You About Capitalism’ the argument put forward by the free marketeers is superfluous. Governments and politicians have always interfered in markets and have always attempted to control them. In his Chapter entitled ” There Is No Such Thing as A Free Market”, he says that markets have always been subject to rules, regulations and laws, some of which are ‘explicit’ but many others are ‘implicit’ and are not therefore obvious to us. For this reason, there is no such thing as a ‘free’ market.

Chang points out that in 1819 when in Britain Parliament introduced laws to protect children from being exploited in coal mines, the ‘ free marketeers’ of the day protested that this was an unwarranted interference in the market for labour (P2). Now we take it for granted that children should not be forced to work in coal mines. Similar protests occurred in the 1960’s and 70’s when legislation was enacted to stop factories from polluting the environment, or from producing products that damaged the environment. Again, the free marketeers of the era protested, saying that the legislation restricted the free choice of the economic agents involved in those industries.  Now we take it for granted that firms should not pollute the environment or produce environmentally unfriendly products (P3).

Chang also points out how there are many rules and regulations emanating from governments determining what can or cannot be sold. For example, in most countries it is illegal to sell votes, university places and government jobs (P4).

Rio Carnival
Participants processing, Rio Carnival, 2014.

How else do governments ‘ control’  or ‘interfere in’ free markets?

One role of government in an economy is to create and enforce laws and two areas of law which are vital for the efficient functioning of free markets are laws of contract and laws about property rights. Take laws of contract. Whenever an economic transaction takes place a ‘contract’ is entered into. A buyer of a house, for example, signs a contract with the seller, usually a physical document, which specifies things like the agreed price that will be paid, how the payments will take place and who the true owner of the property is. If the buyer finds out at a later date that the seller was not the true owner of the property, then that contract becomes null and void, and the buyer can sue the owner for breach of contract.

What a lot of people don’t realize is that even when buying cheaper, more mundane things, like food in a restaurant, or a cup of coffee in a cafe, you are still entering into a contract with the seller. However, the contract is implicit in the transaction, and is something that most people just take for granted. Take buying a coffee in a cafe. When you buy it you are assuming that it is in fact coffee and not another type of product, and you are making the assumption that it is safe to drink. If you bought something that made you violently ill, and turned out not in fact to be coffee, you could sue the sellers of the coffee for breach of contract. Unlike the example above of buying a high value item like a house, you did not  sign a contract with the coffee vendors ( i.e. a physical piece of paper), but you did enter into an implicit contract with the seller when you paid for the product. And if this contract is broken then you have the right to redress in the eyes of the law.

So, is there such a thing as a completely ‘free’ market in the sense of being free from government intervention or government interference? No. Laws and regulations govern how efficiently a market operates, and laws and regulations are created by, and enforced by, the state. These laws and regulations can be explicit, but some are implicit and are just taken for granted. To quote Chang:-

” How free a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved, and those free marketeers are as politically motivated as anyone” (P1).

Author: Mark

I was born in a developing country in Africa (Malawi), and have spent over 15 years living and working outside the UK as a teacher in international schools. I currently live and work in beautiful Brazil, the land of bright sunshine, amazing tropical beaches, dazzling football, eye-wateringly strong caipirinhas, and the sensual rhythm of samba.