The main reason the term “free market” is in disrepute is because the Chicago School of Economics, whose leading lights would be the well known Milton Friedman and the less known but more influential Ronald Coase, who use the term, but in no sense are free marketers. Both endorse and serve the state, and a free market and the state are mutually exclusive. Free markets have government, but we need no state to be well and self-governed in a free market.
Coase won a Nobel Prize in economics writing in relation to Pigou, who was a titan in early 20th century economics. Pigou pointed out the necessity of government providing public goods such as lighthouses, and how to best tax for such provision.
How could something like a lighthouse, that guides ships in the night, ever be in private hands? If the state did not tax for lighthouses, ships would just sail by the light, get the benefit, and pay nothing. Government intervention is necessary to deal with the free rider problem, the ship that does not pay for a necessary service.
Pigou, like Adam Smith, was a moral philosopher, and was writing economics in the milieu in which he lived. He addressed matters such as “externalities,” for example the costs a new factory in a crowded neighborhood are borne by the neighbors, and how to tax to arrive at just distribution of costs. You can see how Pigou would be popular with progressives, with the government stepping in to solve all ills.
Pigou's ideas were popular with the powers that be, because there really was nothing that was not a public good, if the people, or a party, wanted it so. The problem was, by 1937 when Coase started writing, some very wicked people, like Mussolini and Stalin and Hitler were agreeing, everything is a public good. Pigou supported Keynes, who asserted his ideas would work best in national socialism, and said so in the 1935 German edition of his most influential work. The USA economy is largely Keynesian.
Coase made his bones by taking out Pigou. Coase noted that, in fact, lighthouses were, and always had been, privately owned and operated. Lighthouses were private companies. The lighthouse companies charged ships when they landed in port. Ships paid voluntarily. Pigou simply had no idea what he was talking about.
This is an+ archy in action. Free markets existed before there were kings, and free markets are the natural condition. When people say there is no such thing as a free market, they are largely correct. As long as there is a state, there cannot be a free market. Happily, we know we can have free markets, that we already have them, it is just they are buried under the wreckage of prescriptive law 14000 pages of NAFTA and 72000 pages of tax code, 163,000 pages of CFR etc.
Pigou ignored the fact that problems Pigou addressed had already been solved in a free market. But with capitalism, property rights needed to be abrogated, and in essence, the contemporary theories were clearly ignorant and unjust.
Whatever Coase’s intentions, the result was to eliminate property rights and give free reign to big business/big business.
What Coase did not address is, what if the ships did not pay voluntarily? The ships were shunned. Does not do you much good if you come into harbor to unload or pick up, only to find no one will give you a space to dock, tie you up, or load and unload you. As with malefactors among the Amish, you’d get shunned. It’s not that free markets make people saints, it’s that it is a system in which people cooperate or suffer in the measure they refuse to cooperate. It is pitch perfect in dealing with the free rider, when one appears.
The coast guard rescue boats were all private companies, too. Ship owners and insurers were happy to know, and pay for voluntarily, that a crew of expert rowers had a sound boat to come out and rescue a crew in a wreck. Local pride motivated participation, not to mention salvage rights.
You’ll notice in both instances we have an exercise in self-government, but there is no state. So it goes through any and all public goods. There is really no role for the state in life.
Nonetheless, Coase developed a theorem in relation to government action to deal with the problems that arose with capitalism. Coase argued regardless of property rights, two players in an economic action may arrive at a solution without reference to property rights or law. What if a train running along a Montana wheat field sends off a spark that burns down a wheat field? Never mind this too is already laid out in law and free markets and property rights. That 800 year tradition blocked progress as defined as “get big or get out.” Coase offered the idea that regardless of property rights, between the railroad and the wheat farmer, the two rights holders would sort out an agreement in spite of property rights. And this theory could be applied in law to economic problems.
Now this put some rational limit on public goods by reframing the question. What the Chicago school managed to do was to blend economics and law so that less state may yield better results under more freedom, as big business would deem it. Thus the Nobel price.
If you want to understand the application of modern economic theory, then read Coase, not Keynes nor Friedman, especially if you want to understand the rational basis for the modern practices in markets and law. The book to read is The Firm, The Market and The Law.
Of course I much disagree with the contents, but it cannot be denied that Coase's’ ideas are widely applied in modern practice. Reading the book will help you understand some of the more inexplicable policies we see around us. Coase was widely influential, far more than Milton Freidman.
One of Coase’s most prolific expounders was the University of Washington economics professor Steven N. S Cheung, who specialized in the fields of transaction costs and property rights, US authorities have issued an arrest warrant for Cheung on tax-evasion and conspiracy charges, fin relation to his other work in intellectual property rights and truth in advertising. But that is another story.
When asked if at 101 years old this year in an NPR interview “”Is there anything in the world you would consider a public good?” Coase replied, “I don’t know, I can’t think of anything . O yes, I can. The provision of the army is something, which I think, the government, on the whole, can provide better than leaving it to private enterprise.”
Now this is funny. Even at 101 years old, this lifelong academic has not gotten around to reading everything. And too bad for someone who wanted to be an historian, not an economist (in fact, he’s never taken any course on economics.) And he could not become a historian because he could not read Latin, a requirement in his youth. He would have learned, when studying the classics, that in fact in ancient Greece, it was private individuals who raised armies in times of need. It was private individuals who provided all of the items we call “public goods,” he would know Greece as free and safe for 500 years under this system, and grew in wealth and peace. It was the idea USA was founded on, and the basic military unit is called a company, not a coincidence.
And to this day, it is not soldiers who determine if a country is safe, it is the population they front. USA is safe not because of our soldiers, it is because any invader would face an angry and well-armed population. When countries fall, it is a demoralized population that gives in. The Germans lost the will to fight at the end of W.W.II, the Vietnamese, like the Afghanis, have not.
The Chicago School put a happy face on government intervention, and called it “free markets.” It is nothing of the sort. The Chicago School, at the University of Chicago, a Rockefeller outfit (Rockefeller Chapel...! Not Saint James Chapel?) promotes government dominated by big business as opposed to the progressives business dominated by big government.
The two views of the world held a showdown in Chile in 1973, and the Chicago school won out, by violence. “Free markets” as a term, and the Chicago school as an economic system have been loathsome to the Left ever since.
In their sibling rivalry, the two sides in the same family, statist rent seekers, misuse the term free markets. It is a revolutionary act to use term correctly.
The free market preceded the state. The free in free market means free to and free from. Free to join in voluntarily, free to contract, free from force or fraud. We do not have a free market because our currency is an example of both force and fraud, we are obliged to use it, and it is not money. And we are not free to make up our own money, and contract in money. So at the most fundamental level, our state does not permit free trade, so there is no instance in which a problem can be attributed to market failure or the free market. The failures we see around us are state policy failures.
And irony of ironies, the shorthand term for the Chicago school of economics is “monetarist.”
While everyone in Chile asks about Friedman, and indeed Friedman is the face of the Chicago school, few understand it was from Coase and his law and economics that animated the policies that were applied under Pinochet.
I agree with the progressives that the military industrial complex robs us of the resources for education and health care and all sorts of good things. I agree with the fascists that social spending excesses imperial our national defense. But a pox on both of their houses, we can have the best of both in a free market, a term both abuse.
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