The problem is that it can’t be both. Are interventions into the market economy the cause of prosperity? If they are, then free markets cannot be blamed when things go wrong because we don’t have free markets on first place! It could, of course, be argued that there are not enough regulations but there are two problems with this. First, the flaw is still not that free markets failed us. And second, it is empirically not true.

The evidence tends to point to the importance of free markets for achieving high sustainable economic growth. Recently two empirical papers, Harvard University economist Andrei Shleifer’s “The Age of Milton Friedman” and George Mason University economist Peter Leeson’s “Two Cheers for Capitalism?”, analyze economic growth throughout the world in the last quarter century. Both find similar results. Countries that became more “capitalist” during this period, meaning the freer the markets were, became wealthier, healthier, more educated, and politically freer. On the opposite, countries that restricted markets endured stagnating income, shorter lives, less education, and oppressive political regimes.

In other words, when it is appropriate to say, “we have never had it so good,” the reason is because markets have produced wealth in spite of the regulations and restrictions. In times of trouble the appropriate response should be to blame the regulations, which distorted the markets that were responsible for the wealth in the first place. What is needed in both good and bad economic times is not calls for the state to intervene, but instead calls for freer markets. The empirical evidence for pure free markets are a lot stronger than many give it credit for. As my colleague Daniel J. Smith once said, “It doesn’t make one dogmatic to embrace these facts, it makes one dogmatic to refuse to acknowledge them.” The world needs more individuals to fully embrace these facts, and maybe the world needs more market fundamentalism.

Download the Cliché of Socialism Number 32 by Leonard E. Read here.

How much government will it take to “root out” fraud?

FEE (Instant) Classic:
Regulation Will Stop Future Madoffs? It Just Ain’t So! by Chidem Kurdas

Empowered to regulate industry marketing practices, the FDA must develop warning labels that must cover 50 percent of the side space on cigarette packages. The labels must draw from a catalogue of congressionally sanctioned phrases that include:

WARNING: Cigarettes are addictive. WARNING: Tobacco smoke can harm your children. WARNING: Cigarettes cause fatal lung disease. WARNING: Cigarettes cause cancer. WARNING: Cigarettes cause strokes and heart disease. WARNING: Smoking during pregnancy can harm your baby. WARNING: Smoking can kill you. WARNING: Tobacco smoke causes fatal lung disease in nonsmokers. WARNING: Quitting smoking now greatly reduces serious risks to your health.

As dramatic as this all seems, this extension of FDA powers received a somewhat mixed response from the medical and health-advocate communities.

John Cohn, a lung-disease specialist at Thomas Jefferson University Hospital in Philadelphia said, “It’s sort of like asking the police commissioner to regulate prostitution.” Perhaps Cohn anticipates agency capture of the sort typically seen in Washington.

Matthew Myers, president of the Campaign for Smoke-Free Kids, a leading lobbyist for the law, took a more optimistic but still somewhat guarded position. “You can stay with the status quo, with industry controlling the level of nicotine in products—no one knows how much—and companies deciding what health claims to make. Or you can give control to an agency with a history of scientific expertise in regulating products. This fills an important gap.”

This somewhat tepid celebration was prompted by uncertainty about how the FDA would really manage its new authority. There is also the feeling that this statute, like many others, had a title that sounded more powerful that the content justified. The word “prevention” in the title sounds rather dramatic, but the teeth in the law itself are more like baby teeth than fully mature incisors. (Consider, for example, the exception made for menthol-flavored cigarettes.)

The politicians’ commentary that followed the law’s passage was much more boastful and self-congratulatory. Senator Edward Kennedy, long an advocate for more government control of the industry and sponsor of the Senate version of the law, exclaimed, “Miracles still happen. The United States Senate has finally said ‘no’ to Big Tobacco…. Public health experts overwhelmingly agree that enactment of this legislation is the most important action Congress can take to reduce youth smoking.”

Had Congress really said no?

In a way, Kennedy misstated what had actually happened. The Senate had not entirely said no. Indeed, the biggest of big tobacco, Altria Group, the producer of market-leader Marlboro, had lobbied long and hard for the bill’s passage. Altria’s two major competitors, Lorillard and Reynolds Tobacco, saw the law as giving Marlboro, with its market share locked and a lead in developing no-nicotine products, an unfair advantage. As is often the case, the Senate picked a winning horse and rode it. The Senate said yes to one and no to two others.

With Kennedy unable to lead the battle for his bill due to illness, Senator Christopher Dodd assumed leadership. Not quite as dramatic in his comment as Kennedy, but in a way equally inaccurate, Dodd said, “For more years than anyone can count, we’ve had an industry that’s gone basically unregulated.”

Unregulated Tobacco?

It is true that tobacco products have not been regulated by the FDA, though the agency has attempted to do so almost since its 1906 founding. But after decades of regulation by the Federal Trade Commission (FTC), the Federal Communication Commission (FCC), and Congress itself, hardly anyone who has followed the industry would say the industry has gone “basically unregulated.”

Instead, some would argue that it was regulation that defined the industry’s trade practices and, by doing so, maintained the industry’s high profits and expanded the sale of products in just those markets Tobacco Free Kids and others worry about. (See John Calfee’s “The Ghost of Cigarette Advertising Past,” Regulation, Nov.-Dec. 1986.)

How could this be? Consider the following capsules that come from a long tobacco saga (these and more can be found in Bruce Yandle, et al., “Bootleggers, Baptists and Televangelists: Regulating Tobacco by Litigation,” University of Illinois Law Review, 2008):

Industry-Serving Regulation

No, there is no evidence to suggest that the tobacco has until now been “an industry that has gone basically unregulated.” But there is ample evidence that tobacco regulation has served the interests of the industry and the politicians that broker favors to the industry. Meanwhile, consumers of tobacco products, who are generally a lower-income population, have been denied the benefits of competitively determined product information; they also have unwittingly become major sources of revenue for state politicians, who generally provide more benefits to higher income than lower income consumers.

One can only speculate about what might have happened had the FTC not outlawed health-effects advertising and had the industry not become one of the more regulated industries in America.

Cashing in on the common notion that anything unregulated is bad, advocates of government regulation argue that an unregulated market is to be abhorred. This view is captured by twin sculptures outside the Federal Trade Commission building in Washington, D.C. (One is on the Constitution Ave. side, the other on the Pennsylvania Ave. side.) The sculptures, which won an art contest sponsored by the U.S. government during the New Deal, depict a man using all his strength to keep a wild horse from going on a rampage.

The title? “Man Controlling Trade.”

Since trade is not really a wild horse but rather a peaceful and mutually beneficial activity between people, the Roosevelt administration’s propaganda purpose is clear. A more honest title would be “Government Controlling People.” But that would have sounded a little authoritarian even in New Deal America, hence the wild horse metaphor.

What’s overlooked—intentionally or not—is that the alternative to a government-regulated economy is not an unregulated one. As a matter of fact, “unregulated economy,” like square circle, is a contradiction in terms. If it’s truly unregulated it’s not an economy, and if it’s an economy, it’s not unregulated. The term “free market” does not mean free of regulation. It means free of government interference.

Ludwig von Mises and F. A. Hayek pointed out years ago that the real issue regarding economic planning is not: To plan or not to plan? But rather: Who plans (centralized state officials or decentralized private individuals in the market)?

Likewise, the question is not: to regulate or not to regulate. It is, rather, who (or what) regulates?

All markets are regulated. In a free market we all know what would happen if someone charged, say, $100 per apple. He’d sell few apples because someone else would offer to sell them for less or, pending that, consumers would switch to alternative products. “The market” would not permit the seller to successfully charge $100.

Similarly, in a free market employers will not succeed in offering $1 an hour and workers will not succeed in demanding $20 an hour for a job that produces only $10 worth of output an hour. If they try, they will quickly see their mistake and learn.

And again, in a free market an employer who subjected his employees to perilous conditions without adequately compensating them to their satisfaction for the danger would lose them to competitors.

Market Forces

What regulates the conduct of these people? Market forces. (I keep specifying “in a free market” because in a state-regulated economy, market forces are diminished or suppressed.) Economically speaking, people cannot do whatever they want in a free market because other people are free to counteract them. Just because the government doesn’t stop a seller from charging $100 for an apple doesn’t mean he or she can get that amount. Market forces regulate the seller as strictly as any bureaucrat could—even more so, because a bureaucrat can be bribed. Whom would you have to bribe to be exempt from the law of supply and demand?

It is no matter of indifference whether state operatives or market forces do the regulating. Bureaucrats, who necessarily have limited knowledge and perverse incentives, regulate by threat of physical force. In contrast, market forces operate peacefully through millions of participants, each with intimate knowledge of his or her own personal circumstances, looking out for their own well-being. Bureaucratic regulation is likely to be irrelevant or inimical to what people in the market care about. Not so regulation by market forces.

If this is correct, there can be no unregulated, or unfettered, markets. We use those terms in referring to markets that are unregulated or unfettered by government. As long as we know what we mean, the expressions are unobjectionable.

But not everyone knows what we mean. Someone unfamiliar with the natural regularities of free markets can find the idea of an unregulated economy terrifying. So it behooves market advocates to be capable of articulately explaining the concept of spontaneous market order—that is, order (to use Adam Ferguson’s felicitous phrase) that is the product of human action but not human design. This is counterintuitive, so it takes some patience to explain it.

Order grows from market forces. But where do impersonal market forces come from? These are the result of the nature of human action. Individuals select ends and act to achieve them by adopting suitable means. Since means are scarce and ends are abundant, individuals economize in order to accomplish more rather than less. And they always seek to exchange lower values for higher values (as they see them) and never the other way around. In a world of scarcity tradeoffs are unavoidable, so one aims to trade up rather than down. The result of this and other features of human action and the world at large is what we call market forces. But really, it is just men and women acting rationally in the world.

The natural social order greatly concerned Frederic Bastiat, the nineteenth-century French liberal economist. In Economic Harmonies he analyzed that order, but did not feel he needed to prove its existence—he needed only to point it out. “Habit has so familiarized us with these phenomena that we never notice them until, so to speak, something sharply discordant and abnormal about them forces them to our attention,” he wrote.

…So ingenious, so powerful, then, is the social mechanism that every man, even the humblest, obtains in one day more satisfactions than he could produce for himself in several centuries…. We should be shutting our eyes to the facts if we refused to recognize that society cannot present such complicated combinations in which civil and criminal law play so little part without being subject to a prodigiously ingenious mechanism. This mechanism is the object of study of political economy….

In truth, could all this have happened, could such extraordinary phenomena have occurred, unless there were in society a natural and wise order that operates without our knowledge?

This is the same lesson taught by FEE’s founder, Leonard Read, in I, Pencil.

Most people value order. Chaos is inimical to human flourishing. Thus those who fail to grasp that, as Bastiat’s contemporary Proudhon put it, liberty is not the daughter but the mother of order will be tempted to favor state-imposed order. How ironic, since the state is the greatest creator of disorder of all.

Those of us who understand Bastiat’s teachings realize how urgent it is that others understand them, too.