Freeman

ARTICLE

Stability and the Free Market

NOVEMBER 01, 1984 by DENNIS BECHARA

Mr. Bechara is an attorney in Washington, D.C.

An important dividend of the market economy is the prospect it offers of a peaceful and orderly society. Without the stabilizing influence of the market, democracy and representative government would disappear. War, or the threat of its occurrence, breeds authoritarianism and intolerance. Only under peaceful conditions will there be proper incentives for the creation of wealth.

When the political environment is unstable people tend to look to government more for personal security than for freedom. This has happened in many countries in many ages, and the consequent disappearance of the market order in those countries has only tended to strengthen the government’s hold over the population. Such governments attempt to direct the working of the economy, either through outright nationalization of the means of production or by enacting rules and regulations which control the market.

The stabilizing influence of the free market may be observed in the international division of labor. As people engage in free trade internationally, there is a tendency for individuals and countries to specialize in the production of certain goods. Consequently, free trade establishes an interdependence between countries, as each looks to the production of other countries to help meet its needs. There is thus an incentive for the maintenance of peace.

Since the free economy depends upon social cooperation and the progressive division of labor, it follows that peace is a precondition for capitalism. As Ludwig von Mises stated, “The progressive intensification of the division of labor is possible only in a society in which there is an assurance of lasting peace. Only under the shelter of such security can the division of labor develop. In the absence of this prerequisite, the division of labor does not extend beyond the limits of the village or even of the individual household.” (Liberalism, p. 25)

Consequently, the market order promotes peace among nations. As free trade increases the world’s productivity, it is in the self-interest of nations to refrain from aggressive behavior. When governments control substantial sectors of the economy, on the other hand, this leads to economic nationalism, which increases the possibility of conflict.

Before the advent of the free economy, most social relationships were based on one’s heritage or membership in a particular class. Serfs in the Middle Ages, for example, were attached to the land, and it was practically impossible for them to escape such restrictions. Grievances often led to violence. A child’s heritage is of less significance in the free economy. True, the influence upon a child in the home is of utmost importance, but each family is free to choose the values it deems most appropriate. In eliminating institutions that granted privileges on the basis of birth, the free economy has promoted social stability and limited this source of conflict.

Voluntarism

Voluntary activities are encouraged within the free market. Contracts are the quintessence of voluntary relationships, and a body of law has evolved in order to reinforce their validity. No significant economic activity could be accomplished if long-term contracts were unenforceable. So there is this further incentive to maintain peace and stability.

Another characteristic of the free economy is that it promotes self-responsibility, insofar as it assures a correlation between effort and remuneration. As effort is rewarded in proportion to its utility to consumers, a work ethic is fostered.

Whenever market forces have been allowed to operate, one of the consequences has been an unequal distribution of income. People’s abilities and ambitions vary, and consumers value certain goods and services over others. Those people who are best able to identify the op portunities to satisfy consumer demand are rewarded accordingly. When the government attempts to alter this arrangement, economic incentives are reduced and political considerations assume greater importance. The potential for strife and conflict is heightened as people recognize that they may improve their material position not by pleasing consumers but by obtaining political favors. And political favors usually mean special privileges or subsidies at the expense of the population at large. Government thus grows out of bounds as the market is diminished.

The preservation of peace is one of the great virtues of the market order. The market gives neither cause for war, nor gain from it. War is destruction, and people who participate in wars lose both spiritually and materially. Even if a country is victorious in war, if the means of production are in private hands, the acquisition of more territory does not enrich the country’s citizens. If the means of production, on the other hand, are publicly held, then governments will have an incentive to plunder other countries in order to seize their natural resources and factories. This was one of the reasons Nazi Germany was so aggressive, and this is partly why Soviet Russia has an incentive to expand its sphere of influence.

Separation of Power

The free economy disperses power in many centers and it provides countervailing influences which in turn stabilize a pluralistic society. The alternative to the free economy, on the other hand, concentrates power in the state, weakening the individual’s position in society. It is of no use to claim that a constitution or a bill of rights will guarantee our freedom if the government controls the means of production. This is so because as governments control the economy, they will delegate power to bureaucratic agencies. These administrative agencies, however, are not accountable to the public.

Since the legislative branch of the government cannot foresee every possible course of action which may be required of administrative agencies, it must delegate broad powers to them. This in turn weakens the rule of law, because the agencies will not have specific limits defined beforehand; rather, the agencies will legislate their own brand of economic and social justice according to the prevailing notions of the time. This development thus breeds conflict by promoting political action as the means to improve one’s economic position.

Government, the monopoly of organized force, must be limited if there is to be freedom from its coercion. The free economy permits the existence of liberty because it does not allow the state to attain more powers than are necessary to keep the peace. By limiting the power of government to the rule of law, the free economy restores a degree of predictability to the government’s actions, which in turn is a shield from arbitrary power. By broadening the areas within which individuals may act privately, the free economy permits the blossoming of each person’s potential.

Competition, which is enhanced by the free market, raises productivity by rewarding those who most efficiently allocate scarce resources. But besides raising productivity, competition has an additional advantage—it encourages individual growth. As the late Leonard Read so frequently said, “The art of becoming is composed of acts of overcoming.” It is precisely by overcoming obstacles that we are able to negotiate the different stages of growth, in open competition. And the free economy, by creating the framework of peace, cooperation and stability, insures the survival of representative government—a worthy achievement of any social order.

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November 1984

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