Market

As government is incompatible with human nature, we come to the other way humans can interact with each other. It is called the market. It is voluntary in every way and is therefore consistent with human nature.

The market is everything government can never be. It is governed by voluntary contracts between individuals, characterised by voluntary exchanges to mutual benefit, and rationally conforms to human nature.

In a market society, nobody compels anyone to do anything; hence, everyone’s self–ownership rights are intact. Despite that simple and adequate principle, occasionally somebody does impose their will upon someone else, however for now, assume nobody does.

It follows that if one wants to live in solitude and grow their own food, make their own shelter and clothing, and so on, nobody would stop them. Probably though, most people wish to enjoy a higher standard of material life, and enjoy the company of other human beings.

To do either of those, people need to interact with others. What rules are to govern such relationships, if no government is there to define laws of conduct?

Easy: If two or more wish to enter an agreement, they go ahead and enter it. That agreement will describe certain benefits expected by each from the other, and define certain obligations each undertakes in return. The agreement must be explicit and voluntary — if either is dissatisfied with the terms proposed no agreement is consummated and no obligations will exist. Nor, of course, will any of the anticipated benefits result.

If the deal is of more than trivial importance it should be written down, so that misunderstandings and disagreements are avoided later on. But the principle of the market is that all relationships between individuals that actually exist, exist only as a result of such a voluntary contract having been made. Consider some examples from everyday life today:

• Marriage remains very popular, with variations allowing for more temporary and for same–sex associations; usually marriage contracts are written and signed, even if rather short. They are badly marred by being made subject to government permission and over–riding law, but in essence they are deals between two individuals that bring huge long–term benefit.
• Employment contracts are also found everywhere, for many people prefer to work for someone else rather than manage their own business. They too are spoiled by government interference in the form of employment laws, which nullify this clause or that which the contracting parties might prefer to sign — to the advantage of one or the other. In essence the employee agrees to make their time available for so many hours per week, and the employer agrees to provide certain payments and benefits in exchange.
• Everyday shopping also takes place on the basis of contracts — though usually these are not written down because they have such a short term. One enters a supermarket, picks items from the owner’s shelf, makes payment at the checkout, then those items become theirs; there has been a voluntary exchange. The contract is that the advertised price will be paid, and that there is a promise that the items are as described on the package. Government meddling can also be seen here, for almost every package carries information mandated by government law — whether or not either they or you wish to see it — and that certain items, such as alcohol and tobacco, can be bought only by those over a certain age, even though both parties might otherwise agree that one’s age is irrelevant to the transaction.
• Pharmacy shopping is a special case because of the enormous degree to which government interferes. First, one cannot buy many such items unless a government licensee — a physician — prescribes it. One does pay the cost of that, even if one is content to self–medicate. Then, only a limited range of medication is permitted to be sold; one may prefer marijuana as a safe and well–proven painkiller, but government laws prohibit such a sale — prescribed or not. Then, even equipped with the prescription, the pharmacist demands one prove who they are — because government courts have nailed some in their business who provided drugs to impersonators. Then, the price paid is many times that which would yield them a good competitive profit, because government required that its drug regulator delay availability for many years until the maker proved to a certainty that nobody could suffer harm by taking it — even though one might be happy to promise not to sue, in the case that it does harm them.

These are just a few examples which show that market transactions do frequently take place even today, but that they are distorted by government. A true free market would suffer no such distortion, for there would be no government to do the distorting. Familiarity with them will confirm, though, that there is nothing particularly radical or unusual about a market; often without realising it, one transacts in a market every day, even now! It is the natural, normal way in which humans interact and so would be the universal way if government were not there to prevent it.

Everybody wins

Because all market transactions are voluntary for all parties, not only do they “fit” human nature, they also do something perhaps unexpected: All parties win!

In the alternative, non–market transaction one person wins — they have the satisfaction of imposing their will on someone else — while the other loses — their wishes are over-ruled, leading to resentment and maybe violence later on. But in a market transaction, because it is voluntary, both win. That is enormously significant!

It is worth understanding how this can be so. As an example, someone is shopping for a digital camera. The vendor offers it for a certain price. Perhaps the customer haggles; perhaps they never agree and so they walk away — but if they do agree, then consider what is happening.

• The customer prefers the camera to the money, and so they win.
• The vendor prefers the money to the camera, so they win.

Both of them win, because they each have different preferences!

Furthermore, they each win to a very similar degree! That is, as the haggling progresses, the price reduces until each of them are equally satisfied that the loss of their money (and their camera) is just offset by the advantage of the gain of their camera (and their money.) The elegance of this is worth noting carefully. It is the reason why a free market society would be peaceful. Every transaction is not only voluntary, but equally satisfying to all parties in its outcome — there is no built–in source of regret.

Everybody stays selfish

Thanks to many generations of government schooling, “selfish” has become a dirty word. In reality, it means seeking one’s own perceived interests, making oneself independent of others. Starting in America with the abject failure of the Plymouth Colony while its members’ essentially selfish nature was denied, many a Utopian community has tried ignoring it. None succeeded.

In a free market, that elementary fact of human nature is in no way denied; indeed, markets flourish primarily because the participants are selfish, not despite that fact.

That was one of the most important discoveries of Adam Smith, in his path–breaking economics treatise of 1776, The Wealth Of Nations. He noted there that: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. Think how shocking that is — and yet how absolutely true. Sometimes it is called the “invisible hand” paradox: Everyone selfishly pursues their own perceived interest, yet is able to do so only by bringing benefit to their customer.

“Perceived self interest” comes of course in many flavours. Money is universally desirable, since it can be held and then exchanged for anything else, but it also includes the deep satisfaction one can derive from helping someone in need. Charity is a very real part of human behaviour, and always has been — and for that reason. It rewards the giver even more, perhaps, than the receiver.

Everybody prospers

Free markets are “right” primarily because they alone fit human nature; here we show that they also happen to produce enormously beneficial results. They would still be right, even were that not so.

But it is so. It can be seen in two ways:

1. The nearer a society is to a free market, the better it has always prospered, everywhere.
2. There are sound theoretical reasons why that must always be so.

The freer, the richer

For several years the conservative Heritage Foundation has published an annual index comparing its estimate of the degree of freedom in the world’s nations, with their prosperity in terms of income per capita. One can quibble with definitions, measures, and means of estimation, but the result in broad terms is inescapable: All countries where individuals have a higher degree of freedom also enjoy a far better standard of living than those in more restrictive countries.

That method compares countries at one point in time; one can also compare conditions in a single country at several points in time, and America provides a good example. The fastest growth in individual wealth unquestionably coincided with the era of greatest personal freedom — the nineteenth century. It is truly one of humanity’s most thrilling sagas.

By the 1800s the country had been established, with a deliberately limited set of governments — the limits were far too wide, but relative to everywhere else, they were tight enough to be amazing. The ordinary American was a peasant. A hundred years later, they were prospering businesspeople, and the country had passed from being an ex–colonial backwater to one of the richest nations on Earth, both in total and per–capita, which more than tripled during that amazing century.

That, despite, or more likely, because of:

• Massive, almost uncontrolled immigration that magnified population fourteen times.
• Virtually no regulation over the starting, conducting, or licensing of business.
• No government welfare system, nor until mid–century any government schooling.
• Little or no government control over money supply — it was based on gold and silver.
• Except upon former slaves in the South, no restriction on firearms ownership.
• Little or no government supervision of health care or drug use.
• Taxation at a rate five times lower than today with no income tax at all.

A dreadful exception to the story was the Civil War, better called the War to Preserve the Union or the War to Prevent Secession; even so, a century later we are still living off the intellectual and moral capital of that astonishing era. It was not a true market society, but it came closer than any other.

Why it must be so

In a word, motivation.

Writer Brad Edmonds said it well: “Always looking for a better way is not even an American invention. Human beings do it by virtue of being human. We act in our own self-interest”. The key is of course “looking for a better way”; that is, finding a way to do the same work for less cost — of effort, money, or both — or to do more useful work for the same cost. When that search is rewarded, humans progress.

Only a market can align the interest of the searcher with the benefits of an invention, for humans always try to satisfy their own perceived interests. Consider the case of a Mexican gardener.

Unemployment is endemic in that country, thanks to generations of government interference in the labour market. So unskilled and semi–skilled labourers know that their return is maximised not by inventing new ways to do their work in less time — that way, they will be let–go or earn less! — but by spreading the work out to conform with one of Parkinson’s tongue–in–cheek Laws: “Work expands, to fill the time available for its completion”. They may end the day with a beautifully tended garden, but they work at a snail’s pace. Magnified a million–fold, and it is easy to see the tragic waste of resources, and a reason why poverty in Mexico has lasted so long. The same applied in the Soviet Union, where market prices were deliberately suppressed; leading to the famous and ironic one–liner: “We pretend to work, you pretend to pay us”.

A market, in contrast, leaves each participant the responsibility of earning their own living. Nobody owes them one. They must hone their skills and offer them for a price which is acceptable to buyers; just as, when shopping later the same day, they take the role of buyer with the merchants they patronise. Therefore the motivation is right, and therefore progress occurs, as in nineteenth century America. Americans had nothing to fall back on but their own sturdy independence — and yes, the generosity of their neighbours when misfortune struck. Humanity had never seen such progress.

There is no rational alternative to the free market.

Everybody competes

Everybody wins in any one transaction, but the opportunity for self–advancement drives individuals to perform their jobs or provide their goods and services competitively — that is, more attractively than others in the same field, so that more will buy what they are offering. The “profit motive” is at work.

They seek by delivery of excellence to gain “market share” in their particular niche; or to earn promotion, from an employer. This has many beneficial results:

• It stimulates all players to do better and so again helps everyone prosper.
• It drives the process of invention even further — of new products and of cost–saving techniques.
• It widens the choice available to buyers.

In the 1960s and 70s there were skits by Lily Tomlin about the government–sustained telephone monopoly, AT&T. To a complaining customer, with the inimitable Tomlin snort: “Sir, we are the phone company. We can do whatever we want!” The line was accurate; a monopoly — which can remain in place only when government excludes competitors — can do anything it pleases. All others suffer.

The dynamics of a market do prevent the search for a larger share succeeding for long, as a monopoly. When one player becomes dominant, they relax, grow fat, lose their edge; sooner rather than later, a more nimble rival enters the field and offers a better or a cheaper “mousetrap”. Competition, which only a free market provides, is very good indeed for all concerned; buyers and rival sellers, both. Twenty years after government withdrew its support for the AT&T monopoly, long–distance phone service was available ten times less expensively and with many new features with which Ma Bell would never have bothered.

Review

Make use of the following questions and the associated feedback to check knowledge and understanding of the topic covered in this unit.