Tuesday, August 26, 2008

Free markets and morality

I've recently come across the same exemplified argument against free trade several times, so I decided to put a few of my thoughts on it down on my blog. The point goes like that:
On a free market, those who cannot pay the price for bread won't be able to buy bread. Thus, free markets rob poor people of their right to life and cannot possibly be associated with liberty.
On first glance, this appears to be valid since it contains an oversimplified, but common definition of a free market and niftily blinds out the alternative. But let's put first things first.

One reason why not every person X can afford good or service Y at price Z is because producer A wants to make a profit. Profit is a personal reward for the entrepreneur which is added to the cost of production. Profits are not immoral as one particular good or service wouldn't be available without a specific person offering or creating it; thus, you are not being exploited by profit-seeking entrepreneurs, but merely award a thoughtful man for producing a good or service you happen to desire. Remember: without him, it wouldn't be there.

Another reason why some goods may not be affordable to certain people may be the cost of production itself. This includes the cost of raw materials, wages, transport and many other factors, and usually exceeds the amount of profit reaped.

So, if good G is offered, without alternative, for a fixed price Y, and person P is only able to pay "Y - x", there will indeed be no transaction happening. That's how enemies of the free market often tend to portray it: as a rigged profit game with winners and losers.

Now for the real story. Prices on a free market are set according to supply and demand. Both sides change constantly, and they mostly do in favor of the customers in an unregulated market. This has a number of causes:

- The easier it gets to enter a market, the more competitors will there be. Competition leads to falling prices as cheaper providers will attract more customers. Government regulation, however, creates obstacles which tend to discourage potential competitors. This obviously hurts the customer.

- Free market means no tariffs. Tariffs are a surcharge on prices created by government to increase its revenue or to protect domestic producers who fear the competition from abroad. As the classic supply and demand curve shows, higher prices lead to falling demand; thus, tariffs lower the accessibility of goods and services. That doesn't feed the hungry at all.

- If nothing hinders the flow of information on a free market, technological advancements will be implemented in the production process as fast as possible. This lowers the cost of goods and services and therefore increases their accessibility. The Soviet economy, as an example, seriously lacked efficiency compared to Western economies which has certainly been caused, in part, by the communication roadblocks set up by the numerous bureaus and planning committees.

Plus all the other things I didn't mention right now. As we have demonstrated, free markets tend to produce the best access to goods and services. Also, there's always room for charitable actions of wealthy individuals who might want to donate to the less fortunate. Charity is part of a free market as well.

To put it in a nutshell, you'll have the best chances of getting your hands on something you want if you live in a free market.

But this didn't solve the original problem, our fellow progressives might say. What if someone really can't pay for bread? Shouldn't the government intervene so this doesn't happen?

Unforunately, laws don't bake bread. People do.

Congress might pass a bill today stating that everyone should own a '59 Cadillac, but that's just words on paper.

In an attempt to conciliate reality with utopia, quite a few measures have been proposed which appear more reasonable at first glance, but turn out to be just as inefficient when it comes to implementing them. We'll discuss price controls and welfare as the most prominent examples.

Price controls are seen as a guarantee for low prices, but they are by nature unable to live up to their goal. As I pointed out before, laws are just words. In order for bread to exist, people have to produce it. They won't produce if it doesn't pay. Whether it does pay or not is not defined by regulations and politicians, but by supply and demand. So either controlled prices are being set high enough for an entrepreneur to make a profit, in that case they wouldn't have been necessary in the first place, or they are being set too low which causes a thing called "production bottlenecks". As it isn't profitable anymore to bake breads, people will give up doing so and do profitable things instead. Now you have low prices and low bread supplies. Doesn't feed the poor either.

Welfare creates a moral hazard and is thus economically unsustainable. Instead of accumulating wealth through the production of goods and services, needs and wants are satisfied by fiat. This doesn't emancipate welfare recipients, but rather shackles and paralyzes them while at the same time slowing progress among those who finance the system. It has the same effect as simply stealing bread and giving it to others: at some point in time, bread-producing people will be fed up and stop working. "If everybody else is given bread, then so will I", they think and the redistribution machine implodes in lack of funds. Those who have been at the receiving end for a long time will be hit the hardest as they need to relearn being productive. Who will feed them in the meantime? Ask that a caring progressive.


Free markets are still undefeated in making goods and services accessible to the greatest number of people. Government regulation and redistribution schemes, to the contrary, produce poverty and misery in the long run. And most imporantly: There is no free lunch. Even if the law says so.

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