Opinion: Daily Journal

Flashback: Money Trees and Lunar Cheese

As I continue to catch up on some long-term writing projects, here’s the third in a 2006 series of columns on the John Locke Foundation’s founding principles. Back soon with a fresh DJ — the real problem here is that there’s nothing newsworthy going on in North Carolina politics right now…

RALEIGH – “That free-market stuff sounds great in theory, but it doesn’t work in the real world.”

Or so I’ve been told countless times by critics, sparring partners, and emailers. They seem to believe that market economics is either a theory in search of validation or a program that governments must consciously choose to adopt, or not adopt. In fact, it is neither. Markets are a social institution, a means by which human beings communicate and coordinate their actions to advance common interests. Theorists have studied markets for centuries, naturally, but as part of an inductive process of formulating models that describe how markets function day to day. They did not invent an abstraction out of thin air and then attempt to create markets within human societies. Markets are inherent and inevitable, differing only in particulars related to geography, raw materials, and the help or hindrance offered by other social institutions, including governments. Markets exist because of certain realities, including: 1) time and resources are not limitless, 2) choosing to do one thing means giving up the ability to do other things, and 3) human beings can’t read each other’s minds.

If money really grew on trees, we wouldn’t need the market process. No, wait, that’s not really true. For one thing, someone would still have to shake the tree or climb its soaring branches to harvest the loot. I suppose we could all do it for ourselves, but that would take time. Because some people would be stronger, thus better able to shake the tree, or nimbler, thus better able to scamper up the tree, the rest of us would save time and effort by letting the strong and nimble do the money-harvesting for us. Meanwhile, instead of spending time and effort in the financial forest, we could do things we are better at – following rainbows to their stash of gold, perhaps, or mining greenish lunar cheese – and then exchange our wares for arboreal currency.

How would we know what to do? Without telepathy, or universal and impossibly lengthy public-opinion polls commissioned every day (to capture changing preferences and, say, weather conditions), we would each have bits of the information needed to decide the most mutually advantageous mix of work. None of us, however, would have all the required information. Critics of the free market oddly complain that the “theory” fails in reality because it assumes perfect information, which is sort of like complaining that baseball players can’t possibly hit the ball because it is in the pitcher’s glove. The very reason the baseball player has a chance to swing at the ball is that the pitcher hasn’t pitched it yet. The very reason for markets to exist is that we don’t have perfect information. Price signals – how many branch-bucks I am willing to trade today for your hunks of lunar-limburger – are the fastest and most accurate way to share that information.

The John Locke Foundation’s third restatement of America’s founding principles respects the role that unfettered markets play in coordinating human action: “We are a free market in which persons, individually or collectively, have the natural right to sell goods and services to willing buyers, and in which the individual pursuit of economic opportunity benefits all.”

One key insight here is that economic freedom is a natural human right, no less so than religious freedom or political freedom. We do not enjoy the right to choose a profession, create a business, buy goods and services, or sell our labor to others at a mutually agreeable price because some government bureaucrat gives us permission. We enjoy these rights because we are human beings – and it is the nature of human beings, exercising our free will to choose and to learn from our successes and failures, to bargain with each other.

Human nature extends far beyond market behavior, certainly, and those who clumsily apply the model of “homo economus” to all social institutions are misguided. We are all full of contradictory impulses, and capable of gross errors of judgment or worse. From the very beginning of human civilization, we had good reasons to fear strangers from across the river, because they could be coming to kill, enslave, rape, or rob us, as well as good reasons to welcome strangers from across the river, because they could be bringing new foods, clothes, products, or ideas that would make our lives safer and more enjoyable. As the late Jane Jacobs wrote in one of my favorite books, Systems of Survival, these competing impulses (and others, such as the spiritual and altruistic) remained embedded in our heads and social interactions today. As was true with regard to constructing our constitutional republic, we benefit from social arrangements that allow very different institutions to coexist. One of them is the free market.

The real problem in public policy is not that the free market is an unrealistic ideal but instead that too many politicians and political activists adhere to an unrealistic ideal about government’s ability to improve on market outcomes. Allowing individuals to trade freely will not yield a perfect result, for the inescapable reason that human beings are imperfect. But it is the policy most likely to spread the economic information we all need to make reasonable decisions about what to produce, what to buy, and when. Governments are run by flawed human beings, too – and must operate under the additional disadvantage of trying to guess at what an outcome should have been without using price signals as a rough guide.

One final note about phrasing. Some complain that free markets are unfair because they create winners and losers, and that government can turn those losers into winners. Conceptually, that is the mirror opposite of the truth. Within markets, transactions happen when all parties perceive there to be something of value to gain. They are all winners, or at least expect to be, albeit to different degrees (one important free-market insight is that these judgments are subjective – I can’t really know how much you value that new DVD player, or whether you value it more than I do, because again I can’t read your mind). On the other hand, government is coercive. Whether you like it or not, you have to surrender your money to the taxman or comply with a regulation. This really can create winners and losers in a zero-sum struggle for power.

There is nothing ethereal or tidy about markets. They are earthy and messy. Economic actors make dumb decisions everyday. Ideas get tested and rejected. Products turn out to be less than advertised. But we learn from the mistakes. We adjust in making our next decisions. Over time, and compared to any intrusive alternative, markets maximize our ability to get what we seek at the lowest possible cost. That’s good enough. Save the fairy tales for bedtime.

Hood is president of the John Locke Foundation.