Freedom, Fairness, and Regulation

Albert Beardow.

In everyday speech and even in the media, the concepts of free trade, free markets and light regulation are often used interchangeably, with little appreciation for the key differences between them. Both their supporters and detractors see them as part of a laissez-faire package grounded solely in the unwavering principle of individual freedom. Yet the rationales for these concepts as the basis for economic life are quite distinct, and need not draw only on a moral belief in human freedom, but empirical observations and broader notions of fairness and equality before the law.

Free Trade

Free trade is the notion that international trade should be allowed without tariffs or restrictions – or taken in the broadest sense, that trade should be permitted between humans on the same terms regardless of their membership of different nations or any other groups.

Canary Wharf Skyline (photo by David Iliff)

The early advocates of free trade - Adam Smith and David Ricardo prominent among them – tended to argue primarily in terms of its empirical results – comparative advantage and fostering competitiveness. Whilst this is doubtless a significant (though oft disputed) part of the rationale behind free trade, I will not shy from saying that for me it is the moral argument that is most important.

There are two primary ways in which restrictions on free trade violate ethical notions of human freedom and dignity. The first is to subordinate the will of the individual to that of the “community”, membership of which is rarely chosen but bestowed through the serendipity of birth. In spite of what many opposed to free trade say, it is impossible to “force” free trade on a person – rather the opposite, that force can only be used to deny a person the right to free trade. This is perhaps not so much of a problem for those “collectivists” who treat collectives as bodies with superior moral standing to individuals.

Most collectivists (at least in the West) are less inclined to dispose of the moral concept of human equality. Yet restrictions on free trade do exactly that, for the “community” in question is not mankind as a whole, but rather the nation. Given that nations have been for the most part arbitrarily defined through the whims of history, mostly by kings and conquerors long dead, it is difficult to see how these can be given an independent moral standing. If members of a different (perhaps poorer) nation are denied the same rights in their relationship with you as those within your own nation, in what way can it be said that all humans have an equal standing in terms of social justice? Some humans are then clearly more equal than others. One need only observe how quickly protectionist rhetoric introduces the notion of “them” as opposed to “us” to see how the rights and desires of others are soon devalued.

Free Market

If free trade deals with the question of “who”, then the free market deals with the “how”. The core notion of the free market is that prices and the distribution of goods should be set by supply and demand, and not by fiat.

There is, of course, considerable debate over the definition of the term, with many contending that a free market means freedom solely from government interference, and that a free market is equivalent to laissez-faire. However, I would tend to agree with the British classical economists from Smith onwards, who argued that it does not matter whose fiat dictates prices – and as such, monopolistic or monopsonistic markets cannot be characterised as truly free. For supply and demand to work in determining price, competition on both sides is vital, and thus a free market entails both a competitive system and the open access to markets that facilitates this.

Afghan market

It is worth elaborating briefly on the difference between moral and empiricist arguments for human freedom. Perhaps the best example is the question of paternalism - whether society should be ordered and planned by experts who know the best ways for us to live. The moralist might oppose this on the grounds that such an expert would be denying us our right to exercise our freedom as individuals. The empiricist would oppose this on the grounds that no such experts exist.

Moral arguments in favour of human freedom are less convincing if used on their own to justify free markets. Even the most ardent libertarians would deny, for example, that it were a morally just situation if a man dying of thirst freely gave up his life’s savings in exchange for water from a monopolist provider. The crucial argument supporting the free market is empiricist in nature, and relates directly to the competitive system, and its building of what Hayek called “spontaneous order”.

Freely set prices are important because they incorporate all the various pieces of disperse knowledge that different actors in an economy have – knowledge that no expert alone could possibly have access to. These prices then guide resources to be allocated in desirable ways for society – to overcome shortages, improve quality, and identify new demands. The beauty of a free market system is its ability to spontaneously deal with the very complexity that socialists believe makes planning desirable, but which makes planning ultimately hopeless.

Regulation

A free market need not be totally absent from regulation to remain free. It is hard to argue that a well thought out regulation to protect workers’ or consumers’ safety, for example, would on its own distort the method by which prices are set. The damage done by regulations instead arises primarily from two sources: inhibited innovation due to precautionary restrictions, and the costs of excessive complexity.

Economies grow through a process of trial and error, through the success and failure of new business ideas, scientific endeavours and technological breakthroughs. It is in the realm of the untried and untested that the greatest prospects for growth are to be found. It should therefore follow naturally that regulations which prevent (or at least delay) new endeavours are a deterrent to progress. There is, of course, a more profound debate to be had here about the extent to which society wants to risk the uncertainties and possible dangers that come with new developments (which I will write about in more detail in a future post). Needless to say, of course, that societies which opt for a stationary state always fail to satisfy underlying desires for prosperity and opportunity, and are thus on the road to decline.

Lange's 'Migrant Mother', symbol of the Great Depression

Yet it is perhaps the second problem of regulation that is more insidious. Simply put, the cumulative effects of regulations are very different from the addition of their individual costs and benefits. The benefits of multiple regulations can often overlap, with diminishing returns for each added layer of complexity. The cumulative costs, on the other hand, generally exceed the sum of the individual costs, both from the additional need to sort through the vast body of laws to identify which ones are in fact relevant, and due to the far greater share of resources that must be put to work in complying with official directives

The most damaging aspect of this complexity is that its effects are not equally spread – the huge budgets and compliance departments of large and powerful corporations are well equipped to deal with these burdens. Not so the small business or aspiring entrepreneur. By adding an additional hurdle to entry, large companies reap the benefits of less competition (and I am here not even mentioning the hand they have in writing these regulations). Yet the biggest beneficiaries are, of course, the lawyers, accountants and bureaucrats who thrive on complexity.

Rather than arguing blindly over a false dichotomy between regulation and de-regulation, I would like to see more discussion about the fairness of regulations. Though President Obama recently talked about the need for fairer regulations, in asking only whether regulations benefit the rich over the poor he misses the crucial point. We should instead be asking whether they favour any special interests at all over the community as a whole. For the reasons above, fairness and simplicity go hand-in-hand – and rather than simply asking whether regulations favour the poor or the rich, we should recognise that an excessive number of regulations ultimately only favours the powerful.