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 |
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 |
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.
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