3
Markets

Recall from Segment 1 that humans are rational above all - that we each pursue our own interests as we see them, using reason to make our choices, 100% of which we have, as self-owners, an absolute right to make. And recall from Segment 2 that government is in its essential nature an irrational institution because everything it does, it does by force; over-ruling the wishes of those within its grasp or domain. Hence it is incompatible with human nature.

Now here in Segment 3 we come to the other way in which we humans can interact with each other - it's called the Market, or the Market Arena, or the Free Market. It is in every part voluntary and is therefore fully consistent with human nature - with the axiom of human self-ownership. As we noted in Segment 2, the market is all that government can never be:

In a market society, nobody compels anyone to do anything; hence, everyone's self-ownership rights are intact. We'll come later in TOLFA (under "Justice") to consider what happens in such a society when, despite that simple and adequate principle, somebody does impose his will upon someone else. For now, let's assume nobody does.

It follows that if you want to live in solitude and grow your own food, make your own shelter and clothing, etc, nobody would stop you. Probably though, most of us wish to enjoy a higher standard of material life, and enjoy the company of other human beings.

To do either of those, we 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(s), 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:

Those are just a few: they 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. Our familiarity with them will confirm, though, that there is nothing particularly radical or unusual about a market; often without realizing it, we transact in a market every day, even now! It's the natural, normal way in which humans interact and so would be the universal way if government were not there to prevent it.

Remember from Segment 2? - the best definition of "government" is: the absence of a market.

Let's pause a moment to make certain we're in sync so far. Question: what's the key distinguishing feature of a market transaction?

It's one in which the price is unregulated
It's one in which nobody is obliged to honor his contract
It's one in which every party takes part on a strictly voluntary basis
It's one in which government plays no part whatever

1. Everybody Wins

Now let's "kick it up a notch." 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, nonmarket transaction one person wins (he has the satisfaction of imposing his will on someone else) while the other loses (his 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's worth understanding how this can be so. You shop for a digital camera, say. The vendor offers it for a certain price. Perhaps you haggle; perhaps you never agree and so have to walk away - but if you do agree, then consider what's happening.

Isn't that amazing? Both of you win, because you each have different preferences!

Furthermore, you each win to a very similar degree! - that is, as the haggling progresses, the price reduces until each of you are equally satisfied that the loss of your money (and his camera) is just offset by the advantage of the gain of your camera (and his money.) The elegance of this is worth noting carefully. It's 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.

2. Everybody Stays Selfish

Thanks to many generations of government schooling, "selfish" has become a dirty word. Not here on TOLFA. 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 an 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 pathbreaking economics treatise of 1776, "An Inquiry into 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's called the "invisible hand" paradox: everyone selfishly pursues his own perceived interest, yet is able to do so only by bringing benefit to his customer

"Perceived self interest" comes of course in many flavors. Money is universally desirable, since it can be held and then exchanged for anything else, but as we'll see more in the Segment on "Ethics" it also includes the deep satisfaction one can derive from helping someone in need. Charity is a very real part of human behavior, and always has been - and for that reason. It rewards the giver even more, perhaps, than the receiver.

3. 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. We can see it in two ways, and will consider each:

  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

(a) 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. This graph shows the Index for 2006 and for more detail their web page is worth a visit.

That compares countries at one point in time; we can also compare conditions in one country at several points in time and America provides a good example.

The fastest growth in individual wealth in this country unquestionably coincided with the era of greatest personal freedom - the 19th Century. It is truly one of mankind's most thrilling sagas.

In 1800 the country had just been established, with a deliberately limited set of governments. (The limits were far too wide, as we're seeing in TOLFA; but relative to everywhere else, they were tight enough to be amazing.) The ordinary American was a peasant. A hundred years later, he was a prospering businessman 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)

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 wasn't a true market society, but it came closer than any other.

(b) Why it Must Be So

In a word, motivation.

Writer Brad Edmonds said it well: "Always looking for a better way isnít 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"; ie, 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 we humans always try to satisfy our own perceived interests. Consider the case of a Mexican gardener.

Unemployment is endemic in that country, thanks to generations of government interference in the labor market. So unskilled and semi-skilled laborers know that their return is maximized not by inventing new ways to do their work in less time (that way, they will be let-go or earn less!) but by spinning the work out to conform with one of Parkinson's tongue-in-cheek Laws: "Work expands, to fill the time available for its completion." He may end the day with a beautifully tended garden, but he works at a snail's pace. Magnified a millionfold, and it's easy to see the tragic waste of resource, 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 his own living. Nobody owes him one. He must hone his skills and offer them for a price which is acceptable to buyers; just as, when shopping later the same day, he takes the role of buyer with the merchants he patronizes. Therefore the motivation is right, and therefore progress occurs, as in 19th Century America; Americans had nothing to fall back on but their own sturdy independence (and yes, the generosity of their neighbors when misfortune struck) and humanity never saw such progress.

There is no rational alternative to the free market.

4. 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:

Older students may recall the brilliantly funny skits of Lily Tomlin in the 1960s and 70s, about the government-sustained telephone monopoly, AT&T. (To a complaining customer, with the inimitable Tomlin snort: "Sir, we're 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, he relaxes, grows fat, loses his 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.

5. Segment Review

Often, even government people speak in praise of free markets, just as if they understood them; all the while working daily to limit or destroy them. So there's a huge amount of confusion about what markets are, and why they work uniquely well. Segment 3 has introduced that, and before moving on to Segment 4 please answer the questions below to make sure all is clear. As usual, take up any sticking points with your Mentor - and do spend time in "Further Reading", especially the articles with free on line access.

Q1    Q2    Q3    Q4    Q5   

A market society, such as we've just reviewed, is what our own will become sometime in the 2020s. This is what we have to look forward to, and prepare for our children and theirs!

Study Plan

For further reading:
Freedom and Prosperity
"For a New Liberty" by Murray Rothbard
"Power and Market" by Murray Rothbard
"The Virtue of Selfishness" by Ayn Rand
"Capitalism and Freedom" by Milton Friedman